A broker-dealer settled SEC charges for violating order marking requirements under Regulation SHO ("Reg. SHO") ("Short Sales").

The SEC charged the broker-dealer with circumventing Reg. SHO's order marking requirements by artificially separating its hedging of long swaps and short swaps into separate aggregation units and improperly marking certain sell orders in such securities. According to the SEC, these actions allowed the broker-dealer to unwind long swap positions as long sales without regard to the dealer's short swap positions.

The SEC alleged that the long and short hedging units were not considered separate aggregation units because, among other things, they (i) did not have separate trading strategies or objectives; (ii) did not maintain separate management structures; and (iii) had all traders report to the same front-line supervisor with real-time access to all of the trading being executed through the units. As a result, the SEC stated that the broker-dealer did not, as it should have, net the "long" and "short" positions of both units together or across the entire broker-dealer, in violation of the definitions section under Reg. SHO Rule 200(g).

To settle the charges, the broker-dealer agreed to (i) cease and desist from future violations of Rule 200(g), (ii) a censure, and (iii) pay a $5 million civil money penalty. The broker-dealer also agreed to undertake a restructuring of its two trading units to operate them as a single, independent trading unit.

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