Wedbush fined $675,000 by Finra and Nasdaq for leveraged ETF trading snafus

The broker-dealer served as the clearing firm for customer Scout Trading, and acted as an authorized participant of various exchange-traded funds

Mar 21, 2016 @ 1:49 pm

By Bruce Kelly

A series of trading and clearing snafus by Wedbush Securities Inc. involving a client's redemption activity and trading of leveraged ETFs has resulted in the Financial Industry Regulatory Authority Inc. and the Nasdaq Stock Market fining the firm $675,000.

Wedbush served as the clearing firm for its broker-dealer customer, Scout Trading, and acted as an authorized participant of various exchange-traded funds. This enabled Wedbush to submit redemption/creation orders on Scout Trading's behalf and on behalf of its other clients, according to Finra, which announced the fine Monday, although the settlement was agreed to last month.

From January 2010 to March 2012, Scout Trading was insufficiently long in the ETF shares comprising the redemption orders, according to Finra. During the review period, Scout Trading submitted at least 255 naked redemption orders through Wedbush in 11 ETFs, totaling over 295 million shares, according to Finra. This naked redemption activity, along with short selling of the ETFs on the secondary market by Scout Trading, resulted in substantial, repeated failures to deliver by Wedbush.

Failures to deliver may result from either a short or a long sale, according to the Securities and Exchange Commission. A failure to deliver may result from “naked” short selling, according to the SEC.

In a naked short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period, according to the SEC. As a result, the seller fails to deliver securities to the buyer when delivery is due; this is known as a failure to deliver.

For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives.

Scout Trading submitted creation orders, used to create new shares of the ETFs, through Wedbush to close out the failures to deliver, according to Finra. However, Scout Trading, shortly thereafter, submitted further naked redemption orders, or engaged in additional secondary market selling activity in the ETFs, through or with the assistance of Wedbush, that led to failures to deliver redeveloping at Wedbush, Finra said. This pattern of naked redemption orders followed by creation orders resulted in persistent and sustained failures to deliver at Wedbush, and was profitable but impermissible, according to Finra.

A Wedbush spokesperson, Teny Josephbek, did not return a call to comment. Wedbush neither admitted nor denied the charges. Scout Trading, which was a former member of Nasdaq but not a member of Finra, last year agreed to a $3 million fine.

0
Comments

What do you think?

View comments

Most watched

INTV

How advisers can be a gamechanger for women investors

Why women defer to men when it comes to finances and how advisers can combat this phenomenon and make a difference for female investors, according to Heather Ettinger, founder and CEO Luma Wealth Advisors.

Events

MassMutual's LaPianna: Creating better conversations with your clients

What's the secret to building better client relationships? MassMutual's Paul LaPianna says it all begins with great conversations.

Latest news & opinion

Finra reaches settlements with 56 firms for overcharging customers on mutual funds

Regulator obtained $89 million in restitution as a result of the crackdown.

Schorsch, AR Capital to pay $60 million to settle SEC charges

The former REIT czar and his firm wrongfully obtained millions linked to REIT mergers.

CFP Board postpones enforcement of its revised fiduciary standard

Board's new Code of Ethics and Standards to be enforced next June, in line with the SEC's Reg BI

Charles Schwab reportedly in talks to buy USAA brokerage, wealth management business

The deal would net Schwab roughly $100 billion in new assets.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print