by T. GormanPosted on Posted in SECActions

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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by T. GormanPosted on Posted in SECActions

Respondent Kirkland is an investment adviser who founded Universal Financial Independence, Inc., a firm created to sell books and subscriptions. She was joined in marketing the trading system by Respondents Duane Davis, the founder of Investment Software Systems, Inc. and a managing member of Gold Key Investing LLC, and Stephen Schmidt, the founder of TradeWins Publishing Corp. Each individual and entity was named as a Respondent.

Ms. Kirkland is the creator of a trading system built on two competing indicators linked to the price movement of certain NYSE stocks. The adviser typically directed the purchase of options on modestly priced shares listed on the exchange if the Price Percentage Oscillator and Average Directional Movement Index simultaneously changed directions. The former generally decreased when the share price declined while the latter usually increased under those circumstances. The coordinated movement of the indicators supposedly signed a time-limited “squeeze” regarding the underlying stock’s price movement. That indicated an opportunity to purchase either call or put options on the stock.

Messrs. Schmidt and Davis entered into marketing arrangements through their respective firms with Ms. Kirkland. Under the arrangements Ms. Kirkland would serve as the investment adviser while Messrs. Davis and Schmidt would, respectively, manage the trade signal services and provide the platform through which subscriptions were sold.

Marketing materials highlighted the profitability of Ms. Kirkland’s strategies. Marketing brochures, for example, claimed a “win-rate” of 83% for the strategy yielding annual returns of 910%. While the manner in which the rates were determined was not clearly defined, it implied that they were based on actual transactions. Investors were also led to believe that Ms. Kirkland used the system which could, for a fee, be sent directly to a broker for execution. Effusive testimonials from clients reconfirmed the validity of the approach. Millions of dollars poured into brokerage accounts over a four-year period, beginning in 2015, from investors looking to replicate the claim that $6,000 could become almost $2 million in a few months with the system.

In fact, the results cited were not based on actual trades. Investors complained to Respondents as they used the system but could not replicate the claimed results. The marketing continued nevertheless. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2).

To resolve the matter Ms. Kirkland consented to the entry of a cease and desist order based on the sections cited in the Order while each other Respondent consented to the entry of an order based only of the Exchange Act section. Ms. Kirkland is also barred from the securities business. Each Respondent will also pay a penalty of $40,000.

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