The Financial Industry Regulatory Authority (FINRA) has ordered E-Trade to pay $350,000 after finding that they failed in their supervisory responsibilities by not establishing and maintaining a system for detecting potentially manipulative trading practices among clients from February 2016 through November 2021.
FINRA found that E-Trade failed to maintain proper records and procedures which led them into admitting guilt for paying almost double what they should have owed. The broker-dealer was required by law, as well as their own organization’s rules on how much each party is entitled to (FINRA).
In a stunning Turn of Events, E-Trade was found guilty by FINRA for violating its rules. The company’s actions violate both 3110 (regarding supervisory systems) and 2010(governing standards in commercial honor & principles trades).
E-Trade’s consent to FINRA’s findings is an admission that they violated several rules and now have agreed upon punishment.
E-Trade declined to comment on FINRA’s allegations and the sanctions imposed by it, which also included a censure as well an agreement within 180 days of them notifying you (ETR) about this AWC that they will provide information showing how your company has implemented supervisory systems.
Morgan Stanley bought E-Trade for $13 billion in 2020, making it one of the largest purchases that year.
Failures Of E-Trade
E-Trade has been using surveillance reports to identify potential wash trades and prearranged purchases by its clients since December 2016.
“The FINRA has charged several former employees with manipulating stock prices. They were able to do so because certain reports used parameters that significantly restricted their ability to detect such trading, particularly in lower-priced and thinly traded securities (which may be more easily affected by manipulative traders).
The financial firm E-Trade used a surveillance report to identify potential wash sales, which is defined as “one or more transactions where there is no change in beneficial ownership.”
The FINRA accused that surveillance system of wrongly flagging trades as large-dollar transactions, even if they were for less than $1k.
FINRA accused E-Trade of allowing potential wash sales and prearranged trades to go unnoticed by their surveillance reports. The commission also notes that these types of transactions can occur more than one second apart, meaning they would not be detected if executed simultaneously – even though there’s no time limit on when an action has occurred about this kind of transaction!
FINRA accused E-Trade of not having surveillance systems that were reasonably designed to detect trading in thinly traded stocks.
The financial regulator FINRA has issued a warning about this practice called “artificial trading.” It’s where clients attempt to capitalize on an artificially increased price by effecting trades in quick succession and then going back to did sides of markets shortly afterward.
FINRA accused the firm of using surveillance reports that were not designed to detect potentially manipulative trading.
FINRA has provided some interesting examples of what they consider to be “abnormal trading activity.” For example, if one side or position trades within a single second and the other does not then that could raise an eyebrow with regulators because it seems like there may have been something fishy going on!
FINRA has drawn attention to the potential for manipulative trading in retail accounts that have reduced their positions below ten percent during the day.
FINRA found that E-Trade’s surveillance reports “only flagged such trading patterns as potentially manipulative if the customer canceled their order, even though they can manipulate prices without canceling orders.”
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