Bloomberg Tradebook Settles Fraud Charge with SEC

Some brokers claim to be low price, offering investors the lowest price for execution. Others focus on other factors such as speed or liquidity, claiming that their method of obtaining execution for a proposed trade transaction is superior based on those or other factors. The Commission’s most recent action in this area involved an agency broker claiming to have a system based on advanced technology that would determine which market center was appropriate based on factors such as price and liquidity. The firm failed to disclose, however, that in many instances the system was not used or the that the broker did not have a factual basis for its statements regarding execution. In the Matter of Bloomberg Tradebook LLC, Adm. Proc. File No. 3019785 (May 6, 2029).

Tradebook is a registered broker-dealer based in New York city. It is a subsidiary of Bloomberg LP. The firm is an agency broker that has buy-side customers such as asset managers and institutional investors and sell-side clients such as broker-dealers.

Customer orders were traditionally executed in one of two ways. First, the order could be routed to the firm’s Alternative Trading System or ATS. Second, the system cited in the firm’s marketing materials could be used – the so-called Smart Order Router. That system supposedly determined the best execution venue by considering factors such as price and liquidity.

In 2010 the firm became concerned about its profit margins. In some instance the margins were low while in others the firm lost money. This spawned a third method of execution for buy side clients that became known internally as the Low Cost Router or LCR. Under this method the order was sent to a broker with whom the firm had entered into a partner agreement. The partner brokers generally had lower fees based on volume of trades. The partners also used their systems to route the trade.

Tradebook sent certain orders to the partners for execution. For one partner the firm provided routing instructions for each order which specified the market center to be used. For others Tradebook permitted the partners to select the routing. One of these partners executed over 1.3 million Tradebook customer orders over the period of 2010 through 2018. Another of these partners executed 4.9 million orders.

Tradebook’s practice of allowing partners to make routing decisions for certain customer orders was inconsistent with its representations to customer. To the contrary, materials available to those customers touted Tradbook’s routing decisions from its advanced and sophisticated system.

Generally, when a partner received a Tradebook customer order as part of the LCR arrangement it would report back the execution information. During some periods, however, the information was not reported back – Respondent did not know where the order was sent or executed. Those facts were not disclosed to the client. In those instances Tradebook reported back the venue it had intended for execution without admitting it did not actually know if the information was correct as to the actual venue of execution. The Order alleges violations of Securities Act Section 17(a)(2).

To resolve the proceedings, Respondent consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. The firm also agreed to pay a penalty of $5 million. The Commission considered the cooperation of the firm in agreeing to accept its offer of settlement.

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