Vertical Trading Group, LLC ( CRD #104353, NewYork, NewYork) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $25,000 and required to revise its written supervisory procedures regarding the One Percent Rule; the dissemination of quotations to vendors; monthly order execution information; SEC Regulation SHO’s locate requirements; the acceptance of short sale orders for threshold securities; maintaining identical quotes; market order protection; best execution for block orders, not held orders and orders with special pricing terms or conditions; reporting the capacity in which trades are executed; ensuring the accuracy of trades reported on the member’s behalf; the tick test; and books and records. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it failed to properly identify orders as short sale orders and, therefore, failed to report to the NNTRF the correct symbol indicating whether transactions were buy, sell, sell short, sell short exempt or cross for transactions in reportable securities, and to properly mark the orders as short. The findings stated that the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance with applicable laws, regulations and FINRA rules concerning the One Percent Rule; the dissemination of quotations to vendors; monthly order execution information; Regulation SHO’s locate requirements; the acceptance of short sale orders for threshold securities; maintaining identical quotes; market order protection; best execution for block orders, not held orders and orders with special pricing terms or conditions; reporting the capacity in which trades are executed; ensuring the accuracy of trades reported on the member’s behalf; the tick test; and books and records. The findings also stated that the firm failed to produce documentation that it enforced its written supervisory procedures concerning the marking of order tickets and locate requirements. The findings also included that the firm failed to report the correct symbol to the NNTRF or OTCRF indicating whether the firm executed transactions in reportable securities in a principal, “riskless” principal or agency capacity. (FINRA Case #2006004088101)
(Note: VERT is widely recognized by investors as a market maker who abuses their market making obligations and manipulates stock prices for profit. They are the firm the less than reputable clients trade through when they want a “job done” and this enforcement case, despite the paltry fine, illustrates their willingness to avoid the rules.)
The point to this exercise is that a considerable expense is already being paid for having poorly designed rules and regulations.
1. FINRA must expense resource to audit and bring enforcement action against firms for short sale violations taking such resource away from more pressing issues.
2. Market pricing and efficiency suffers due to the fraud committed by these “compliance” errors. Short sales executed illegally in proprietary accounts or for preferred clients distort the markets.
3. Those fined must expense capital to address supervisory systems to meet the variables existent in the present rule making. Having a hard borrow would eliminate the expense of affirmative determination and would eliminate the trade mismarking as it would be abundantly clear with the borrow that it is a short sale.
4. Finally, abuse by market makers such as VERT can be addressed by proper rule making. More clearly defined rules must be put in place to address how and when market makers inject liquidity to insure that price discovery is not being distorted for profit by these firms.
The evidence is right before your eyes. The SEC should address rules in part based on how the present rules are being violated.