DriveWealth Institutional LLC
The findings stated that upon receipt of a customer short sale order, the firm effected a principal short sale in the same security on an exchange or other execution venue and then satisfied the customer order by buying the security as principal at a different price. The firm effected short sale orders for its own account to facilitate customer short sale orders on a net basis without borrowing the securities, entering into a bona fide arrangement to borrow the securities, or having reasonable grounds to believe the securities could be borrowed so that they could be delivered on the date delivery was due.
The findings also stated that the firm executed short sale transactions and failed to report each of the transactions to the FINRA/NYSE Trade Reporting Facility (FNYTRF) with a short sale indicator. The firm failed to report these transactions as short sales because its front-end order management system was not programmed to include a short sale indicator for the customer when submitting the second leg of a net trade. As a result, the trade reports incorrectly reflected that the contra-party sold long. The firm has since corrected this issue.
The findings also included that the firm violated Rule 201(b)(1) of Regulation SHO by failing to establish, maintain and enforce written policies and procedures reasonably designed to prevent short sales during a circuit breaker. The firm had no reasonable supervisory process to identify whether short sale transactions were executed at or below the National Best Bid when a circuit breaker was in effect. Instead, the firm relied on automated pre-trade controls within its front-end order management system, which also did not subject the transactions to automated pre-trade controls designed to achieve compliance with Regulation SHO.
In addition, the firm’s WSPs provided for a review of order records and trade reports, however, they did not allow the firm to assess whether it complied with Regulation SHO, as these records do not contain information about the National Best Bid or whether a circuit breaker was in effect at the time of execution. As a result, the firm was unable to identify that its controls were not preventing short sales during short sale circuit breakers in relation to the second leg of the net trades until FINRA inquired about it. FINRA found that the firm improperly reported trades using the wrong modifier by incorrectly reporting a W modifier on the trade reports for its net trades, even though none were priced at an average weighted price or with a special pricing formula.
FINRA also found that the firm failed to establish and maintain a supervisory system reasonably designed to achieve compliance with the locate requirement in Regulation SHO and FINRA’s trade reporting rules. The firm programmed its order management system to not require locates for the principal short sale orders sent to facilitate customer short sale orders on a net basis. The firm also had no reasonable process to identify whether a trade was properly marked as short or whether a locate was obtained.
In addition, although the firm’s WSPs summarized short sale requirements and provided for a weekly review of a reasonable sample of orders, trade records and trade reports, they failed to describe what constituted a reasonable sample size and did not explain for what the supervisor should be reviewing, how the supervisory review was to be conducted, or how the locate requirements applied to net trades. The firm’s WSPs failed to describe for what the supervisors should be reviewing daily trade reports or explain how the supervisory review was to be conducted. Further, a review of NASDAQ Report Cards would not identify whether trades were reported with accurate indicators or modifiers.
Finally, the firm’s WSPs related to net trading did not include any review to verify that net trades were accurately reported to trade reporting facilities.
