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NEWSLETTERS & ALERTS
Credit Suisse Pays for Misrepresenting Order Execution Services
by Howard Haykin
Credit Suisse agreed to pay $10 million to settle charges brought by the SEC and the Office of the New York Attorney General regarding material misrepresentations and omissions made in connection with its now-closed Retail Execution Services (“RES”) business’ handling of certain customer orders.
SEC FINDINGS. Between mid-2011 and March 2015, Credit Suisse operated a New York-based wholesale market making business called Retail Execution Services, which executed retail-originated orders in equity securities sent by other broker-dealers. During this period, RES executed both “held” and “not held” equity orders for its retail broker-dealer customers, including over 15 million held retail-originated equity orders (over 8.5 billion shares) having a total market value of approximately $227 billion.
- Held orders that are marketable orders – i.e., market orders or buy/sell limit orders whose limit price is at or above/below the current market price - must be immediately executed at the then-prevailing market price (i.e., there is no price or time discretion).
- Not held orders allow for price and time discretion.
- For both held and not held orders, the executing B/D generally has discretion to select the routing strategy, including the venues to which the orders are routed, but must do so in a manner consistent with its representations.
Beginning in mid-2011 and continuing until March 2015 (when RES closed), RES made material misrepresentations and omissions as to its handling of held retail equity orders, in violation of Section 17(a)(2) of the Securities Act.
- RES sought to differentiate itself by marketing its access to “vast” dark liquidity in Credit Suisse’s own ATS and dark pool, as well as RES’s access to dark pools operated by other B/D’s. However, between September 2011 and December 2012, RES executed an exceedingly minimal number of held orders (unlike not held orders) in dark pools.
- RES further represented that opportunities for “robust” and “enhanced” price improvement was one of the “core” elements of its approach to executing orders. While describing the factors relevant to the securities for which it would provide price improvement, RES did not disclose that a subset of orders for which execution quality was not included in publicly reported execution quality reports pursuant to Commission Rule 605 (“non-605” orders) – i.e., held orders - typically would not receive any price improvement.
- The result was that retail customers did not receive any price improvement from RES on their non-reportable (held) orders from mid-2011 to March 2015 – which Credit Suisse failed to disclose. RES generally did not direct non-reportable orders to dark liquidity pools or ATS’s, and instead disproportionately routed such orders to ‘lit markets’ that generally caused market impact and resulted in less favorable execution prices for customers, despite claiming to benefit RES’s customers.
[For further details, click on SEC Order.]