Online Firm Penalized for Foreign Manipulation of U.S. Stocks

The Financial Industry Regulatory Authority, four national stock exchanges and the Securities and Exchange Commission Tuesday took action against an online trading firm for allegedly allowing traders overseas manipulate prices of stocks on U.S. markets.

The SEC said Hold Brothers On-Line Investment Services ignored “red flags” that traders from outside the United States were using accounts provided by the firm to “repeatedly” manipulate stocks, in an illegal practice called either “layering” or “spoofing.”

FINRA, along with NYSE Arca, the NASDAQ Stock Market, NASDAQ OMX BX and BATS Exchange, said they censured and fined Hold Brothers for manipulative trading activities, avoidance of anti-money laundering practices and other violations.

The fine levied by FINRA and the exchanges was $3.4 million. Hold Brothers settled its case with the SEC for $2.5 million.

In layering, the trading firm or firms involved send out waves of false orders intended to give the impression that the market for shares of a particular security at that moment is deep.

The technique may also use a large amount of "wash trades,'' that have no economic effect, to achieve the appearance of market depth. The traders then take advantage of the market's reaction to the layering of orders.