First HFT Casualty As Finra Fines Trillium $1 Million For Quote Stuffing And General Market Manipulation (Again)

Tyler Durden's picture

In a landmark development for a return to market integrity, regulators are finally getting serious on this whole "HFT thing" after over a year of disclosures of their illegal and manipulative practices by Zero Hedge. Today, Finra announced it is fining Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy. So just what is this illicit high frequency trading strategy, that incidentally is used by the bulk of low latency market quote stuffers, er, participants? "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....
Trillium's traders bought and sold NASDAQ securities in this manner in
over 46,000 instances
, resulting in total profits of approximately
$575,000, of which the firm retained over $173,000 and subsequently was
required to disgorge." But. But. But. They just provide liquidity damn it! Plus, just like gold, you can't eat HFT. So Finra is telling us now that HFT has market abusive potential? Egads! Does this mean that that the Goldman announcement from last summer's Aleynikov affair when Goldman lawyer Facciponti said that “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways”, that he was not merely kidding? Luckily, Goldman will no longer have a HFT division as it is spinning off all of its prop trading. Correct Messers van Praag and Canaday?

More from Finra on this first landmark HFT manipulation case:

FINRA Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) today announced that it has censured and fined New York-based Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy and related supervisory failures. 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. Other market participants were unaware that they were acting on the layered, illegitimate orders entered by Trillium traders.

In addition to the nine traders, FINRA also took action against Trillium's Director of Trading and its Chief Compliance Officer. The 11 individuals were suspended from the securities industry or as principals for periods ranging from six months to two years. FINRA levied a total of $802,500 in fines against the individuals, ranging from $12,500 to $220,000, and required the traders to pay out disgorgements totaling about $292,000.

"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 Thomas R. Gira, Executive Vice President, 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."

FINRA's investigation found that nine Trillium proprietary traders intentionally created the appearance of substantial selling or buying interest in the NASDAQ Stock Market and NYSE Arca exchange. Trillium's traders bought and sold NASDAQ securities in this manner in over 46,000 instances, resulting in total profits of approximately $575,000, of which the firm retained over $173,000 and subsequently was required to disgorge.

The individual sanctions are as follows:

  • 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.

In concluding this settlement, Trillium and the individual respondents neither admitted nor denied the charges, but consented to the entry of FINRA's findings. This conduct was initially referred to FINRA by NASDAQ's MarketWatch Department.

Also what is interesting about Trillium (an offshoot of Schonfeld Securities) is that the firm was also fined in way back in 2006 for "misusing the NASDAQ trading system."

Amusingly, even further back in 2005, Trillium director of automated trading Paul Farmighetti, in an interview with Advanced Trading, was discussing his co-location strategy at Nasdaq, Archipelago, and Instinet, as well as his-plans for co-locating at the CME. In a nutshell, Mr. Famighetti described renting a cabinet at the NASDAQ which can hold 43 servers as well as a self cooling system, which he remotely controls, with only basic maintenance provided by NASDAQ employees. He talks of paying $100,000/month for co-location in general (and this is 5 years ago!), but emphasizes that the profitability of being closer to NASDAQ’s matching engine outweighs the cost.

So let's consider the chain of events:

NASDAQ sells co-location to Trillium. Trillium gets fined for abusive practices (per FINRA and the SEC). So did NASDAQ still sell them co-location after this 2006 fine, and are they selling them co-location  after the current fines?

Perhaps one should ask who the permissive factors in this ultimately illegal activity are: and the answer is the exchanges themselves.

Should exchanges have a responsibility to protect the clients on their exchange? Should that responsibility outweigh its profitability from co-location? Are owners of orders on any exchange entitled to be protected on that exchange from nefarious activity? Should they at least expect the exchange to not continue profiting from those unscrupulous outfits that harm its clients?

With Nasdaq and other exchanges providing the means for less-than-conscientious elements to manipulate the market, one can be sure Trillium will not be the last one caught with its hand in the ultra-low latency cookie jar.

The question that has to be asked by regulators and politicians is what are the fiduciary duties of exchanges with regard to protecting the owners of orders on their platforms? And, more important, why are stricter ones not already in place?