Independent US securities regulator the Financial Industry Regulatory Authority (FINRA) has fined high-frequency trading firm Trillium Brokerage Service a total of US$2.26 million and suspended 11 of its employees for using algorithms to manipulate stock prices.
Trillium has been ordered to pay a $1 million fine for the illegal practice, while the 11 individuals – including nine proprietary traders – were ordered to pay a range of fines totalling $802,500 as well as disgorgements of $292,000 relating to the profits made from the illegal trading strategies.
The action comes amid a heightened scrutiny of high-frequency trading following the 'flash crash' in US markets on 6 May, when the Dow Jones Industrial Average dived by 1,000 points in a matter of minutes before quickly rebounding. While a firm explanation for the day's events has yet to be identified, some market participants have suggested that the sudden withdrawal of liquidity could be linked to a mass exit of high-frequency trading firms from the market. US regulator the Securities and Exchange Commission and futures and options regulator the Commodities Futures and Trading Commission is due to release a report on 6 May before the end of this month.
According to FINRA, which was first alerted to the matter by Nasdaq's MarketWatch department, Trillium entered numerous layers of orders – often substantial in size relative to a stocks overall volume – designed to generate buy or sell interest in the targeted stocks. By creating false buy and sell pressure, other market participants bought into the stock. Once their orders were filled, Trillium cancelled orders that were only designed to create artificial market activity, allowing them to benefit from advantageous prices on 46,000 occasions and make a $575,000 profit. The trading activity monitored took place between 1 November 2006 and 31 January 2007.
As well as nine proprietary Trillium traders, the firm's director of trading Daniel Balber and chief compliance officer Rosemarie Johnson were also fined and censured.
“Trillium’s trading conduct was designed to improperly bait unsuspecting market participants into executing trades at illegitimately high or low prices for the advantage of Trillium’s traders,” said ThomasGira, executive vice president for FINRA market regulation. “FINRA will continue to aggressively pursue disciplinary action for illegal conduct, including abusive momentum ignition strategies and high frequency trading activity that inappropriately undermines legitimate trading activity, in addition to related supervisory failures.”
Trillium and the employees involved have neither admitted nor denied the charges, but have accepted FINRA's findings.