US SEC sues Virtu Financial for policy lapses on trade information access

By Austin Weinstein and Chris Dolmetsch

The US Securities and Exchange Commission sued market-making giant Virtu Financial Inc. in federal court for alleged policy lapses that the regulator said could have let employees access confidential information behind customers’ trades.
 

The SEC claimed on Tuesday that for a 15-month period “virtually all employees” at subsidiary Virtu Americas LLC could access confidential trade information. According to the regulator, data included the names of customers and securities, as well as execution price and volume. 

Wall Street’s main regulator also said that the firm made misleading statements about its barriers to prevent access of customer information. The SEC didn’t accuse Virtu of misusing information, and said the issues were resolved around April 2019. The company’s stock declined by as much as 6.9% on Wednesday. 

In a statement, Virtu said that the SEC’s case is focused on “hypothetical internal access,” and that it follows the firm’s public criticism of the agency’s controversial bid to overhaul stock-trading rules. 

Read More; Wall Street Stock Trading Set for Overhaul in New SEC Plan

“We look forward to vigorously defending ourselves in court against these meritless allegations,” said Doug Cifu, the firm’s chief executive officer. Cifu said that the regulator’s position “appears to be driven by politics and headlines rather than the facts and the law.” 

In response, the SEC said its case only had to do with alleged misconduct. “The charges were driven solely by Virtu’s alleged materially false and misleading statements and omissions regarding information barriers to prevent the misuse of sensitive customer information,” the agency said in a statement. 

Executing Trades
 

In addition to executing trades for others as one of the leading US market makers, Virtu makes its own trades. 

The SEC said this made Virtu’s alleged failure to prevent possible misuse of confidential information “particularly important.” Firms like Virtu, whose units both trade on behalf of clients and make markets themselves, are required to segregate information related to those functions. 

“We allege that proprietary traders had nearly unfettered access to material nonpublic information about its institutional customers’ trades – information which could be abused for personal gain,” Gurbir Grewal, the SEC’s enforcement chief, said in a statement. 

In its complaint, the SEC said Virtu, which processed about 25% of market orders placed by US retail investors at the time, failed to establish and enforce policies to prevent the misuse of material nonpublic information. These alleged lapses came as company repeatedly said it used “information barriers” and “systemic separation between business groups” to protect confidential data, according to the regulator.

Information Safeguards
 

Virtu made misleading claims to at least six customers about its procedures for safeguarding the information, the SEC said. The agency said the information could have been valuable to traders because it could reveal which Virtu customers were trading in the market, in what securities, as well as the direction and size of their orders.

The SEC’s probe into Virtu’s information-access policies was sparked after the company told SEC staff that some “post‐trade data in its back‐office database was hypothetically accessible to a broader group of employees than intended,” according the statement from Virtu.

The brokerage had entered into settlement talks with the SEC earlier this year, but those fell apart in July.  

The case is Securities and Exchange Commission v. Virtu Financial Inc., 23-cv-8072, US District Court, Southern District of New York.