SEC Charges N.Y.-Based High Frequency Trading Firm With Violating Net Capital Rule For Broker-Dealers
$16 Million Penalty Is Largest Ever for Net Capital Rule Violations
The Securities and Exchange Commission today charged a New York-based high frequency trading firm with violating the net capital rule that requires all broker-dealers to maintain minimum levels of net liquid assets or net capital. The firm’s former chief operating officer is charged with causing the extensive violations.
An SEC investigation found that Latour Trading LLC operated without maintaining its required minimum net capital on 19 of 24 reporting dates during a two-year period, and the firm missed the mark by large amounts ranging from $2 million to $28 million. During this period, Latour’s trading at times accounted for as much as 9 percent of the trading volume in equity securities for the entire U.S. market.
To settle the SEC’s charges, Latour agreed to pay a $16 million penalty, the largest ever for violations of the net capital rule. The previous high was $400,000 in an enforcement action in 2004. Nicolas Niquet, Latour’s chief operating officer when the series of violations began, agreed to pay a $150,000 penalty to settle the charges against him.
“This record sanction reflects the seriousness of Latour’s violations of the net capital rule, which is a critical broker-dealer financial responsibility requirement,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “We also will aggressively pursue executives who cause the violations.”
According to the SEC’s order instituting a settled administrative proceeding, a crucial step for a broker-dealer when calculating its net capital is to take percentage deductions referred to as “haircuts” from the firm’s proprietary securities and other positions. The purpose of these haircut deductions as prescribed in the net capital rule is to account for the market risk inherent in a firm’s positions and create a buffer of liquidity to protect against other risks associated with the securities business. A failure to calculate proper haircuts can inflate a broker-dealer’s net capital.
The SEC’s order finds that Latour repeatedly miscalculated its net capital amounts in 2010 and 2011 by failing to make proper haircut deductions from the market value of its proprietary securities positions and other positions. Latour incorrectly used hypothetical positions that the firm did not actually hold to create hedges and capitalize qualified stock baskets. Latour also used inaccurate index composition data for certain international exchange-traded funds that the firm traded. Latour’s combined use of hypothetical positions and inaccurate index composition data resulted in haircuts that were generally far too low when calculating the firm’s net capital. Latour also failed to calculate minimum capital charges on all of its futures positions, and excluded some positions from taking any haircut at all due to a computer programming error. Niquet designed the processing code that facilitated Latour’s haircut calculations and caused its net capital violations.
According to the SEC’s order, Latour’s net capital violations also resulted in violations of the books and records and financial reporting provisions of the federal securities laws.
The SEC’s order finds that Latour violated Sections 15(c)(3) and 17(a)(1) of the Securities Exchange Act of 1934 and Rules 15c3-1, 17a-3(a)(11), 17a-4(f), and 17a-5(a). The order finds that Niquet caused Latour’s violations of Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1, 17a-3(a)(11), and 17a-5(a). The order censures Latour. Without admitting or denying the findings, Latour and Niquet agreed to pay the financial penalties as well as cease and desist from committing or causing any future violations of the securities laws.
The SEC’s investigation, which is continuing, has been conducted by Leslie Kazon, Alexander Vasilescu, Osman Nawaz, and Christopher Mele. The examination of the firm that led to the investigation was conducted by Ashok Ginde, Tamara Heller, Ilan Felix, Ronald Sukhu, and Jennifer Grumbrecht. The Enforcement Division collaborated with the SEC’s Division of Trading and Markets as well as Ms. Heller, Mr. Ginde, and Michael Fioribello of the National Exam Program.