The SEC and the New York Attorney General's office penalized a broker-dealer for a combined amount of $37 million for misleading clients about the performance of an order router that primarily routes equity orders to dark pools (the "Dark Pool Order Router"). The Dark Pool Order Router is supposed to determine where, when, and how to route orders based on a number of factors, including client instructions and the firm's own routing algorithms, including an algorithm that is intended to assess the execution quality and liquidity of all venues to which the Dark Pool Order Router sends orders (the "Dark Pool Ranking Model").
However, according to the SEC, due to a coding error, the firm updated the Dark Pool Ranking Model only once during a two-year period, causing at least two dark pools to receive inflated rankings. In addition, the SEC Order found the firm at fault for manually overriding the rankings on certain occasions and manually assigning fill rates for new venues based on subjective judgment in a manner that was not properly disclosed to customers and that turned out to be inconsistent with the venues' actual performance.
Additionally, the SEC Division of Corporation Finance waived the disqualification of the firm as a "well-known seasoned issuer" by agreeing not to consider it an "ineligible issuer," as defined in Securities Act Rule 405 as a result of the settlement.
In a related action, FINRA fined the firm $3.25 million for failing to provide the same information to all clients relating to certain services and features of the firm's automatic trading system ("ATS"). FINRA found that the firm failed to timely or completely disclose to all users the availability of certain ATS services and features, most of which involved the ability to include or exclude counterparties or groups of counterparties against whom orders would execute. As a result, some ATS clients requested and received services that others may not have known were available.
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