In a landmark move, Trillium Capital, a high frequency trading firm in New York, has been fined by FINRA for quote stuffing and market manipulation.
The fine may be small, $1 million, but the implications of the decision to charge the firm are huge. Trillium is the first high frequency trading firm ever to be charged with using an illicit high frequency trading strategy.
HFT firms have been suspected of manipulative practices for years, but no one has ever been able to prove anything.
That changed today when FINRA charged Trillium. Here’s what they did.
On the quote stuffing charge:
Trillium, through nine proprietary traders, entered numerous layered, non-bona fide market moving orders to generate selling or buying interest in specific stocks. By entering the non-bona fide orders, often in substantial size relative to a stock’s overall legitimate pending order volume, Trillium traders created a false appearance of buy- or sell-side pressure.
This trading strategy induced other market participants to enter orders to execute against limit orders previously entered by the Trillium traders. Once their orders were filled, the Trillium traders would then immediately cancel orders that had only been designed to create the false appearance of market activity. As a result of this improper high frequency trading strategy, Trillium’s traders obtained advantageous prices that otherwise would not have been available to them on 46,000 occasions.
This is big. FINRA found evidence of market manipulation and is faulting Trillium and these people:
- Trader, John J. Raffaele: $220,000 fine, $78,245 in disgorgement, and a two-year suspension.
- Director of Trading, Daniel J. Balber: $200,000 fine, and a two-year suspension in a principal capacity.
- Senior Vice President of Trading, Frank J. Raffaele, Jr.: $80,000 fine, $61,495 in disgorgement, and a two-year suspension, 10 months of which are in all capacities.
- Trader, Brian M. Gutbrod: $80,000 fine, $51,465 disgorgement, and a 17-month suspension.
- Vice President of Trading, James P. Hochleutner: $65,000 fine, $27,286 in disgorgement, and a two-year suspension, 10 months of which are in all capacities.
- Trader, Samuel J. Yoon: $50,000 fine, $33,535 in disgorgement, and a 14-month suspension.
- Trader, Tal Sharon: $25,000 fine, $20,622 in disgorgement, and an 11-month suspension.
- Chief Compliance Officer, Rosemarie Johnson: $50,000 fine, and a one-year suspension in a principal capacity.
- Trader, Bradley L. Jaffe: $20,000 fine, $12,169 in disgorgement, and a nine-month suspension.
- Trader, Tal B. Plotkin: $12,500 fine, $7,125 in disgorgement, and a six-month suspension.
- Trader, Michael S. Raffaele: 11-month suspension.
FINRA says they will continue prosecuting firms that engage in activities like Trillium’s.
This is good news for everyone. Later this month, HFT regulation is expected to get an overhaul – or the beginnings of one – from the SEC. The upcoming regulations are a contested issue. They could be hurtful to the industry – and market liquidity, because of the 60% volume HFT firms provide.
Mary Schapiro announced last week that even though there’s no proof of market manipulation (UNTIL NOW that is), she doesn’t think people can’t trust a market while they suspect many HFT firms of market manipulation.
But of course most HFT firms operate 100% above board and should not be faulted for a few bad apples, so many felt new regulations would punish them unfairly.
Now this fine comes along and suggests that regulators are able to fault HFT firms with wrong doing – perfect timing – so high frequency trading firms that operate legally should feel more confident that new regulations might not be stringent. And this should be a harbinger of retail investors’ and day traders’ new confidence in HFT.
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