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SEC Charges Broker-Dealer for Misleading Disclosures About Its Order Routing Practices

Sept. 20, 2021

File No. 3-20576

September 20, 2021 - The Securities and Exchange Commission instituted settled charges against Illinois-based Coda Markets, Inc. for making material omissions and misleading statements to the broker-dealer subscribers of its alternative trading system (ATS) about how it handled and routed orders for execution. The SEC also charged Coda's President, Edward G. O'Malley, on a settled basis, for causing Coda's violations.

The SEC's order finds that from December 2016 to July 2019, Coda failed to disclose its use of a circular routing arrangement when handling subscriber orders. According to the SEC's order, Coda disclosed that it created individually customized routing tables for the subscribers to its ATS, with venues ranked in the routing tables depending on the subscriber's trading priorities. The order finds that when Coda had discretion over the routing table, Coda inserted one of two broker-dealers as the first external destination because, among other reasons, Coda had agreements with these broker-dealers to share the net trading profits on executions of orders routed from Coda. The order further finds that Coda derived a material portion of its annual profits from this undisclosed arrangement. As stated in the order, O'Malley knew the details of the routing arrangement, and reviewed and approved Coda's disclosure documents containing material omissions and misleading statements.

The SEC's order finds that Coda violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and that O'Malley caused Coda's violations. Without admitting or denying the findings in the order, Coda consented to a censure and a cease-and-desist order, and agreed to pay a $1.2 million civil penalty. Also without admitting or denying the findings, O'Malley consented to a cease-and-desist order and agreed to pay a $35,000 penalty.

The SEC's investigation was conducted by Liora Sukhatme and Thomas P. Smith, Jr. of the SEC's New York Regional Office, and supervised by Sanjay Wadhwa. The investigation was prompted by an examination by Steven Vitulano, Paul Eberhard, Daniel Tempone, and Michael Marren of the New York and Chicago Regional Offices' broker dealer examination teams.

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