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SEC Charges Against Wedbush Securites Raise Issues With Direct Risk Controls

The regulator accused Wedbush of violating the Market Access Rule by allowing customers to set their own risk controls on proprietary and third-party platforms.

Last week, the Securities and Exchange Commission filed charges against Los Angeles-based Wedbush Securities for violating the market access rule, signaling that brokers must directly take charge of risk controls.

The SEC alleges that Wedbush failed to establish, document, and maintain a system of risk management controls and supervisory procedures to manage the risks associated with Rule 15c3-5.

The move is a sign that the SEC is toughening its enforcement of the Market Access Rule, a rule that was approved in November 2010 and was put into effect on July 14, 2011.

Citing the firm’s failure to maintain “direct and exclusive control” over settings in trading platforms used to send customer orders to the markets, the SEC alleges that Wedbush violated the Market Access Rule from July 2011 into January of 2013.

The regulator contends that Wedbush allowed thousands of anonymous foreign traders to send orders directly to US trading venues to trade billions of shares each month.

“Wedbush provided market access to overseas traders without approval and without ensuring that they complied with U.S. law,” stated Andrew J. Ceresney, director of the SEC Enforcement Division, in a release announcing the charges.

“We hold Wedbush accountable for reaping substantial profits while failing to protect U.S. markets from the risk posed by these traders,” commented Ceresney in the release. The Enforcement Division blames the violations on Jeffrey Bell, the former EVP in charge of Wedbush’s market access business, and Christina Fillhart, SVP in the market access division.

Defending itself against the charges, Wedbush posted a statement that said it “respectfully disagrees” with the SEC’s administrative complaint that the firm’s risk controls were inadequate.

“This rule has a level of depth and complexity that people are starting now to appreciate,” said Anthony Masso, president and CEO of Succession Systems, a provider of risk management and analytics to the trading process.

“Brokers are struggling with the exact nature of how to put together a good program around 15c3-5 requirements and, within that program, how to deal with different lines of business and the complexity they pose,” said Masso.

The dispute stems from trading activity by certain former correspondent firms and clients that held market access accounts through Wedbush’s clearing services business in 2011 through the beginning of 2013. Wedbush said it terminated those accounts more than a year ago.  In its statement, Wedbush said the SEC is seeking to impose additional regulatory requirements “retroactively,” without giving fair notice in advance of its expectations.

However, the SEC said that prior to the effective date (July 14, 2011) of the Market Access Rule, Wedbush received indications that its sponsored-access trading business posed regulatory and compliance risks. In 2009 and 2010, two of Wedbush’s sponsored-access customer firms extended their market access to a Latvian trader who used that access to conduct profitable trading as part of a widespread account intrusion and market-manipulation scheme, said the SEC in its order.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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