14 Specialist Firms for Improper Proprietary Trading

The Securities and Exchange Commission today brought enforcement actions against 14 specialist firms for unlawful proprietary trading on several regional and options exchanges. The firms agreed to settle the SEC’s charges by collectively paying nearly $70 million in disgorgement and penalties.

The SEC charged the specialist firms for violating their fundamental obligation to serve public customer orders over their own proprietary interests by “trading ahead” of customer orders, or “interpositioning” the firms’ proprietary accounts between customer orders.

“These firms violated the public trust by abusing the privileged position they had as specialists on the various exchanges,” said James Clarkson, Acting Director of the SEC’s New York Regional Office. “Today’s enforcement action demonstrates that the SEC has no tolerance for unscrupulous trading practices, and will work vigorously to protect investors from improper trading conduct.”

David Rosenfeld, Associate Director of the SEC’s New York Regional Office, added, “Specialists who engage in unlawful proprietary trading hurt the investing public and undermine confidence in the fairness of our capital markets. We will aggressively pursue market professionals who engage in improper trading and hold them accountable for their actions.”

The SEC’s investigation into the improper trading began with a referral from the SEC’s Office of Compliance Inspections and Examinations (OCIE). Lori Richards, Director of OCIE, said, “The SEC expects strict compliance with the trading rules governing market participants.”

The Commission instituted settled administrative and cease-and-desist proceedings against eight specialist firms:

  • Botta Capital Management L.L.C.;
  • Equitec Proprietary Markets LLC;
  • Group One Trading L.P.;
  • Knight Financial Products LLC;
  • Goldman Sachs Execution & Clearing L.P.;
  • SLK-Hull Derivatives LLC;
  • Susquehanna Investment Group;
  • TD Options LLC.

According to the SEC’s order, the firms engaged in improper proprietary trading on the American Stock Exchange, the Chicago Board Options Exchange, and the Philadelphia Stock Exchange.

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