According to FINRA, Sagetrader, LLC was censured and fined a total of $775,000 for failing to reasonably supervise potentially manipulative trading on its platforms, including layering, spoofing, wash trades, and marking the close or open.
The firm's supervisory system had multiple deficiencies. First, the firm conducted no supervisory reviews for potentially manipulative trading initially. When it later implemented an automated surveillance system that generated post-trade alerts, the system did not initially surveil for marking the open, and a coding error prevented it from capturing trading activity of individual traders at one high-risk customer. Second, the firm's review of alerts was unreasonable, with first-level reviewers permitted to close alerts without any oversight or supervision by a principal.
The firm's written supervisory procedures failed to provide reasonable guidance on reviewing for manipulative trading. Procedures required escalation of "significant alerts" to a review committee but did not explain what qualified as significant or what steps reviewers should take. The firm focused on resolving individual alerts from separate traders but had no system to consider aggregate alerts from multiple traders at the same customer to evaluate overall regulatory risk. Although the firm identified two customers as high risk requiring enhanced surveillance, it had no procedures for conducting such surveillance and did not do so. Finally, the firm did not routinely document alert reviews, and existing documentation was often insufficient.
This case emphasizes the responsibility of broker-dealers to actively surveil for market manipulation that can harm legitimate traders and undermine market integrity. Manipulative practices like spoofing and layering create false impressions of supply and demand, leading to artificial prices. Investors should be aware that reputable firms must maintain robust surveillance systems with proper oversight. The lack of effective supervision allowed potentially manipulative trading to continue undetected, putting other market participants at risk.
