The Securities and Exchange Commission is charging Latour Trading LLC with violating the agency’s rules regarding market structure. To resolve the case, the high-frequency trading firm will pay over $8M, including more than $3 million of disgorgement of gross trading profits, rebates it received from exchanges, and prejudgemenet interest, as well as a $5 million civil penalty.
According to the SEC, Latour violated the SEC’s Market Access Rule and Regulation National Market System for almost four years, sending millions of orders that were non-compliant to US exchanges. The Commission noted that because the firm shares parts of its electronic trading infrastructure with parent company Tower Research, some of the employees from that company could modify the computer code without the firm’s approval or knowledge.
In 2011, Tower Research made a coding modification that produced an error in the infrastructure, causing Latour to transmit millions of orders to exchanges that were not in compliance with Regulation NMS’s requirements. Specifically, from 10/10 through 8/14, Latour sent about 12.6 million intermarket sweep orders for over 4.6 billion shares.
With ISOs, trade centers may execute them at prices that might otherwise seem to violate Regulation NMS’s Rule 611, which usually mandates that trades be done at the best available price displayed. Also, trade centers can execute them right away according to the ISO router’s obligation to transmit additional orders against better price displayed quotes.
In the SEC case against Latour, some of the orders that were executed caused the high frequency trading firm to make gross trading profits and receive rebates from stock exchanges. The SEC said that over 1.1 million trade throughs and over 1.7 million crossed or locked markets occurred. Non-compliant ISOs were also transmitted because of information-related orders the firm had sent before.
After finding out about the error, Latour corrected a lot of the issues, addressing all of them by August of last year. The SEC said that the firm did not have direct and sole control over its financial and regulatory risk management controls even though that is required under the agency’s Market Access Rule. The Commission also said that Latour’s post-trading surveillance tools for identifying non-compliant trades were not adequate.
Latour has consented to the SEC’s order but is not denying or admitting liability.
The SSEK Partners Group is an institutional investor fraud law firm.
Read the SEC Order (PDF)