Brokerage, CEO charged with abetting manipulative high-frequency trading
Lek Securities charged with allowing a trader’s ‘layering,’ a form of market manipulation involving high-frequency trading
The Financial Industry Regulatory Authority and the major stock exchanges on Monday brought charges against a brokerage and its CEO for allegedly helping a customer engage in what’s called “layering,” which is a form of market manipulation involving high-frequency trading.
Lek Securities and its CEO, Samuel Lek, were charged with aiding and abetting manipulative trading by one of its customers, as well as not having adequate risk-management controls, violating the know-your-customer rule and not following rules including the preservation of electronic communications. Charges were brought by Finra as well as units of the New York Stock Exchange, NasdaqNDAQ, -1.20% and BATS.
Layering is the term for when a trader places multiple orders in multiple venues to create the appearance of interest, and then executes a trade on the opposite side of the market. The limit orders are then canceled. The idea is to get a better price for the trade. The Dodd-Frank bank reform law specifically outlawed spoofing in commodities but didn’t apply that language to securities.
According to Finra, Lek allowed 1.7 million such transactions between Nov. 2010 and June 2015 in 224 trading symbols by a single account called Avalon. Lek accounted for nearly 15% of all “non bona-fide orders” despite accounting for only 0.07% of cross-market order volume, the industry self-regulator said.
The Securities and Exchange Commission earlier in March charged Ukraine-based Avalon with making more than $21 million over five years in a layering scheme.
Lek allowed the activity because “the Avalon account brought in sufficient business to the firm to make it profitable, notwithstanding numerous red flags and ongoing investigations into the activity by Finra, the Securities and Exchange Commission, and various exchanges,” Finra said.
Lek provided the traders with office space, computer services, trading software, and the services of two people who managed the account by maintaining paperwork, tracking profits and the like. Lek allegedly received multiple inquiries and warnings from regulators. In 2013, Lek installed controls ostensibly to curtail layering, but then disclosed the nature and parameters of the controls to the Avalon team, Finra said.
Kevin Harnisch, a partner at Norton Rose Fulbright who represents Lek, said the activity the regulators describe is “good trading” if no false information was made. The orders were legit because, when they were available, other traders did hit them.
“This is a copycat version of an SEC complaint that orders that tighten the spread are manipulative simply because orders are canceled,” Harnisch said.