UBS Settles SEC Dark Pool Case for $14M

A UBS AG (UBS) subsidiary has consented to pay $14.4 million to resolve Securities and Exchange Commission claims that the firm committed violations involving the marketing and operation of its dark pool. The subsidiary, UBS Securities LLC, is accused of placing some players at an advantage in its alternative trading system the UBS ATS, which is the second largest dark pool in the United States.

According to the regulator, the Swiss bank failed to adequately disclose the way the dark pool worked to all of its clients, which allowed only some investors to know all of its rules. The SEC said that beginning in 2008 and into 2012, UBS let customers turn in orders at prices with denominations under a penny even though market rules dictate that all orders cannot be in any denomination below one cent.

UBS pitched the PrimaryPegPlus (PPP) order type, which let traders sell and purchase securities at the under the one cent increment prices, primarily to market makers and high-frequency trading firms. This let them get in front of orders that were made at the legal, whole-penny prices.

The SEC also said that UBS did not tell all subscribers about the “natural-only crossing restriction,” which was supposed to ensure that certain orders would not execute against orders made by the high-frequency trading firms and market makers. The shield only benefitted orders made using UBS algorithms, which are automated trading strategies. It wasn’t until 2 1/2 years after this feature’s launch that every subscriber was notified of its existence.

The SEC is accusing UBS of other violations, including the submission of incomplete and inconsistent statements about sub-penny orders and its natural-only crossing restriction in Form ATSs. The firm also purportedly did not set up written standards for giving subscribers access to the natural-only crossing restriction.

The Commission says that from August 2008 to March 2009, and for a certain period in 2010, UBS failed to preserve certain order data for the UBS ATS. It is accused of violating confidentiality requirements when it gave employees that shouldn’t have had access the private trading data of subscribers.

By settling, UBS is not denying or admitting to the SEC findings. Of the $14.4 million payment, $12 million is a penalty.

According to Bloomberg, a source said that the SEC is working on rules that will compel dark pools to follow some of the same requirements as exchanges. This would include requirements dealing with disclosure of order types available in the dark pools, as well as pricing data sources.

The regulator is reportedly considering whether to make dark pool operators tell investors who else is trading as opposed to keeping trader identities anonymous. Some critics have expressed concerns that dark pools give computerized trading firms the upper hand. Also, because certain dark pools use aggregated feeds to match traders, critics are worried that investors are getting dated data when considering whether to trade.

SEC Order (PDF)

More Blog Posts:
NY Sues Barclays Over Alleged High Speed Trading Favors in Dark Pool, Stockbroker Fraud Blog, June 26, 2014
Deutsche Bank, UBS Are Probed Over Dark Pools & High-Frequency Trading, While An Investor Sue Barclays, Institutional Investor Fraud Blog, July 30, 2014

SEC Working on Mutual Fund Regulations, Conducts Dark Pool Probes, Enacts New Exchange Rules, Institutional Investor Fraud Blog, November 20, 2014