SpeedTrader Settles with FINRA for $165,000

SpeedTrader settles with the Financial Industry Regulatory Authority (FINRA), agreeing to a substantial $165,000 fine. This penalty is a direct result of significant supervisory and risk management lapses. The settlement also includes a $13,200 payment to FINRA, with the remaining amount distributed among EDGX, Nasdaq, and NYSE Arca.

Between November 2017 and January 2020, SpeedTrader, a direct market access provider to a large client base of approximately 570, including numerous day traders based in China and at least one foreign broker-dealer, was found to have significant supervisory deficiencies. These clients collectively traded billions of shares worth tens of billions of dollars through the firm, underscoring the scale of the issue.

The core issue at SpeedTrader was its reliance on an automated third-party surveillance system that was not tailored to its specific business model. This system, which generated exception alerts when certain parameters were met, was not regularly assessed for its effectiveness. As a result, the surveillance system was not reasonably aligned with the firm’s operational needs, highlighting a significant oversight.

SpeedTrader Settles with FINRA for $165,000

Additionally, SpeedTrader assigned only one trader identification number per account, regardless of the number of authorized traders. This system’s shortcomings hindered the firm’s ability to track and review individual traders’ activities effectively. For instance, in June 2018, a foreign broker-dealer’s rapid series of trades generated 42 alerts for potential wash trading. Still, the lack of detailed trader identification compromised the firm’s ability to address these alerts appropriately.

Further exacerbating the issue, SpeedTrader’s procedures for handling alerts were inadequate. The firm frequently closed alerts without thorough investigation and demonstrated a lack of understanding in its closing comments. For instance, alerts for layering and spoofing were often dismissed as being due to the volatility or float of the security, a justification that did not adequately address the potential for manipulative trading.

Moreover, SpeedTrader’s risk management controls were insufficient. The firm did not set appropriate credit thresholds for its customers or document how these thresholds were established and monitored. Its annual compliance certifications for 2017, 2018, and 2019 failed to confirm adherence to required risk management controls.

As a result of these deficiencies, SpeedTrader violated several FINRA and SEC regulations, including FINRA Rules 3110 and 2010, and Exchange Act Rule 15c3-5. The settlement underscores the critical importance of robust supervisory and risk management systems in maintaining market integrity.

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