9/13/2010 - High-Frequency Firm, 11 Individuals Fined Over "Non Bona Fide" Orders

September 13, 2010
Tom Steinert-Threlkeld

The director of trading, nine traders and the chief compliance officer of a high-frequency trading firm, as well as the firm itself, have been fined $2.3 million for placing "non bona fide orders" that an industry regulator said were designed to generate buying or selling activity in specific stocks.

The Financial Industry Regulatory Authority fined Trillium Brokerage Services, based in New York City, $1 million "for using an illicit high-frequency trading strategy and related supervisory failures.''

The individuals and their sanctions include:

• John J. Raffaele, trader: $220,000 fine, $78,245 in disgorgement, and a two-year suspension.
• Daniel J. Balber, director of trading: $200,000 fine, and a two-year suspension in a principal capacity.
• Frank J. Raffaele, Jr., senior vice president of trading: $80,000 fine, $61,495 in disgorgement, and a two-year suspension, 10 months of which are in all capacities.
• Brian M. Gutbrod, trader: $80,000 fine, $51,465 disgorgement, and a 17-month suspension.
• James P. Hochleutner, vice president of trading: $65,000 fine, $27,286 in disgorgement, and a two-year suspension, 10 months of which are in all capacities.
• Samuel J. Yoon, trader: $50,000 fine, $33,535 in disgorgement, and a 14-month suspension.
• Tal Sharon, trader: $25,000 fine, $20,622 in disgorgement, and an 11-month suspension.
• Rosemarie Johnson, chief compliance officer: $50,000 fine, and a one-year suspension in a principal capacity.
• Bradley L. Jaffe, trader: $20,000 fine, $12,169 in disgorgement, and a nine-month suspension.
• Tal B. Plotkin, trader: $12,500 fine, $7,125 in disgorgement, and a six-month suspension.
• Michael S. Raffaele, trader: 11-month suspension.

The firm and the individuals were not immediately available to comment. In concluding this settlement, Trillium and the individual respondents neither admitted nor denied the charges, but consented to the entry of FINRA's findings, the broker-dealer regulatory body said.

The conduct was initially referred to FINRA by NASDAQ OMX Group's MarketWatch Department.

Through its proprietary traders, Trillium "entered numerous layered, non-bona fide market moving orders to generate selling or buying interest in specific stocks," FINRA charged. "By entering the non-bona fide orders, often in substantial size relative to a stock's overall legitimate pending order volume, Trillium traders created a false appearance of buy- or sell-side pressure."

This induced other firms to place orders against limit orders entered by the Trillium traders.

Once their orders were filled, the Trillium traders would then immediately cancel orders that had only been designed to create the false appearance of market activity.

FINRA counted 46,000 instances where this "improper high-frequency trading strategy" gave Trillium "advantageous prices." The actions created profits $575,000, of which the firm retained over $173,000 and was required to disgorge.

Counterparties "were unaware that they were acting on the layered, illegitimate orders entered by Trillium traders.'' FINRA said.

"Trillium's trading conduct was designed to improperly bait unsuspecting market participants into executing trades at illegitimately high or low prices for the advantage of Trillium's traders," said Thomas R. Gira, Executive Vice President, FINRA Market Regulation.

The illicit orders were mainly used to create "the appearance of substantial selling or buying interest in the NASDAQ Stock Market and NYSE Arca exchange.''

Last Monday at the Economic Club in New York, Securities and Exchange Commission chairwoman Mary Schapiro signaled that order cancellations would be getting the attention of rules enforcers.

"We know that, in the ordinary course, many high frequency trading firms cancel 90 percent or more of the orders they submit to the markets,'' she said. "There may, of course, be justifiable explanations for many cancelled orders to reflect changing market conditions."

But, she said, "the SEC and other regulators are looking carefully at certain practices in this area to assess whether they violate existing rules against fraudulent or other improper behavior.''

One counteraction she said the SEC could take is requiring a minimum "time-in-force" for quotations, particularly if they were submitted by market participants who otherwise were not subject to meaningful obligations governing their quoting behavior.

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