LeveL ATS Failed to Protect Info on Unexecuted Orders, SEC Says
October 3, 2012
The Securities and Exchange Commission charged Wednesday that the operator of the LeveL ATS failed to protect information about unexecuted orders in its dark pool.
The regulator said eBX LLC, which operates the LeveL alternate trading system, did not “protect the confidential trading information of its subscribers,” allowing an outside technology firm to use information about LeveL subscribers’ unexecuted orders, for its own “business purposes.”
The violations of Regulation ATS lasted from at least 2008 through early 2011, the SEC said in its complaint.
The smart order router of LeveL’s technology provider, the Lava Trading unit of Citigroup, kept in its memory information about LeveL subscribers’ unexecuted orders. The router then used that information to make routing decisions for the benefit of its own order routing business.
For example, the SEC said in its complaint, if the router knew that a buy order had been routed to LeveL, the service provider would use that information to route a sell order to LeveL to obtain an execution.
Conversely, if the provider of the smart order router, Lava, knew that no buy order had been routed to LeveL, its system would likely route any sell order it subsequently received to another destination.
The Lava has a retained memory function that, according to LeveL, is a “commonplace” feature of smart order routes.
That “memory feature," the SEC said, enabled the Lava router to retain a record of any order submitted to various market centers, and to use that information to make automated routing decisions. The feature retains the symbol, side, source, quantity, and received time for these orders; and can be turned on or off.
In a letter to customers, LeveL chief executive Whit Conary said Lava confirmed in April 2011 that it no longer was using the feature when it involved LeveL subscribers.
But he defended the use of memory functions in smart order routers, like that marketed by Lava.
“We believe retained memory functions benefit ATS subscribers by delivering contraside trading interest to subscribers while avoiding both blind “pinging” and the information leakage inherent in sending out indications of interest,’’ he said.
While not naming Lava, the SEC said the router involved “was aware of the prices and pricing attributes of orders resting in LeveL, and was programmed to use that information in determining whether to send an order to LeveL as opposed to another venue based on where it knew it might get a better price for its own customers’ orders.’’
That gave the service provider’s order routing business an information advantage, the SEC said, because it could increase the execution rate of its own customers’ orders by knowing about the LeveL subscribers’ unexecuted orders.
Even so, the SEC also noted “there is no evidence that information about LeveL’s unexecuted orders was displayed, or otherwise communicated to, clients of the Order Routing Business or other third parties.’’ The SEC also said actual execution prices were not affected by the use of the memory feature.