Manual Surveillance of High-Speed Trading Doesnt Cut It, FINRA Says
October 22, 2012
A manual review of 3 billion shares worth of trades a month for one high-frequency customer does not constitute adequate surveillance of potential money laundering, FINRA has told a Chicago broker-dealer.
The firm, a four-person shop called Title Securities, is controlled by the family of a Cyprus investor that accounted for 99% of its business. Title, without admitting any guilt, agreed to pay $150,000 to FINRA, the NASDAQ Stock Market, NYSE Arca and the BATS Exchange to settle the case.
Title was contacted for comment Friday, but has not yet responded.
Title’s large customer is a company based in Cyprus called Hainy Investments Ltd. The firm uses 1,800 traders around the world, about half of whom are in China, to trade its capital, according to FINRA in the letter that Title and its counsel, Irving Feinstein, signed to settle the case.
FINRA, BATS, NYSE Arca and NASDAQ, and Title's clearing firm alerted the firm to numerous instances of potentially suspicious trading activity in the Hainy account, such as trading in odd lots, matching the buying and selling shares in a company at the same time, known as “wash trading,” and layering of orders, to move the market in given stocks.
Title, the regulator of brokers said, did not try to investigate the orders it was carrying out, in a serious way. When the account opened, Title began conducting manual surveillance of the trading that it was executing for Hainy, FINRA said. This surveillance was done, though, “primarily for profit and was an “unreasonable” method “due to the large volume of trading activity.’’
Hainy's “sole business is day trading its capital by utilizing both manual trading and high frequency algorithmic trading methods, including statistical arbitrage,’’ FINRA said. As many as 3 billion shares in a month were traded for the account.
FINRA, in making its case, said firms such as Title ‘’have specifically been instructed to consider conducting computerized surveillance of account activity to detect suspicious transactions.’’
But, Title basically “had no surveillance system,’’ FINRA said.
Title's staff manually reviewed trading information to ascertain whether activity was manipulative or illegal.
Hainy, which opened its account at Title in 2009, accounted for approximately 90% of orders and 99% of revenue, FINRA said. Volume ran from 1.5 billion to 3 billion shares a month, on Hainy’s behalf.
And Title, effectively, was controlled by its largest customer.
Here’s FINRA’s synopsis:
Title is 100% owned by Title Brokerage Holding Corporation, which in turn is 100% owned by an Irrevocable Trust, the beneficiaries of which are the children of the owner of Hainy, and the trustee is Title's Head Trader.
In addition, FINRA said:
Title failed to create or contribute to the monitoring parameters established by its clearing firm, and also improperly relied upon Hainy's authorized representative, Title Trading, to establish and implement the wash sale and odd lot filters in its order entry software.
Payment of the $150,000 fine is to be split between FINRA, NASDAQ, BATS Exchange and NYSE Arca.