Alternative Trading Systems Operator Liquidnet Charged with Violations of Market Access Rule and for Failing to Protect Confidential Subscriber Trading Information

The Securities and Exchange Commission today announced settled charges against broker-dealer Liquidnet Inc., an operator of multiple alternative trading systems (ATSs), for failing to have necessary controls and procedures regarding market access, for failing to protect confidential subscriber trading information, and for related disclosure failures. Liquidnet agreed to pay a $5 million civil penalty to resolve the SEC's charges.

As an ATS operator that provides market access to non-broker-dealers, Liquidnet is subject to the market access rule, which requires it to have a system of controls and procedures to prevent the entry of orders that would exceed appropriate credit thresholds for its customers. The SEC's order finds that, for a number of years, Liquidnet violated the market access rule by, among other things, setting inappropriate credit thresholds, including having a default of $1 billion.

In addition, to satisfy the applicable ATS exemption from having to register as an exchange, Liquidnet must comply with certain conditions, including having written safeguards and procedures to limit access to confidential subscriber trading information to certain employees of the ATS. According to the SEC's order, for several years, Liquidnet failed to adequately limit access to systems containing confidential subscriber trading information and failed to make adequate related disclosures on certain forms. The SEC's order finds that Liquidnet also made material misrepresentations to customers about its market access controls and to subscribers about its ATS safeguards for subscriber confidential trading information.

"ATS operators account for a significant amount of liquidity in public markets and are part of the fabric of our market structure," said Joseph Sansone, Chief of the Market Abuse Unit. "ATS operators must have controls in place to mitigate risks associated with their systems, such as market access and the potential exposure of confidential subscriber trading information in order to protect investors."

The SEC order finds that Liquidnet willfully violated the market access rule and other rules governing ATSs. Without admitting or denying the findings in the order, Liquidnet agreed to be censured and pay the $5 million penalty noted above. The SEC's order also finds that Liquidnet undertook remedial efforts, including retaining an outside consultant to correct and improve its controls and procedures related to the market access rule and Regulation ATS. Liquidnet has undertaken to submit certain reports and certifications in connection with those efforts.

The SEC's investigation was conducted by Rachael Clarke, Mandy Sturmfelz, and Lindsay S. Moilanen of the Market Abuse Unit and was supervised by Mr. Sansone.