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NEWSLETTERS & ALERTS
WWW: Miami B/D Faulted Over Trade Allocations
Bulltick, a Miami, FL- based broker-dealer, agreed to a $10K fine to settle FINRA charges that its WSPs did not adequately document the process and procedure for allocating certain of its customers’ trades executed by a firm trading desk to ensure that trade allocations were accurate, and to ensure against potentially unlawful trade allocations.
BACKGROUND. Bulltick, a FINRA member since 2000, has 2 branches and approximately 40 registered reps (RRs). The Firm primarily provides direct market access ("DMA") trading for U.S. and Latin American institutional customers.
FACTS AND CIRCUMSTANCES ACCORDING TO FINRA.
Trade Allocations. Throughout 2015, most Bulltick client trades were effected directly by the firm's clients through DMA arrangements. Bulltick utilizes an order execution management system ("EMS") through which its clients can place equities DMA trades. Customers are also able to place an equities order by telephone or instant message with a Bulltick trader, who is then able to place and execute the order on behalf of customers using the same EMS (hereinafter, "desk-entered customer orders"). When traders place orders in the EMS, the executions are typically assigned to accounts within the EMS which have been set up by the Firm and which relate to the customer that placed the order.
However, during the relevant period, on some occasions, Bulltick's Argentina Arbitrage Desk placed desk-entered customer orders into a generic EMS account which was not assigned to a specific customer and which the Argentina Desk also occasionally used for Firm proprietary orders.
- In these instances, the Argentina Desk would later allocate the trade to the respective customer's account(s).
- With respect to these desk-executed customer orders, Bulltick did not create any contemporaneous record to reflect whether the trade was for a customer or proprietary, and if for a customer, which customer.
- Rather, the firm relied on informal processes to later complete the allocations to the client or Firm accounts, if applicable.
Bulltick's WSPs were inadequate as they related to allocating desk-executed customer orders that were initially processed into the EMS generic account to ensure trade allocations were accurate. Failing to require a contemporaneous record indicating which desk-executed customer order in the generic EMS account corresponds to which customer, and instead completing the allocations after-the-fact, creates the potential for errors in the final allocations.
Self-Supervision. As described above, during the relevant period the head trader on the Firm's Argentina Desk occasionally performed trades on behalf of customers. He also traded in his own accounts and performed proprietary trades for the Firm. In those circumstances where he placed trades for Firm customers, himself, or the Firm, the head trader was also permitted to review and approve those trades on his own. FINRA rules generally require a firm to set up procedures for supervising a supervisor’s activities – be it sales or trading.
FINANCIALISH TAKE-AWAYS. There appears to be a disconnect in this case - i.e., between FINRA’s relatively light penalty ($10,000) and the inherent systemic flaws for trade allocations and ceratin supervisory reviews.
Regarding the fine:
- Might FINRA's relatively light penalty indicate that the regulator did not have a big problem with what was going on at Bulltick?
- Did Bulltick have some additional control procedures in place that FINRA, for some reason, did not mention in the case summary?
- Did FINRA find no instances where customers were disadvantaged?
- If FINRA had no significant / real problems, why did it not simply issue a Letter of Caution, rather than issuing an AWC with a fine?
Regarding the Control Deficiencies:
- Financialish would characterize the described deficiencies as rather significant, because each provides a dishonest employee with the ability to manipulate transactions against firm clients.
► After-the-fact allocations opens up the possibility of cherry picking; and,
► Failure to supervise the supervisor in his/her trading or sales activities is a recipe for abuse.
- Oftentimes, these type of deficiencies carry FINRA penalties that greatly exceed $10,000.
Without further information, we can just conjecture about the basis for FINRA's disciplinary actions. That said, this is a helpful case for firms to take note and learn what not to do.
This case was reported in FINRA Disciplinary Actions for April 2017.
For details on this case, go to … FINRA Disciplinary Actions Online, and refer to Case #2015048101801.