SEC Sanctions Credit Suisse For Inaccurate Marketing
In mid-September the Commission settled an action centered on a false claim by a dark pool operator that high frequency traders were not permitted in the venue. In the Matter of Citigroup Global Markets, Inc., Adm. Proc. File No. 3-18766 (Sept. 14, 2018). Days later Commissioner Robert Jackson gave a speech regarding the fairness of the markets and the impact of that on retail investors. As the month drew to a close the agency filed a settled action alleging that a trading operation operated by registered broker-dealer Credit Suisse Securities misrepresented the manner in which certain retail orders were handled and executed. In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-18857 (Sept. 28, 2018).
Credit Suisse operated a New York based wholesale market making business called Retail Execution Services or RES. It executed retail originated orders in equity securities from other broker-dealers. The operation received customer orders on either a held or not held basis. The former must be immediately executed at the prevailing market price. The latter allow for price and time discretion. The executing broker typically has discretion in the selection of routing and venues for execution. For held orders RES did not charge a commission or markup. Rather, its profit came from its principal trading.
The marketing for RES stressed quality executions, emphasizing its access to dark pool liquidity through its own venue and that of others. The firm did in fact frequently route its not held orders through the dark pool venues. It did not, however, typically route its held orders in this fashion. To the contrary, RES rarely executed these orders in the touted dark pool venues between September 2011 and December 2012. Indeed, during that period only a de minimis number of those orders were executed in the more liquid dark pools despite the statements in the firm’s advertising.
RES also did not handle its Rule 605 orders in accord with the representations in its marketing materials. Rule 605 requires that market centers such as RES publicly report certain aggregate order execution information on an aggregate basis with certain exceptions. RES received both Rule 605 eligible and non-605 eligible order flow. A computer distinguished between the held and not held Rule 605 orders. From mid-2011 through March 2015 RES treated many non-605 orders less favorably than Rule 605 –eligible orders that were similar in other respects. This differential was not disclosed to customers. For example, Credit Suisse represented that opportunities for what it called robust and enhanced price improvement was one of the core elements of RES’ systems. What the firm failed to disclose was the fact that the non-605 orders were generally ineligible for price improvement by RES.
Similarly, from February 2013 through March 2015 RES applied a market routing tactic which sent outsized non-605 orders to a lit venue rather that a dark pool. This tactic meant that the order generally had a greater market impact – price movement from execution – and therefore obtained a less favorable overall execution to those routed to a more liquid venue. This tactic did, however, give RES the opportunity to profit from the resulting price movements. The broker-dealer did not disclose these facts in the marketing for RES. 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 will also pay a $5 million penalty.