BofA Securities failed to detect spoofing due to inadequate supervisory systems. These systems were not equipped to identify manual spoofing by traders.
FINRA fined BofA Securities $24 million for engaging in spoofing activities. The fine addresses 717 instances of such activity in the U.S. Treasury markets by two former traders.
The incidents occurred from October 2014 to February 2021. Spoofing involves creating a false appearance of market activity to manipulate trading decisions.
Bill St. Louis, Executive Vice President of FINRA, highlighted the severity of spoofing in financial markets, particularly in U.S. Treasury securities. “Spoofing undermines the transparency and integrity of the markets by distorting the true nature of supply and demand. Spoofing is especially detrimental in the U.S. Treasury securities market, given its status as a benchmark for countless financial instruments and transactions. This action sends a strong message that FINRA will aggressively pursue firms that engage in spoofing, including cross-product spoofing.”
BofA Securities failed to detect spoofing due to inadequate supervisory systems
BofA Securities failed to detect spoofing due to inadequate supervisory systems. These systems were not equipped to identify manual spoofing by traders.
The investment bank’s supervision system for detecting spoofing in Treasuries was established only in November 2015. However, it remained deficient until mid-2019. The system initially focused on algorithmic spoofing, overlooking manual spoofing methods used by traders.
BofA Securities also failed to monitor orders entered into external systems until at least December 2020. This gap in surveillance contributed to the oversight. The firm did not supervise potential cross-product spoofing in Treasuries until September 2022.
FINRA fined Wedbush for improper market surveillance
Earlier this year, FINRA ordered Los Angeles-based Wedbush Securities Inc, a provider of private and institutional brokerage in the US, to pay a fine of $975,000 for various lapses over at least seven years.
An investigation by FINRA found that Wedbush has provided customers with access to third-party electronic trading platforms, However, the broker-dealer didn’t monitor customers’ trading activity, which increased the risk that potentially suspicious trading, including layering, spoofing, and wash sales, would go undetected.
Instead, the firm relied upon third-party broker-dealers to conduct such reviews. Also, since June 2015, Wedbush failed to supervise the trading activities of its proprietary traders and other firm customers for potential layering and spoofing.
The firm’s flawed implementation led to significant gaps in addressing the risk of market abuse. Specifically, Wedbush failed to detect suspicious activity of an institutional customer in 2017. Over two months, FINRA surveillance identified 2,900 layering exceptions involving over 130 stock symbols associated with the customer’s order flow.
In March, the executing broker dealer detected the potential layering by this client and provided a notice to Wedbush, which then closed his trading account. Wedbush, however, did not take any steps to spot potential and attempted market abuse across a wide scope of markets and financial instruments. As a result, nearly 90 customers opened more than 3.4 million transactions involving 13.5 billion shares without being subject to any checks.
