UBS is to pay a fine of more than $14.4 million after the US Securities and Exchange Commission found “disclosure failures” and legal violations from the operation and marketing of its dark pool.
The US regulator’s announcement includes a $12.2 million penalty which is the largest it has ever made against an alternative trading system (ATS).
Specifically, the SEC said that UBS had failed to tell users about an order type called PrimaryPegPlus (PPP) that it promoted almost exclusively to market markers and high-frequency trading firms.
PPP allowed certain subscribers to buy and sell securities by placing orders in increments of less than one cent. The bank was told not to accept orders at those prices under Regulation NMS.
In ignoring this instruction, it allowed users of the PPP order type to place sub-penny-priced orders that jumped ahead of other orders submitted at legal, whole-penny prices.
The SEC also discovered that UBS was not being fully transparent about its “natural-only crossing restriction” which was designed so that select orders would not execute against orders placed by market makers and high-frequency trading firms.
Initially, UBS only made this available to benefit orders which had been placed using UBS algorithms, which are automated trading strategies.
While UBS did eventually disclose the existence of this feature to all subscribers it took around two and a half years to do so after the initial launch.
In a written statement, a spokesperson for UBS, said the fine related to “historical shortcomings”.
He added: “The issues that led to these charges were remedied in mid-2012, and the firm has updated and enhanced its supervisory and operational procedures. In the interest of even greater transparency, UBS posts on its website various documents which describe the ATS functionalities, as well as FAQs addressing the operation of the UBS ATS.”
In a statement to the market, Andrew Ceresney, enforcement director at the SEC, said: “The UBS dark pool was not a level playing field for all customers and did not operate as advertised.
“Our action shows our continued commitment to policing the equity markets to ensure fairness and compliance with all laws and rules.”