Third Largest Futures Broker Gets Record Fine For HFT Stock Market Manipulation

Tyler Durden's picture

When we tapered our coverage of HFT manipulation and stock market abuse some time ago, we thought that the message had been heard loud and clear: high frequency trading is a sophisticated market manipulating parasite, whose only real function is to abuse market structure and integrity, by making conventional market manipulation practices more difficult to spot and identify. It turns out some, i.e., Newedge, thought they could still get away with traditional manipulative practices such as spoofing, layering, momentum ignition, wash trading, bypassing, and others, if only they were wrapped in an HFT blanket. It did so for four years from 2008 until 2011. As it turns out it was wrong, and in a stunning example of actually doing its job, FINRA fined Newedge, which is one of the largest futures brokers in the world and ranks third in terms of U.S. customer assets on deposit, a record $9.5 million.

And while the mechanisms by which Newedge was engaging in market manipulation and outright fraud are largely irrelevant (one can always be found that works and escapes supervision for some period of time), what is more troubling is that seemingly "respected" brokerages continue to abuse markets and rule-abiding participants for the sole benefit of their clients, and their own bottom lines and bonuses of course, despite signing such ironclad fraud prevention mechanisms as self-policing, ethics and compliance manuals. Shocking.

Oh, and yet another reason - one which we have been pointing out for years - as to why the retail investor has given up on the manipulated venue where hedge funds and prop desks pass to each other the hot potatoes money printed up by the Fed.

From the WSJ:

Brokerages are required to monitor clients' trading activity in order to keep the clients from breaching risk limits, and to curb manipulative activity, among other things. Newedge failed to do so for years despite repeated warnings, according to Finra. The brokerage allowed potentially manipulative trading such as "spoofing," in which firms place orders designed to trick other firms into buying or selling stocks, and "marking the close," in which firms push around stock prices at the close of trading in order to benefit from the final price, Finra said.


The sanctions come as regulators step up scrutiny of computer-driven trading amid worries that it is enabling market manipulation that could pose risks to the financial system and damage investor confidence. Regulators have fined several trading firms for manipulative activities over the past year, and expect to bring more such cases in the near future, according to people familiar with the matter.


Newedge allowed the questionable behavior—some of which was executed by day-trading firms—to persist despite numerous red flags, including concerns raised by employees, an independent consultant, exchanges and regulators, the filing and documents show. Regulators said Newedge's failure to track client orders over the four-year period "caused considerable systemic risk to the marketplace," according to a settlement document reviewed by the Journal.

That's ok though: Ben Bernanke is there to make sure all risk is gone.

Naturally, this being a story about HFT, there is much humor:

The emergence of manipulative trading activity—made easier by improved technology and the proliferation of electronic trading venues—has prompted regulators, traders and investors to try to build better methods to track and defend against stock-market gamers, traders say.  Finra last August implemented a sophisticated market-surveillance system that already has sparked nearly 300 investigations, Mr. Gira said. The SEC is using a new market-monitoring system called Midas to track trading across stock exchanges.  "Professional traders and [brokers] have developed systems and functionality to avoid being taken advantage of through bad behaviors, whether it's spoofing or other forms," said Chris Concannon, partner at Virtu Financial LLC, a high-frequency trading firm.

So the SEC is using an HFT firm to catch other HFT firms "at it." The same HFT firm that the SEC used a month ago to find that HFT does not cause flash crashes. Absolute, mindboggling idiocy.

Below is one example of what NewEdge did -  spoofing, a practice we have long described on Zero Hedge.

What else:

Finra said clients also engaged in multiple "wash trades," in which a firm acts as buyer and seller in the same trade to distort market activity. The practice can create the illusion of heavy trading volume that lures firms that are tracking for such activity. Between October 2008 and September 2009, three Newedge customers executed wash trades involving more than 70,000 shares of stock on an NYSE exchange, according to Newedge's settlement offer with NYSE, which was reviewed by the Journal.


Newedge also allowed some customers to evade rules around short-selling, in which traders borrow shares and sell them with the intent to buy the stock back at a lower price, profiting from the decline, according to the documents reviewed by the Journal.


For instance, Newedge allowed some clients to operate through "by-pass" accounts, which enabled skirting of rules requiring firms to locate stock—or provide assurances that they could borrow the stock—before entering a short sale. Newedge allowed the firms to short the stock without confirming that they had actually located it, "essentially relying on an 'honor system,'" according to Finra's letter reviewed by the Journal.


Newedge, which began providing direct access to U.S. stock exchanges in January 2008, received repeated warnings that its systems weren't capturing client orders, and that it was uninformed about the risk controls of clients, according to the NYSE settlement.


From the service's inception, Newedge "knew that it was unaware of what controls its clients had implemented," the settlement says.


In May 2008, a high-ranking Newedge employee sent an email to another employee expressing concerns "about the proliferation of equity trading systems without any sort of systemic evaluation of risk control functions," according to the NYSE settlement.


Another red flag, the settlement says, was "numerous regulatory inquiries [Newedge] received regarding the activity of one particular Newedge client." The client wasn't identified.

As long as that client wasn't the NY Fed's Kevin Henry all is well. Which of course he isn't. After all the NY Fed only uses Citadel.

The list of abuses goes on and on and on, because nothing has ever actually been fixed, and will continue to remain unfixed until the next, and courtesy of the central banks' all in gambit on reflation, final crash. Until then, retail will continue to disappear until finally just the primary dealers and the central banks are left buying and selling meaningless pieces of paper from each other.

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krispkritter's picture

Speaking of mirages,

  I wonder when the Fed vaults and Fort Knox get this app?

Pladizow's picture

$9.5mil, WTF!!!!!!!!!!!!!!!

NoDebt's picture

"a record $9.5 million."

I think that word is supposed to start with a 'B' as opposed to the "M' that you used, Tyler.


NoDebt's picture

Oh, and one more thing.... who got their securities ticked pulled and escorted out of the industry?  I see no mention of it.  If I did that I would be escorted out the door so fast the pictures of my kids would still be sitting on my desk.

Frankly, the fine is nothing.  If you want ANY sort of integrity you have to get people like that OUT OF THE INDUSTRY.  They are toxic.

cifo's picture

"traditional manipulative practices such as spoofing, layering, momentum ignition, wash trading, bypassing"

How else can you make money trading?

Badabing's picture
Third Largest Futures Broker Gets Record Fine For HFT Stock Market Manipulation

the 3rd largest $9.5 mil, oh no no no no


fourchan's picture

they are just providing liquidity lol.

Ban KKiller's picture

Relevant fines? On Wall Street? With their revolving door to "government" and " regulation"? 

Rules are for the other guy. 

Antifaschistische's picture


In Central America, South America, Africa and most of Asia.....these are called "BRIBES".    Only the U.S. calls them "FINES"

Element's picture

$9.5 mill? This is getting serious ... they may not be able to cover that from petty-cash.


"we're gonna need a bigger skim"

Theosebes Goodfellow's picture

So they pull this shit from 2008 through 2011 and the fine is $9.5 mil? Damn, that's just the cost of doing business. I'll venture they made that much in a day with these manipulations. What ever happened to putting cheats out of business for good?

ghengis86's picture

That'll teach 'em! Almost an eight-figure fine!

Eat shit, fuckers!

Bananamerican's picture

it's a piddling "sin tax"....

Stuart's picture

Wow, a whole $9.5million..... what's that 22 minutes worth of profit from their corrupt practices....  not even symbolic but what would you expect from 'captured regulators'.   Just look at how MFG was dealt with.

DaveyJones's picture

The bankers, the finance industry, they don't do jail. These pathetic fines are the (small) cost of doing business. No wonder this place is going down. 

TeMpTeK's picture

I put a bid in to buy before I pulled the bid and sold.


achmachat's picture

so... those 9.5 million dollars represent how many days' worth of profit for them?

Rainman's picture

they'll spoof it all back by noon today.

SMG's picture

When coruption becomes this widespread, collapse is the only result.  Not much longer.

It is inevitable, Mr. Anderson.

Stuck on Zero's picture

If the government fines wrong doers less than they earned from illicit activities then it is a partner in crime.  Period.


SeattleBruce's picture

Right.  Tthe 9.5M is not going to some Mother Teresa

"and in a stunning example of actually doing its job, FINRA fined Newedge" - what?!  No one's going to jail...yawn...

Prepare accordingly.

NoTTD's picture

It is stunning only in the sense that it did anything.

DaveyJones's picture

exactly. I've noticed the government is a partner in crime in most industries. ANd it's now this pathetically naked which tells you how desperate they be, how bad things are, and how worse they'll become 

Whoa Dammit's picture

Probably about 2 hours worth. 

Temporalist's picture

Silly computers...don't they know that ekwities are going up only moar?  Just buy and hold.

Flakmeister's picture

As good a place as any for this: (and so much for the theory that Morsi was an Obama stooge...)

Exclusive: US bankrolled anti-Morsi activists

Documents reveal US money trail to Egyptian groups that pressed for president's removal.

Documents obtained by the Investigative Reporting Program at UC Berkeley show the US channeled funding through a State Department programme to promote democracy in the Middle East region. This programme vigorously supported activists and politicians who have fomented unrest in Egypt, after autocratic president Hosni Mubarak was ousted in a popular uprising in February 2011.

The State Department's programme, dubbed by US officials as a "democracy assistance" initiative, is part of a wider Obama administration effort to try to stop the retreat of pro-Washington secularists, and to win back influence in Arab Spring countries that saw the rise of Islamists, who largely oppose US interests in the Middle East.

Information obtained under the Freedom of Information Act, interviews, and public records reveal Washington's "democracy assistance" may have violated Egyptian law, which prohibits foreign political funding.

It may also have broken US government regulations that ban the use of taxpayers' money to fund foreign politicians, or finance subversive activities that target democratically elected governments.

Tortuga's picture

UR quoting UC Berkley for a source, for sop to obummer, that he really wasn't in the tank for Morsi. LMAOROTF.

SeattleBruce's picture

"It may also have broken US government regulations that ban the use of taxpayers' money to fund foreign politicians, or finance subversive activities that target democratically elected governments."

Obama took a LOT of money from foreign sources in his two 'elections' by disabling source checking on its online giving technology.  Conveeeeeeeeeeeenient.  Did the FEC do anything?...but, of course not.  So now, Obummer's just returning the favor, according to their latest interpretations of the Democratic party and what they like to call 'community organizing' around the world.

Regulations, smeguilations - the law breaking starts with the US Constitution, and no one goes to jail - so anything goes.

And they call Snowden a traitor - puuuhllleeeease....

Bush/Cheney broke laws/lied in other ways - but the 'media' opposed them.

Such a sorry state our US goobermint is in.  I love Ron Paul's comments recently about how we're reaping the fruit of our meddling in other state's affairs.  And I do get that the world's a dangerous place.

NoTTD's picture

Get off this thread, dickhead.


You want to write about whatever comes to mind, grind your personal axes, start you're own blog.

Acet's picture

Only $9.5 million for 4 years of abuse!???

Crime does pay!

krispkritter's picture

Pays for FINRA's porn surfing, coffee, and bigger monitors to play WoW on...

Tortuga's picture

Ouch, that hurt.

"Call Corzine, sweetie; and tell him our petty cash will be low for about, oh, 11 nanoseconds so he is still to come in today and tell him thanks for the headline text over at ZH. Record, my ass."

q99x2's picture

Finra is simply taking its cut. It is a tax not a crime.

ziggy59's picture

What about 9 plus years in jail, and forced to watch Crap, Nothing But Crap reruns as punishment?

DaveyJones's picture

that would raise 8th amendment issues

Debeachesand Jerseyshores's picture

WTF!!!!! $9.5 MILLION for over 4 YEARS of CORZINE ACTIVITY !!!!!!!!


NoWayJose's picture

Now that firms know the amount of any fine will be trivial compared to their potential profits, it will open up these manipulative practices for all the trading firms. All this did was allow the algos to more accurately price in the fines as a cost if doing business. Without jail time or suspension of trading privileges, Wall Street has no fear.

Acet's picture


This has been going on for at least a decade or two.

EVERYBODY in finance knows that only the small fry ever get trully punished. The big banks, brokers and other financial institutions just have a small likelyhood of being forced to give the Government a small cut of the profits from their crimes.

Certainly both in the US and the UK, regulators are at best a joke, at worse able and willing partners in executing and covering up financial crimes.


Bananamerican's picture

"All this did was allow the algos to more accurately price in the fines as a cost if doing business...Wall Street has no fear."

So, who IS still playing in Wall Street's catbox?

Why the hell would ANY sentient being particpate?

Is this just the hi-tech version of the Zimbabwe market melt-up?

SmallerGovNow2's picture

$9.5 million to these guys is like me getting a 25 cent speeding ticket.  Means dick...

Pumpkin's picture

Steal billions and get a $9.5 million fine?  And it is not even paid to the traders who lost due to the practices.  Typical.  Why do pretend justice at all?  No one can take this seriously.

DaveyJones's picture

Shhhh, don't give them any ideas

loonyleft's picture

FINRA fined Newedge, which is one of the largest futures brokers in the world and ranks third in terms of U.S. customer assets on deposit, a record $9.5 million.

TEOTWAWKI. This is big, really big. I mean this could mean a myriad of changes. Probably a drop of 0.0002% in bonuses. Never mind a new yacht, refinishing the wood interiors of the existing could possibly be delayed by a week....maybe 2. But it gets worse. Buying a private jet? NOPE, sorry, you'll have to make do with the one you already have.  Oh, I could go on, but this is big. Serious big. 

youngman's picture

FINRA´s needed to pay some bonuses this year...and with the sequistration...they needed some extra easy money for them...a penalty with no one at fault or no crime involved...cha ching

machineh's picture

More sleeze from the futures industry.

I traded futures for years, but it is clear that industry lacks both integrity and adequate supervision from bought-off regulators.

Shut the fuckers down.

NoTTD's picture

9.5m huh?


Again, this "biggest fine ever" amounts to no more than a service charge.  What would they stop?

buzzsaw99's picture

volume would be zero without guys like that

Soph's picture

$9.5 million fine? How is that in any way a meaningful penalty? $9.5 billion, or 95 billion...maybe, but even those numbers would likely not change anything. Its another example of the powers that be talking big, and acting small. In truth this is simply putting more lipstick on the pig. Its still an ugly sow and nothing has changed with this move by FINRA.


If they start throwing people in maximum security prisons for a decade or two, then one might actually do some good and discourage the activity.