HSBC unit settles trade volume advertising case

HSBC Securities (USA) has agreed to pay a $575,000 fine and revise certain written supervisory procedures (WSPs) to settle allegations of inaccurate trade volume advertising and related supervisory weaknesses – but has secured credit for co-operating with regulators. 

The Financial Industry Regulatory Authority (Finra) has accepted a letter of acceptance, waiver and consent from the firm, which does not admit or deny wrongdoing. An HSBC spokesperson did not have an immediate comment.

According to Finra, HSBC Securities between November 2009 and September 2014 used an order management system (OMS) that allowed the firm to designate certain accounts to automatically transmit trade volume to Bloomberg for advertisement. During that period, the self-regulatory organization (SRO) says in a related filing, the firm opened a number of accounts with a default setting that resulted in certain trade activity being sent to Bloomberg twice.

The firm’s programming error caused HSBC Securities to over-advertise trade volume executed in at least 30 separate trading books during the period at issue, Finra alleges.

Bloomberg enables subscribers, including broker-dealers, to advertise their intra-day and historical trading in a particular security, officials say in the regulatory filing. Buy-side traders use those trade advertisements as a pre-trade analytic to help them figure out which brokers have recently had access to the greatest amount of liquidity in a particular security and are therefore most likely to execute the contra side of their trade with the minimum of market impact, the officials note.

They add that sell-side traders use the advertisements as a way to measure their market share performance in comparison to their peers in a particular security or based on an aggregate level. Over longer periods, trade advertisement data can be used by issuers to gauge which brokers are most likely to be interacting with clients that invest in their security, sector or type of security and are most likely to be able to help them access those clients to raise additional capital, officials say.

While participation in the Bloomberg service is voluntary, advertising inaccurate trade volume violates NASD Rule 3310, IM-3310 and Finra Rule 5210 – which HSBC Securities did, the SRO alleges.

Specifically, Finra says the firm:

• Over-advertised its executed volume by up to 50 percent in 10 instances
• Over-advertised its executed volume by 50 percent or more, but by less than 100 percent, in nine instances
• Over-advertised its executed volume by 100 percent or more in 15 instances.

In addition, the SRO writes that many firms, including HSBC Securities, use OMS platforms that enable traders to manually enter trade volume for advertising on Bloomberg. Finra says that between August 2011 and December 2011, an unnamed trader at the firm manually entered trade volumes in certain securities for advertising on Bloomberg – but those securities were also sent to Bloomberg for automatic advertising through the firm’s OMS.

The trader’s erroneous manual advertisements meant HSBC over-advertised its executed trade volume in 42 instances by roughly 7.9 million shares, according to Finra.

The SRO alleges that, between June 3, 2011 and September 30, 2014, the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance with rules and regulations regarding trade volume advertising. Specifically, Finra says, the firm’s supervisory system did not include WSPs stating:

• The identity of the person(s) at the firm responsible for ensuring compliance with relevant rules
• The step(s) such person(s) should take to ensure compliance with those rules
• How often those person(s) should take such steps(s)
• How the enforcement of the WSPs should be documented.

CO-OOPERATION CREDIT
Officials write that, consistent with a 2008 notice to members, the ‘mitigated monetary sanction in this matter reflects the firm’s self-reporting of the over-advertising violations’ caused by the automatic transmission issues related to the alleged programing error.

In that notice, officials outline the circumstances in which ‘extraordinary co-operation’ by a firm or individual may directly influence the outcome of an investigation. The SRO categorizes co-operation that may result in credit as:

• Self-reporting before regulators are aware of the issue
• Extraordinary steps to correct deficient procedures and systems
• Extraordinary remediation to customers
• Providing ‘substantial assistance’ to Finra’s investigation.

‘These steps alone or taken together can be viewed in a particular case as extraordinary co-operation and, depending on the facts and circumstances, can have an impact on Finra’s enforcement decisions,’ officials write.

The Commodity Futures Trading Commission’s division of enforcement on January 19 issued its own advisories outlining the factors it will consider in evaluating co-operation in the agency’s investigations and enforcement actions (CorporateSecretary.com, 1/24).