On November 2, Andrew Ceresney, the director of the Securities and Exchange Commission’s Enforcement Division (Division), gave a speech highlighting the sweeping changes that have occurred in equity market structure over the past 10 years and how SEC enforcement actions have kept pace with those changes. The Division’s job has been complicated in recent years by the proliferation of exchanges and other trading venues, the increased use of technology and automation with respect to trading, and the increased competition for order flow. Mr. Ceresney gave valuable insight into issues the Division has been and will continue to be committed to addressing, which include lack of fairness in trading venues, the misuse of confidential customer order information, inadequate risk controls by those with direct market access and high-volume manipulative trading.
To ensure fairness in trading venues, Mr. Ceresney noted that the Division focuses on a trading venue’s approach to executing, reporting and regulating trading as well as operational issues. The Division has brought an increasing number of proceedings against exchanges and off-exchange venues. In particular, Mr. Ceresney noted that the SEC imposed a $14 million penalty against two Direct Edge exchanges (to date, the largest penalty the SEC has imposed against an exchange) where certain order types did not comply with rules the SEC has approved for Direct Edge and where Direct Edge selectively disclosed how those order types worked.
In order to preserve customer trust, Mr. Ceresney indicated that the Division takes a harsh view of the misuse of confidential customer order information. He detailed a case recently brought by the Division where a firm misused such information to benefit the firm’s proprietary trading scheme. In that case, the firm was required to disgorge $2 million in trading profits and pay an additional $18 million in the form of a penalty.
Enforcement of the market access rule (SEC Rule 15c3-5) has also been a priority of the Division. That rule requires broker-dealers with market access to have systems and procedures to manage financial and regulatory risks associated with direct market access. Mr. Ceresney reiterated the obligation of firms with market access to design controls over their automated trading systems that anticipate mistakes and limit the potential harm caused by those mistakes. Finally, he touted the Division’s enforcement of the market access rule as well as its dedication to curtailing market manipulation by mentioning several cases successfully brought by the Division that resulted in multi-million dollar penalties.
The speech is available here.