SEC hits UBS with record $12 million penalty 19 January 2015Washington DC Reporter: Stephanie Palmer
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A subsidiary of UBS has agreed to pay a record penalty after been charged by the US Securities Exchange Commission (SEC) with disclosure and confidentiality violations related to the operation and marketing of its dark pool.
UBS Securities LLC agreed to settle the charges by paying more that $14.4 million, including a $12 million penalty, the largest ever issued to an alternative trading system.
The SEC examination and investigation found that UBS failed to disclose a particular order type, PrimaryPegPlus (PPP), to all subscribers, pitching it almost exclusively to market makers and high-frequency trading firms.
PPP enabled subscribers to buy and sell securities by placing orders in increments of less than one cent, at a time when UBS was prohibited under Regulation NMS from accepting orders at such low prices. This technique allowed the subscribers to jump ahead of other orders of whole-penny, legal prices.
USB also failed to disclose its ‘natural-only crossing subscription’ to all subscribers. The subscription was developed to ensure that select orders could not be placed against orders by market makers or high-frequency trading firms. It acted as a shield, only available for orders placed using UBS algorithms, which are automated using trading strategies.
UBS did not tell all of its subscribers about the feature until about 30 months after it was launched, thereby unreasonably prohibiting subscribers from using it.
These disclosure failures were in violation of Section 17 (a)(2) of the Securities Act 1933, however UBS was also found to be in violation of several other securities laws.
UBS’s Form ATS and amendments filed featured inconsistent and incomplete statements about the dark pool’s sub-penny orders and natural-only crossing returns, while failing to attach some key documents.
It also failed to preserve order data for the dark pool from at least August 2008 to March 2009, and from August to November 2010.
Finally, UBS violated confidentiality laws, giving subscribers’ trading information to 104 employees who should not have had access to it.
Andrew Ceresney, director of the SEC’s Division of Enforcement, said: “The UBS dark pool was not a level playing field for all customers and did not operate as advertised.”
He added: “Our action shows our continued commitment to policing the equity markets to ensure fairness and compliance with all laws and rules.”
UBS consented to the order without admitting or denying any wrongdoing. The order censures the firm, and requires a payment of $2.24 million in disgorgement and $235,686 in prejudgement interest, on top of the $12 million penalty.
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