Hw the SEC Unraveled Pipeline Trading System Scheme

For the affiliate, the combination of technology, its ties with Pipeline and a feel for the market, developed through constant trading against Pipeline clients and via sophisticated techniques like flashing, allowed Milstream to get better at gauging and filling Pipeline clients' orders.

Once it judged that an order for a given stock was to buy, Milstream commonly would purchase shares of the stock on another market, then turn around and use these to fill the client's order, the SEC and people familiar with the operation said.

If Milstream instead judged that a Pipeline client wanted to sell a stock, Milstream often would sell first, by borrowing shares from a broker and selling them in a short sale. Then Milstream would buy the client's shares—thus filling its sell order—and use these newly purchased shares to close its short position, according to the SEC account and those familiar with the affiliate.

From:
http://online.wsj.com/article/SB10001424052970203889904577199114267593518.html

 

This excerpt sounds like a perfectly normal block trading algorithm, and is common practice at most broker/dealers.

 

Read more here:

http://www.sec.gov/litigation/admin/2011/33-9271.pdf

2. The undisclosed subsidiary (the “Affiliate”) was entirely owned and funded by Pipeline, which created the Affiliate to provide liquidity to Pipeline’s customers.

3. Pipeline advertised that it had “no prop[rietary trading] desk gaming [customer] orders.” Its advertising and other public statements repeatedly claimed that the trading opportunities on the ATS were “natural,” that the ATS would not reveal the side (i.e., whether an order was to buy or to sell) or price of a customer order before a trade was completed, that the ATS denied “arbitrageurs” and “high-frequency traders” information needed to “front run,” that it provided a refuge from “predators,” and that it prevented “pre-trade information leakage.”

4. These claims were false and misleading in that the Affiliate was on the other side of the vast majority of trades executed on the ATS. The Affiliate sought to predict the side and price of Pipeline customers’ orders and then trade on the same side as those orders in other trading venues before filling them on the ATS.

 

Most telling excerpt page 10:

<i>
“No prop desk”
45. Some operators of ATSs own proprietary trading desks that trade securities on their ATSs with the operators’ own money. Pipeline’s customers believed that Pipeline was not such an ATS. Pipeline specifically instructed its sales force to tell customers that there was “no prop desk at Pipeline attempting to game your block orders.”
</i>

 

E. VIOLATIONS
88. As a result of the conduct described above, Pipeline Trading “willfully”2 violated:
a. Section 17(a)(2) of the Securities Act, which prohibits, directly or indirectly, in the offer or sale of securities, obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the state-ments made, in light of the circumstances under which they were made, not misleading.
b. Rule 301(b)(2) of Regulation ATS, which requires an ATS to file an amendment on Form ATS at least 20 days prior to implementing a material change to the operation of the ATS, 30 days after the end of a quarter when information contained in an initial operation report filed on Form ATS becomes inaccurate, and promptly upon discovering that an initial operation report filed on Form ATS or an amendment on Form ATS was inaccurate when filed; and
c. Rule 301(b)(10) of Regulation ATS, which requires an ATS to establish adequate safeguards and procedures to protect subscribers’ confidential trading information and to adopt and implement adequate oversight procedures to ensure that the safeguards and pro-cedures for protecting subscribers’ confidential trading information are followed.
89. As a result of the conduct described above, Federspiel and Berkeley caused Pipeline Trading to violate Section 17(a)(2) of the Securities Act and Rule 301(b)(10) of Regulation ATS, and, pursuant to Sections 15(b)(6) and 21B(a)(3) of the Exchange Act, are liable for civil penalties for their “willful”3 acts or omissions that were a cause of Pipeline Trading’s violations of Rule 301(b)(2) of Regulation ATS.

 

Yeah, the WSJ reported that this was an action brought out by a whistleblower.

 

So they've ceased and desisted without admitting or denying wrongdoing?

Even if they're still around I'm sure they'll lose business over this.

 

New name and new chairman.

http://www.tradersmagazine.com/news/pipeline-new-name-aritas-securities-sec-fine-109716-1.html

Pipeline Trading Systems, which was fined $1 million by the nation's top regulator in October, has changed its name to Aritas Securities. The announcement came this morning.

Jay Biancamano, named executive chairman in November, said Aritas Securities would focus solely on three products: AlphaPro, which recommends trade execution strategies based on past experience; its Algorithm Switching Engine, which attempts to predict market moves and allows traders to switch strategies in anticipation; and the Block Market, an electronic venue for trading in large blocks of stock.

Biancamano came to Aritas from Liquidnet, the top electronic venue globally to trade stocks in block size. Biancamano led its global execution strategy and the launch of Liquidnet H2O, its streaming liquidity dark pool.

After the fine was announced, Pipeline immediately halted operation of Milstream Securities, the brokerage that landed Pipeline in hot water last year with the Securities and Exchange Commission.

 

Figures nobody believes in ethics anymore. These men should have been barred, but probably learned something in their compliance process.

It also figures that they'd publish this announcement in a trading journal read by few people.