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?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
tony bonn's picture

this is merely bait for the masses....goldman, morgan stanley, jpm, and a host of other big names are walking scot free.

Missing_Link's picture

Gotta start somewhere.  I'll happily take this over no action at all.

nonclaim's picture

So, they got one small fish to scare others away from the practice or to eliminate competition in the shrinking pond? Better than nothing, but, for now, I'm not sure it is good...

TeddyRoosevelt's picture

The order flows these individuals were trading against WERE algos.  These are the best day traders in the industry, and by diligently typing up hundreds of stocks a day and putting in orders they NOTICED that COMPUTERS chissled their orders trying to front run them.  The developed a strategy to profit from the ALGOS that have DESTROYED our equity market.  They are some of the only people dedicated enough, smart enough, and patient enough to BEAT the ALGOS... but...

In the this 1984, Orwellian, kleptocratic society they are being taken to the woodshed by a regulatory agency that is basically the whore of K Street Lobbyists that represent the banks that turned equities into a walking dead, zombie, worthless, manipulated market.

Thanks FINRA.  and when, you get off you knees, wipe the corner of your mouth, and look up and smile at your favorite LOBBYIST PIMP, remember what you are.  Wake up people.

No More Bubbles's picture

Yes, this is the equivalent of the SEC going after Martha Stewart when they knew Bernie Madoff was out there.....

goldmiddelfinger's picture

No even close. It's the equivilent of FINRA paying Mary Shapiro $7M in severance while Lehman, Bear, Citi, AIG stuff their SIVs with aged dog puke from which they protect GS but not the public.

unwashedmass's picture


laughing. lunch money. who cares? but it will make nice headlines for the peasantry on bloomberg, cnbc and marketwatch.

Vampyroteuthis infernalis's picture

Trillium can find more cash stuffed in the sofas in the front offices. I am sure they are shaking in their boots over this "massive" fine. Get real!

bada boom's picture

Apparently Trillium was cutting into someone's profit.

Sick the dogs on them...

TeddyRoosevelt's picture

yes, i'm so refreshed at least that so many here understand what is going on.  I know this is ZH, but I thought I'd find a bunch of posts about how great it is regulators are doing something

Thomas's picture

Does anybody ever accept the admission of guilt as part of their penalty anymore? Christ, Charles Manson wouldn't be forced to accept guilt.

Imminent Crucible's picture

Not so fast.  The traders involved got up to two years' suspensions, besides fines and disgorgements.

A $1 million fine is a wrist-slap, even for Trillium, but all the major trading banks did the same quote-stuffing, and a lot more than 46,000 times.

This opens the door to much larger fines and disgorgements, and a long stint in the penalty box for platoons of prop traders from the Big Five.

This looks like throwing down the gauntlet to me.  FinRA is holding the big trading houses over the fire.  Somebody, somewhere is feeling the heat.

No More Bubbles's picture

Why have a "stock market" at all?  Just shut it down so people stop getting their pockets picked!

aint no fortunate son's picture

hey, algo's gotta eat too you know.

tpberg7's picture

Jail time bitchez!

goldmiddelfinger's picture

Absolutely. This is far worse than GS and JPM setting up AIG and Bear for the takedown then blackmailing Geithner who then sets up the bluecollar fieldhand taxpayer. But hey! We can't have elites in this country do jail time. What would the ChiComms think?

sysin3's picture

Just like when you have a bunch of lawyers buried up to their necks in sand .... it's a good start.

Mercury's picture

Are current "painting the tape" type prohibitions really sufficient to beat down HFT?  I'm all for market structure reform that banishes or seriously restricts this kind of computerized trading but exactly what rule/regulation has Trillium transgressed here?

Arbitrary prosecution and vague assertions of wrongdoing aren't exactly the kinds of progress I was hoping for here.

Trifecta Man's picture

When they get rid of all those HFT computers sitting on the exchanges, then I may believe they are doing something about this theft.  Congrats Zerohedge on this great bit of real journalism.

frankTHE COIN's picture

Trillium is now a Buncha Bitter Bitches !

Chippewa Partners's picture

I don't where I saw it said, but I had more fun this weekend telling the cocktail party crowd it's not a market folks, it's just a crime scene.


LoneStarHog's picture

So they busted another kid's Lemonade Stand?

firstdivision's picture

So FINRA acted before the SEC could figure out what letter head to use?

espirit's picture

Could it be the Fed supports HFT to prop the markets, and Trillium just got greedy-sloppy?

Have to burn someone to show (or give illusion) of SEC enforcement, as a lure for the retail investor.

goldmiddelfinger's picture

You co-locate in order to acheive a millisecond timing advantage. What "customers" need that?

Cognitive Dissonance's picture

Exactly. The fines act as a strawman for the bigger theft.

I'll fine you for walking out of the store without paying for the Twinkies and we won't talk about the dead cashier and the empty cash register.

RockyRacoon's picture

Love the analogy, CD.  This is just a warning shot don't ya know.   Problem is, it was enough to send the message that all the thievery is well worth the down side.   Dumbshits.

Nucking Futs's picture

I don't believe that co-locating the machines near the market servers would provide even that millisecond of timing advantage. 

Now unless you're talking that these co-located machines were in the same network as the market servers (which I doubt, but if it were true would be an unbelievable advantage).  In that case, yes, there would be a significant timing advantage.

However, with co-located machines on a separate network, you'd probably get faster speeds by placing your machines as close as you can to your Internet Service Provider (ISP) and choosing the closest ISP to the market servers. Co-located machines still have to travel out to the Internet Service Provider (ISP) then travel back to the market servers.  Physical distance is not the same as the logical distance.  Just a thought.


count_zero's picture

Are you kidding? That's how HFT lives. On-site with the exchange. They do not trade across the interwebs competing with bittorrents of littlelupe.

jbc77's picture

This is bullshit. What the fuck? Everyone's stuffing quotes, why don't they fucking fine everyone. FINRA is another, as worthless as they come, quazi-government worhtless overloard watchdog.

liberal sodomy's picture

Normally the feds have to go to hong kong to find inside traders/manipulators.

Rainman's picture

Criminal fraud right in your face. No different than the keyboard jockey intercepting the passwords on your accounts and chipping off part of your stash or hijacking your credit cards. Yet these particular clowns get handslap fines and suspensions. They should all be jailed and barred from trading for life. The firm should be shut down and liquidated.

dxj's picture

We will have to see if the "message" has sunk in at other HFT desks. A decline in quote volume would signal that firms on the street are getting the "message" that they are next.

Id fight Gandhi's picture

Throw a few token criminals under the bus and create illusion of regulation and law.

Doubt anyone doing this has a shred of compunction.'s picture

tyler, did you know that america "always" comes back, economically that is.

warren buffet said so, must be true.

Spalding_Smailes's picture

TLT is moving up ...

iShares Barclays 20+ Yr Treas.Bond (ETF)  



Will have to see how stocks end the day but I just loaded up on ----VXX

HelluvaEngineer's picture

Good luck to you.  I unfortunately loaded up on that pig last week when I thought it was cheap.  Wrong.

firstdivision's picture

Well we win some and lose some.  I hope you're still holding your VXX for earnings season here.  You should at the very least break even.

HelluvaEngineer's picture

Thanks.  Holding on to it for now with an open limit order.

shushup's picture

If profit is 575 mil and you were only fined 1 mil - no incentive to quite quote stuffing. in fact seems more like incentive to keep quote stuffing....they got away with it, with a teeny tinny itty bitty fine. Who wouldn't gladly trade 1 il for 575 mil? Duh?

tom's picture

it was $575k profits, but that's only the amount finra could prove, and with chances of getting caught so far amounting to one in however many HFT-ers are out there, you're right, not much of a disincentive.

sheep92's picture

In the Arabic numbering system 575,000 is pronounce five hundred and seventy five thousand and is a smaller number than 1,000,000 which is one million. Duh?

What_Me_Worry's picture

" can't eat HFT."

Give this man the Pulitzer.

Dismal Scientist's picture


     Sept. 13 (Bloomberg) --  Warren Buffett said businesses owned by his Berkshire Hathaway Inc. are growing and ruled out a second recession in the U.S. “I am a huge bull on this country,” Buffett, Berkshire’s chief executive officer, said today in remarks to the Montana Economic Development Summit. “We will not have a double-dip recession at all. I see our businesses coming back almost across the board.”

A huge bull, eh ? He's a huge something...

Bartanist's picture

I would agree with Buffet except for one thing. The problem is not the existing businesses, it is the structural financial and governmental problems that threaten to swamp the effects of even good business.

Our company can exist on only 80% of the total US population/market because we are not dependent on the bottom 20%. However, the banks and government are affected by the bottom 20% of the economy... even if they might think they are isolated.

A way to interpret what Buffet is saying is that he believes his businesses are doing fine and isolated from the effects of further financial defaults. As a result, there will not be a general second dip, but there might be isolated pockets of trouble such as in financial, retail and construction.

Lord and Master's picture

another way to interpret what Buffett is saying is: "F*CK YOU!"...  F*ck you from Buffett to the lower 95% by wealth in America.  When anyone refers to this concept of "double-dip" they are saying they would prefer if the bottom 95% of america would die.  This stupid double-dip concept is completely a MARKET PHENOMENON-- S&P  dips to 666, then it bounces back to 1220 purely on QE measures and short-term balance sheet improvements... meanwhile unemployment in america grinds ever lower.  The very wealthy have their stocks salvaged at the expense of the currency being shredded.  Heres what Buffett's mindset is:


"F*ck you america!  I act like your benevolent grandfather, then chuckle with awkward adolescent delight at the chance to abuse you even more via the impending currency destruction/ govt default or effective default.  DOuble-dip you say??  What double dip?!!???  My silly tikes-- theres no double-dip when you can trade around currency degradation!! au contraire-- things are looking very bullish for me and my investments.... HEEHEEHEEHEHE Grandpa is wise enough to know that HYPERINFLATION IS A VERY DEVIOUS ECONOMIC EVENT! It allows Grandpa to take advantage of you more often and more outwardly!!   WIth a colossal debt AND govt/military/agency commitments that--come hell or high water (or nuclear holocaust)--MUST be maintained, even the dopiest of his children can see that Grandpa must position himself for torrid downdrafts in deflation and inflation, in order to take advantage of his many little ones best... (and yes then one long blast of hyperinflation/devaluations/war in the finale HAAAUUUhauuu hhauuu heehee--it would warm his heart so, for Grandpa to stick around to see that conflagration!!).. For his 300 million little ones, it will surely mean misery, but they should remember that Grampa with his stocks and commodities is on the other side of the trade... so whatever agony they may face (and they certainly will face agony--- F*CK YOU my dearest little ones!), they should at least take pleasure knowing that grandpa delights in it!!  Have a ride on my train, while it carries commodities across the country to ports in the west to ship to the highest bidder!!  Jump on board for a train ride kiddies... ill chase you from car to car heheheeeheheheehe  if you please me , and go slow enough that i can pursue , ill give you a squeeze right after i catch my breath and wipe my sweat-fogged glasses.  Do u suffer from Grandpa's too-eager clawings??  Well-- my little ones-- Grandpa does that because he is VERY bullish on this majestic sh*thole mommy and daddy once called America .... HEEheeheeheah and never forget that Gramps in his infinite wisdom always looks out for your best interests! Come along now... all aboard grandpas hellride!!!!

Hansel's picture

I worked for Trillium for a short period of time, during which the 2006 problem occurred.  Having worked at another prop shop after Trillium, all prop shops use quote stuffing.  Most traders I know call the massive orders intended to push the price around without getting filled "juice".  Getting hit on your juice was bad.  Juice the book, get your trade off, cancel your juice.  It is not limited to Trillium, and not even exclusively an HFT phenomenon.  Humans are just as good at juicing books.

As for the 2006 problem (which actually occurred in late 2004/early 2005), it was NASDAQs fault.  Trillium was the scapegoat.  NASDAQ started a pilot program where people could start putting in orders extremely early, around 7:15 am, and orders were prioritized solely based on time, and orders would then execute at the market price.  So you could cross a stock $100, but as long as you were first in line, you got the best price offered by the market makers when those orders started filling at 9:25, 5 minutes before the market opened to the peons.  Trillium got in trouble because they created a program where you could put in an order based on the displayed price with a delta, which some traders set at $1.  Well, when 100 traders in the company each set $1 deltas based on the last quote, Trillium ended up crossing lots off stocks up $100 pre market.  Oops.  And I hated Dan Balber, who looked and talked like Elmer Fudd.

Lastly, a prior incarnation of Trillium, (I think it went something like Datek -> Heartland ->Trillium), was busted during the rollout of SOES way back when for what the traders at Trillium called "rapid fire SOES".  SOES mandated market makers to fill all orders for up to 1000 shares at the market makers displayed price, even if the market was only showing 100 shares.  Rapid fire accounts were set up so that each trader had many accounts linked to his account, so he could take the market makers for far more shares than 1000, in 1000 share increments.  One of the owners was banned from the securities business for life I think, and his brother took over.

MrTrader's picture

Trillenium is just a starter. According to "informed informants" several of the high flying names will be soon in the headlines. That´s going to be "fun" !