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From Securities Regulation Daily, January 15, 2015

UBS dark pool to pay largest penalty against an ATS for disclosure violations

By Jacquelyn Lumb

The SEC today announced the settlement of an administrative proceeding in which it charged UBS Securities LLC with securities law violations in connection with the operation and marketing of its dark pool.  UBS agreed to settle the charges, without admitting or denying the SEC’s findings, by paying a penalty of $12 million, the largest to date against an alternative trading system (ATS). SEC Enforcement Director Andrew Ceresney said the UBS dark pool did not provide a level playing field for its customers and did not operate as advertised.

The violations were discovered during an SEC examination and subsequent investigation. Ceresney said the UBS ATS is among the nation’s largest. The case against UBS is notable because it is the first involving disclosure violations by a dark pool and also because of the breadth of the violations, according to Ceresney.

Disclosure violations. The SEC found that UBS failed to disclose that its order type called PrimaryPegPlus (PPP) was almost exclusively disclosed to market makers and high frequency traders. PPP allowed these subscribers to place orders in increments of less than a penny, which is prohibited under Regulation NMS. The sub-penny orders enabled these traders to jump ahead of other orders that were placed at legal, whole penny prices.

UBS also failed to disclose to all subscribers a “natural-only crossing restriction” which ensured that select orders would not execute against orders placed by market makers and high-frequency trading firms. This feature was only available for orders that were placed using UBS algorithms.

Other securities violations. In addition to the disclosure failures, Ceresney said that UBS filed incomplete and inconsistent statements on its Form ATS and amendments, unreasonably prohibited subscribers from using the natural-only crossing restriction, failed to preserve certain order data, and violated confidentiality requirements under Regulation ATS.

Disgorgement with interest. UBS agreed to pay $2,240,702 in disgorgement and $235,686 in prejudgment interest in addition to the $12 million penalty. Ceresney responded to an inquiry about why the SEC did not require an admission in this matter. He noted that the Division considers whether to require admissions in every case but concluded that it was not called for in the UBS matter.

Ceresney said this case and the actions earlier this week against the Direct Edge exchanges show the SEC’s ability and expertise in handling complex investigations in a complicated industry. He said there would be additional actions in this area in the coming months. The SEC is very focused on disclosure by ATSs and exchanges and their provision of clear and accurate information.

Ceresney distinguished the UBS order types from those in the Direct Edge matter, noting that the UBS order types were problematic since they were prohibited under the rules, but the Direct Edge order types were legal. In the Direct Edge matter, the exchanges failed to accurately describe the order types that were used on the exchanges.

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