Sense on Cents

SROs have got to go!

To my point, I offer the following release from the SEC. I thank the reader who brought this to my attention.

SEC Charges Boston-Based Dark Pool Operator for Failing to Protect Confidential Information

FOR IMMEDIATE RELEASE
2012-204

Washington, D.C., Oct. 3, 2012 — The Securities and Exchange Commission today charged Boston-based dark pool operator eBX LLC with failing to protect the confidential trading information of its subscribers and failing to disclose to all subscribers that it allowed an outside firm to use their confidential trading information.

Additional Materials
SEC Order
According to the SEC’s order instituting a settled administrative proceeding, eBX operates the alternative trading system LeveL ATS, which it calls a “dark pool” trading program. Dark pools do not display quotations to the public, meaning that investors who subscribe to a dark pool have access to potential trade opportunities that other investors using public markets do not. eBX inaccurately informed its subscribers that their flow of orders to buy or sell securities would be kept confidential and not shared outside of LeveL. eBX instead allowed an outside technology firm to use information about LeveL subscribers’ unexecuted orders for its own business purposes. The outside firm’s separate order routing business therefore received an information advantage over other LeveL subscribers because it was able to use its knowledge of their orders to make routing decisions for its own customers’ orders and increase its execution rate. eBX had insufficient safeguards and procedures to protect subscribers’ confidential trading information.

eBX agreed to pay an $800,000 penalty to settle the charges.

“Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Many eBX subscribers didn’t get the benefit of that bargain – they were unaware that another order routing system was given exclusive access to trading information that it used for its own benefit.”

According to the SEC’s order, eBX and the outside firm it hired to run LeveL signed a subscription agreement in February 2008, after which the outside firm’s separate order routing business began to use certain LeveL subscribers’ confidential trading data. In November 2008, eBX signed a new agreement with the outside firm that allowed its order routing business to remember and use all LeveL subscribers’ unexecuted order information. As a result of the agreements, the outside firm’s order routing business began to fill far more of its orders than other LeveL users did. Its order router also knew how other eBX subscribers’ orders in LeveL were priced and could use that information to determine whether to route orders to LeveL or another venue based on where it knew it might get a better price for its own customers’ orders.

According to the SEC’s order, eBX failed to disclose in required SEC filings that it allowed LeveL subscribers’ unexecuted order information to be shared outside of LeveL.

In addition to the $800,000 penalty, eBX was censured and ordered to cease and desist from committing or causing further violations of certain provisions of the federal securities laws regulating alternative trading systems.

My oh my. No surprise with this news. Same old, same old.

The falling number of fraud prosecutions is striking given what many claim is a strong pattern of financial-sector misconduct in recent years, culminating in a housing crisis characterized by alleged rampant mortgage fraud and improper foreclosure, as well as the weakening of the national and global economy.

The TRAC report, which compiles Justice Department data obtained through the Freedom of Information Act, notes that 2011′s relatively low number of financial fraud prosecutions is only the continuation of a trend spanning more than a decade.

Every year since 1999, the number of such prosecutions has gotten smaller and smaller, the report states. This means, for example, that there were more prosecutions in any given year during the presidency of George W. Bush than in any year during the presidency of Barack Obama.

David Burnham, a co-director of TRAC, told The Huffington Post that the fall-off in financial fraud prosecutions most likely does not reflect a fall-off in financial fraud itself.

Federal Prosecution of Financial Frauds Falls to a 20 Year Low

Amen.