June 6, 2014 / 2:48 PM / 5 years ago

SEC charges Liquidnet, Wedbush with regulatory violations

WASHINGTON (Reuters) - U.S. securities regulators filed civil lawsuits on Friday against a “dark pool” trading venue and a major brokerage firm as part of a crackdown on market structure rule violations.

A woman waits for an elevator in the foyer of the Fort Worth Regional Office of the Securities and Exchange Commission (SEC) in Fort Worth, Texas June 28, 2012. Mike Stone/REUTERS

In the first case, the Securities and Exchange Commission charged the New York-based dark pool operator Liquidnet with improperly using its subscribers’ confidential trading information to market its services. The company is paying a $2 million penalty to settle the charges without admitting or denying them.

In the second case, the SEC charged brokerage firm Wedbush Securities Inc and two individuals with a slew of violations, including failing to follow “market access” rules that require trading firms to have risk controls in place before giving their customers access to the market.

The cases came just one day after SEC Chair Mary Jo White unveiled a sweeping series of proposed equity market reforms targeting high-speed traders, less transparent trading venues, traditional stock exchanges and other brokerage firms.

Critics in recent years have raised concerns about high-speed trading, unlit markets like dark pools and the havoc that technological errors can wreak on the marketplace due to technological glitches by exchanges and major brokerages.

Dark pools are a type of alternative trading system, a venue that competes with exchanges for business.

Unlike exchanges, they let investors trade anonymously and do not publicly display quotes until after trades are completed.

SEC rules require alternative trading systems to have certain safeguards to protect users’ confidential information.

The SEC said that over a three-year period, Liquidnet improperly let a business unit outside of its dark pool operation access that private data.

Seth Merrin, the chief executive at Liquidnet, said he agreed with the SEC that there was a “lack of oversight” in the firm’s procedures but the firm has taken steps to fix that.

“We are very happy about resolving this case,” he said, noting that customers were not harmed.

Liquidnet’s U.S. trading volume is about 40 million shares a day.

In the second case filed Friday, the SEC laid out a laundry list of alleged violations against Wedbush, a Los Angeles-based firm that owns a stake in the BATS Global Markets exchange and is consistently ranked as one of the five largest firms by trading volume on the Nasdaq exchange.

The SEC said the company violated its market access rule between 2011 and 2013, when it allowed most of its customers to send orders directly onto trading venues over which the firm did not have “direct and exclusive control.”

The SEC said that Jeffrey Bell, the firm’s former vice president who oversaw the market access business, and senior vice president Christina Fillhart both caused the violations.

Attorneys for the company and the two individuals could not be immediately reached.

Reporting by Sarah N. Lynch in Washington, D.C.; additional reporting by Emily Flitter, Suzanne Barlyn, Jonathan Stempel and John McCrank in New York; Editing by Doina Chiacu

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