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by Howard Haykin

Wedbush Securities agreed to pay a $110K fine to settle FINRA charges that it violated Regulation SHO when it: (i) mismarked short sale orders; (ii) engaged in short sales without fulfilling its borrowing obligations; and, (iii) failed to comply with trading unit aggregation requirements. It is the 3rd aspect of this case that Financialish covers in this post.

BACKGROUND.    Wedbush, a Los Angeles, CA-based broker-dealer, has been a FINRA member since 1955. The firm has several relevant prior regulatory disclosures – though relating in large part to mismarked orders and incorrect OATS submissions.

FINRA FINDINGS.    Rule 200(f) of Regulation SHO … requires a broker or dealer to aggregate all of its positions in a security unless it qualifies for independent trading unit aggregation – which is available only if:

• the broker-dealer has a written plan of organization that identifies each aggregation unit ("AGU"), specifies its trading objectives, and supports its independent identity;
• each AGU within the firm determines, at the time of each sale, its net position for every security that it trades;
• all traders in an AGU pursue only the particular trading objectives or strategies of that AGU and do not coordinate that strategy with any other aggregation unit; and,
• individual traders are assigned to only one AGU at any time.

During a 2014 Trading and Financial Compliance Exam (“TFCE Exam"), staff of FINRA Market Regulation observed that Wedbush Securities employed 4 individuals who acted as both a trader in one AGU and as a trader or supervisor in another AGU. Two individuals served in such dual capacities dating as far back as February 2008. In addition, the firm's written plan of organization reflected unclear strategies, strategies that overlapped for multiple AGUs, and traders that also acted as traders or supervisors in other AGUs.

FINRA Market Regulation concluded that ... Wedbush engaged in trading unit aggregation but failed to ensure that: (i) individual traders were assigned to only one AGU at any time; (ii) AGUs had operated autonomously and engaged in separate trading strategies without regard to other trading units; and, (iii) AGUs had not coordinated trading activities or interacted or shared order or position information. 

Such arrangement is improper because it could result in the coordination of trading strategies or trading based upon position or trading information of the other AGU.

This case was reported in FINRA Disciplinary Actions for October 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014039939801.