The Financial Industry Regulatory Authority has fined the broker-dealer arm of Wells Fargo $200,000 for overstating the trades it made for clients, possibly to attract more business.
Wells Fargo Securities also agreed to a censure to resolve the Finra’s allegations that it overstated its advertised trade volume through Bloomberg LP, Thomson Reuters and other data providers.
Wall Street’s self-regulatory body said that from December 2016 to June 2018, Wells Fargo exaggerated its trading volume by nearly 148 million shares in over 10,000 instances. The firm also failed to establish and maintain a supervisory system during the relevant period, including written supervisory procedures for trading volume captured by market data providers.
FINRA, an industry-funded watchdog, found 4,597 instances in which an error in the firm’s trade advertising software caused to falsely advertise certain options trades as equity transactions. Additionally, a misconfiguration of the order management system used by Wells Fargo’s trading desk caused certain trades to be advertised on Bloomberg twice.
“During this period, the firm conducted daily reviews of its manually advertised trade volume, and monthly reviews of a sample of its auto advertised trade volume. The firm, however, had not defined criteria for selecting the monthly sample, or for determining how many securities or what proportion of the firm’s advertised trade volume should be included in the sample. Also, to perform its monthly reviews, the firm compared its actual trading volume against its advertised trade volume as reflected in a report generated by its trade advertisement software and on the Thomson Reuters webpage,” the authority said in a consent order filing dated December 22.
That process, however, was not designed to identify overstatements of trading volume advertised on Bloomberg which were sent directly through the firm’s order management system rather than through its trade advertisement software.
To its credit, Wells Fargo self-reported the issue and in October 2018 revised its supervisory systems and implemented new WSPs addressing the issue.
The settled enforcement action speaks to the need of broker-dealers to continually monitor the output of their automated compliance tools to ensure generating accurate results. FINRA has repeatedly warned them about misrepresenting their trading metrics in order to attract business from large investors. Such practices often grow in periods of low volume as the securities industry typically suffer from excessively low trading volume.
Under FINRA rules, brokerage firms are supposed to advertise only actual orders and open interests that were placed by customers, which are used by third-party data providers to compile reports and rankings.
