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From Securities Regulation Daily, December 3, 2015

Latest market structure case adds to Enforcement Division’s list of firsts

By Jacquelyn Lumb

The SEC has announced a contested proceeding which is its first enforcement action focusing on customer-versus-professional order types and the first involving a spoofing scheme that took advantage of an exchange’s maker-taker program. The SEC brought fraud charges against three traders and two companies for circumventing the market structure rules with their options trading schemes. Enforcement Director Andrew Ceresney would not comment on how the activities were discovered but noted that the Market Abuse Unit has developed significant expertise in this type of complex case (In the Matter of Behruz Afshar, Shahryar Afshar, Richard F. Kenny, IV, Fineline Trading Group LLC, and Makino Capital LLC, Release No. 33-9983, December 3, 2015).

Scheme involving order types. Two former brokers used a broker friend to execute orders for their two companies’ accounts. The accounts placed customer orders over a two-year period that received benefits which professional accounts do not receive, including execution priority, lower fees, and higher rebates. A customer account is a non-broker-dealer that does not exceed 390 orders in options per day during a calendar month. If the threshold is exceeded, the account will be designated as a professional account for the next quarter.

The respondents were able to continually place customer orders by alternating their trading on a quarterly basis between accounts, and by falsely claiming that each company was solely owned by one of the two brothers when one had an ownership interest in both companies. The accounts far exceeded the 390-order threshold for every quarter during the two-year period, and both should have been designated as professional accounts under the options exchange rules. Ceresney said that respondents received over $2 million in lower fees and higher rebates under the scheme.

Spoofing scheme. In the spoofing scheme, the respondents used all-or-none options orders and smaller, non-bona fide displayed orders in the same options series on the on the other side of the market. The smaller orders were not intended to be executed, but to alter the best bid or offer in order to induce or spoof other market participants into placing orders at the same price. The orders from other market participants that were executed against respondents’ hidden all-or-none orders, and any open displayed orders, were canceled. Since the executed all-or-none orders existed before the counterparties’ orders, they were deemed to have added liquidity and generated rebates for the respondents’ accounts. The respondents profited by over $225,000 in the spoofing scheme, which Ceresney characterized as very disruptive.

Violations. The respondents were charged with violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b) and Rule 10b-5. An administrative law judge will adjudicate the allegations and determine what, if any, remedial actions are appropriate.

The release is No. 33-9983.

Companies: Fineline Trading Group LLC; Makino Capital LLC

MainStory: TopStory FraudManipulation Enforcement ExchangesMarketRegulation

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