AOS, Inc. dba TradingBlock
The findings stated that the firm’s surveillance for manipulative trading was not tailored to the particular risks of its business. The firm relied on an automated trade surveillance platform to monitor for potentially manipulative trading, including spoofing. The platform was configured such that the spoofing alert would trigger only if a non-bona fide order was canceled within seconds of the execution of a bona-fide order in the security. This time parameter, however, was not reasonably designed to detect spoofing in thinly traded options because, unlike actively traded securities, orders for illiquid securities can remain unfilled for extended periods, sometimes minutes, allowing spoofing to occur even if a non-bona fide order is not canceled within seconds. The firm had no other alerts or procedures designed to detect potential spoofing in illiquid securities. As a result, the firm failed to detect spoofing in thinly traded options by a customer account.
In addition, the firm did not reasonably review and investigate its trade surveillance alerts. The firm’s policies and procedures required that, for each alert generated by the firm’s trade surveillance system, the alert reviewer enter a comment explaining the disposition of the alert and escalate any potentially manipulative trading to the firm’s chief operations officer (COO) and chief compliance officer (CCO) for review. However, the alerts were routinely closed using a generic, pre-populated comment.
The firm also did not reasonably review potential “wash” trading. The firm built and implemented a proprietary, automated process to surveil for and cancel potential “wash” trades. The firm, however, did not have policies or procedures for investigating these trades for patterns of potential market manipulation.
Finally, the firm’s surveillance for suspicious patterns in customer money movements was not reasonably designed. The firm’s review was not reasonably designed to detect patterns of suspicious transactions. In addition to the large number of money movements and accounts it contained, the report also lacked key information for identifying suspicious patterns, such as customer income or asset information, or comparisons of any money movements against a customer’s contemporaneous trade activity.
The findings also stated that firm’s AML program did not include appropriate risk-based procedures for conducting ongoing customer due diligence. The firm lacked written procedures regarding what account activity or risk profile warranted ongoing customer due diligence. In practice, the firm did not perform ongoing customer due diligence and instead relied on its clearing firms to notify it of any adverse information or news about a customer that might impact the customer’s risk profile.
