Two Sigma Securities

Two Sigma Securities was censured and fined $225,000 for entering certain short sale transactions without borrowing, or entering into a bona-fide arrangement to borrow the securities, or having reasonable grounds to believe they could be borrowed, by the delivery date of such securities contrary to the requirements of Rule 203(b)(1) of Regulation SHO (the locate requirement).

Two Sigma self-reported to FINRA that it had discovered certain system issues impacting its calculation of available securities for purposes of complying with the locate requirement.

The first system issue caused the short and long positions related to the firm’s legacy market-making strategy to be omitted from net position computations of its market-making aggregation unit and caused it to be miscalculated.

The second system issue resulted from inadvertent failures to distinguish between threshold and non-threshold securities in certain trade strategies for locate compliance purposes.

As a result of coding errors, certain trade strategies re-applied locates from earlier short sales to subsequent intra-day short sales in threshold securities.

This occurred when the trade strategy covered the earlier short sale with a purchase. In these situations, it was unlikely that the firm would have reasonable grounds to believe that the securities could be borrowed for delivery on settlement date, and at least 13 such short sales resulted in the failure to deliver of securities at the firm’s clearing firm.

The findings also stated that the firm’s supervisory system was not reasonably designed to achieve compliance with the locate requirement. Other related failures included:

• Not reasonably testing the quality and accuracy of the systems that the firm relied on;

• Lack of supervisory reviews to ensure that the data its surveillance reports relied upon for supervising locate compliance was accurate.

• Lack of WSPs concerning its system changes, updates and checks for regulatory compliance.

• Procedures did not make clear that the designated supervisor’s responsibilities encompassed reviews designed to confirm whether systems changes were reasonable for achieving compliance with applicable securities laws and rules.

• The WSPs did not provide complete descriptions of the nature, scope and use of the firm’s locate requirement surveillance reports.