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Screenshot of a breaking news alert e-mail from Q2 2017
The U.S. Securities and Exchange Commission (SEC) has announced that two exchanges formerly owned by Direct Edge Holdings, and since acquired by BATS Global Markets, the second-largest financial exchange in the United States, have agreed to pay a record-breaking $14 million penalty to settle charges that the exchanges failed to accurately and completely disclose how order types functioned on its exchanges, and for selectively providing such information only to certain high-frequency trading firms.
The case was prompted by an SEC whistleblower complaint filed in 2011 by market expert Haim Bodek, a client of Seattle-based litigation firm Hagens Berman, whom assisted Mr. Bodek in his efforts.
Mr. Bodek, who now serves as Managing Principal of Decimus Capital Markets and was former head of Trading Machines LLC, with tenures at Goldman Sachs, UBS and other investment banks behind him, has blown the whistle on deceptive practices by certain high-frequency trading firms and financial exchanges catering to them.
“This SEC action is the product of several years and hundreds of hours of careful analysis by our client, and an enormous job done by the SEC’s Market Abuse Unit under Daniel Hawke,” said Shayne Stevenson, partner and head of the whistleblower practice at Hagens Berman in a corporate statement.
“Haim Bodek performed an incredible public service at great risk to himself. He is exactly the kind of person the SEC whistleblower program was established to attract” concluded Mr. Stevenson.
The SEC Order finds that Direct Edge, an exchange that merged with BATS in late January 2014, failed to accurately describe order types used on the exchange. It also found that such information was selectively disclosed to certain high-frequency trading members and not to the SEC or the investing public.
This conduct violated sections 19(b) and 19(g) of the Securities Exchange Act of 1934.
The investigation centered on the controversial “price sliding” process for handling buy and sell orders. It revealed that the Exchange actually offered three variations of “price sliding” order types but did not disclose these features in its required disclosures to the SEC or to the investing public.
“This case and its outcome should serve as inspiration to other whistleblowers to report market manipulation and other fraudulent activities,” Shayne Stevenson said. “After all he has been through and grief from self-serving detractors, this is Haim Bodek’s well-deserved vindication.”
Prior to this penalty, the largest fine ever levied against a stock exchange was $10 million against Nasdaq OMX Group in May 2013 to settle civil charges stemming from mistakes made during Facebook’s initial public offering in 2012.