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From Securities Regulation Daily, December 16, 2016

Deutsche Bank will pay $18.5M for misleading clients about order router problems

By R. Jason Howard, J.D.

Deutsche Bank has agreed to settle charges with the SEC in connection with findings that the bank made material misstatements and omissions from January 2012 through February 2014 regarding the operation of SuperX+, an order router that primarily routes orders to venues known as "dark pools" (In the Matter of Deutsche Bank Securities Inc.,Release No. 33-10272, December 16, 2016).

Order router. SuperX+ is one of Deutsche’s order routers that has a feature called the Dark Pool Ranking Model (DPRM) which was intended to measure execution quality and liquidity of venues to which it sent orders. The model was used to determine which venues would receive orders and the sequence in which Deutsche Bank would send them. The model, as described by the bank in its disclosures to clients and potential clients as the "quantitative core" of SuperX+, stating that it "smartly routes and selects optimal pools of liquidity on an order by order basis."

Misleading statements and omissions. SuperX+, however, had unanticipated technological problems, causing Deutsche to not operate SuperX+ in the manner and fashion that its clients had been told.

As a result of the problems, rankings and fill probabilities were not being calculated correctly, resulting in millions of orders that SuperX+ would have sent elsewhere if the system was working properly to be directed to two dark pools that received inflated rankings. Compounding the failure, the SEC also found that the bank "manually overrode the rankings on certain occasions and manually assigned fill rates for new venues based on subjective judgment that that turned out to be inconsistent with the venues’ actual performance."

During this time, Deutsche "failed to inform clients and potential clients that the DPRM was not fully operational and did not disclose the subjective process by which it assigned DPRM Rankings and Fill Probabilities to new venues and its own dark pool."

Violations. Deutsche was found to have violated Section 17(a)(2) of the Securities Act and Rule 301(b)(2) of Regulation ATS, was censured, and agreed to pay $18.5 million in penalties to the SEC.

Andrew Ceresney, Director of the SEC’s Enforcement Division said, "Deutsche Bank claimed to be using ongoing data analysis to rank the dark pools best suited for customer orders when in reality its system failed to actually do this analysis. When broker-dealers tout their material products and methodologies, their statements must be accurate."

Robert Cohen, Co-Chief of the Enforcement Division’s Market Abuse Unit added, "Automated strategies for routing customer orders are a critically important part of the market. Broker-dealer customers expect to be told if a routing program like Deutsche Bank’s does not function properly, relies on stale data, and routes millions of orders contrary to the described methodology."

The release is No. 33-10272.

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