According to FINRA, SageTrader, LLC was censured and fined $175,000 for mismarking approximately 9.7 million principal short sell orders, resulting in approximately 390,000 executions being incorrectly marked as long, and for failing to obtain required locates for short sales.
The firm began effecting customer short sale orders on a net basis but mismarked its principal short sales as long because it incorrectly believed that receiving a customer sell order created an unconditional contract to purchase securities from the customer. However, the firm would only purchase securities from customers if it could sell those securities to another broker-dealer, meaning no unconditional contract existed. As a result of mismarking principal sell orders as long, the firm effected approximately 390,000 short sales without obtaining required locates under Regulation SHO.
When the firm corrected the marking issue and began marking principal sales as short, it uploaded easy-to-borrow lists to its smart order router to comply with locate requirements. However, the firm failed to program the router to prevent routing of short sale orders for securities not on the lists, resulting in approximately 100,000 principal short sales without proper locates.
Investors should understand that Regulation SHO's order marking and locate requirements exist to prevent abusive short selling practices and maintain market integrity. The locate requirement ensures that shares are available for borrowing before executing short sales, preventing failures to deliver. The firm also failed to establish reasonable supervisory procedures for order marking and locates for principal short sales, conducting no supervisory reviews in this area.