The broker-dealer subsidiary of electronic market maker GETCO has been fined US$450,000 by the US markets regulator for lapses in the procedures and controls related to its high-frequency and algorithmic trading practices.
GETCO’s broking unit OCTEG – through which the market maker’s proprietary activity is sent – was charged by US exchange Nasdaq OMX through independent securities regulator the Financial Industry Regulatory Authority (FINRA) for failing to “establish and maintain a reasonable supervisory system… and risk control systems related to the operation of high-frequency trading and algorithmic trading”.
The charges related to a review of OCTEG’s trading activity from 7 May 2010 – the day following the flash crash in the US – through December 2011.
On 6 May 2010, US markets plummeted and then rebounded in the space of 30 minutes. A joint report by the Securities and Exchange Commission and Commodity Futures Trading Commission found the trigger for the event to be a mutual fund algo that was deployed without price or time constraints. High-frequency trading firms were found to exacerbate the steep declines caused by the erroneous algo trade.
In addition to the fine, OCTEG will be required to retain an experienced independent consultant to review its risk controls for algorithmic trading and its levels of message traffic and associated behaviours which may constitute potentially improper trading activity.
OCTEG accepted the penalties without admitting or denying the charges. The firm was also fined US$10,000 on 29 June 2010 for violations in the supervision of clearly erroneous transactions.
“We are pleased to have resolved this matter," said a GETCO spokesperson. "While the settlement did not find that there was any harm caused to the market or participants, we are always looking for ways to further enhance our policies, procedures and controls.”