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Attorney General Barbara D. Underwood today announced that Credit Suisse Securities (USA) LLC (“Credit Suisse”) has agreed to pay $10 million to settle an investigation into fraudulent practices in connection with Credit Suisse’s Retail Execution Services (“RES”) business. Credit Suisse’s RES division was a wholesale market-making business that executed retail equity orders of everyday investors that Credit Suisse received from retail broker-dealers like Edward Jones, Raymond James, and others.
The Attorney General and the federal Securities and Exchange Commission found that Credit Suisse systemically treated orders that were not subject to public reporting of aggregate execution quality less favorably than orders that were subject to such reporting, without disclosing this practice to RES’s customers. In addition, Credit Suisse misrepresented the liquidity its customers had access to when they sent orders to RES.
“Credit Suisse gamed its publicly-reported statistics and misled customers – and now they’re being held to account,” Attorney General Underwoodsaid. “Wall Street firms cannot offer misleading assurances about the execution quality they provide their customers while engaging in electronic trading strategies that undermine those promises.”
The Attorney General’s investigation, which involved extensive review of Credit Suisse source code, trading data, and server logs, uncovered that Credit Suisse programmed a function called “CountsForStats” into the computer code RES used to manage customer orders. “CountsForStats” distinguished between orders that had to be included in Credit Suisse’s publicly reported execution quality reports, issued pursuant to SEC Rule 605 (“Rule 605-eligible orders”), and orders that would not be included in those reports (“non-605 orders”). RES systematically treated its customers’ non-605 orders, which did not “count for stats,” worse than Rule 605-eligible orders.
Credit Suisse treated non-605 orders less favorably than Rule 605-eligible orders in two ways:
- First, for relatively large non-605 orders that had the potential to move the market, RES disproportionally used a particular routing tactic that caused greater market impact than other routing tactics. RES then attempted to profit from this market impact by arranging RES’s principal trading to benefit from any post-trade price reversion, where stock prices that have been temporarily displaced due to market activity revert toward the original price level. These practices resulted in less favorable overall execution prices – meaning customers received worse prices. Credit Suisse did not disclose these practices, which ran counter to Credit Suisse’s representations that it attempts to avoid unfavorable market impact and seeks to execute customer orders at the most favorable terms reasonably available.
- Second, RES generally did not provide price improvement (i.e. a better price than the then-current quotes) to non-605 orders, while it frequently provided price improvement to Rule 605-eligible orders. Credit Suisse did not disclose this practice, even though it represented that providing opportunities for “robust” and “enhanced” price improvement was one of the “core” elements of RES’s approach to executing orders.
Finally, RES sought to differentiate itself from its competitors by representing that its customers would have access to “vast” liquidity in Crossfinder, Credit Suisse’s dark pool (then the largest in the United States), as well as dark pools operated by other broker-dealers. In dark pools, unlike displayed exchanges and markets, bids and offers are not visible to market participants, which can help protect clients with large orders, since other market participants (like high frequency traders) cannot see the pending large order and move the market in response. However, RES executed only a de minimis number of held orders (i.e.orders without time or price discretion) in dark pools, depriving such orders of the liquidity that Credit Suisse had promised.
Today's settlement is the latest in a series of actions arising from the Attorney General’s Investor Protection Bureau’s initiative related to electronic and high frequency trading. In connection with those efforts, the Attorney General filed an action against Barclays in 2014, after uncovering evidence that Barclays made knowing and systematic misrepresentations to investors about how, and for whose benefit, Barclays operated its dark pool, and that Barclays exposed its clients to the predatory traders from whom it promised to protect them. In January 2016, Barclays settled with the NYOAG for $35 million, admitted that it violated securities laws, and agreed to install an independent monitor to ensure the proper operation of its electronic trading division.
Also in January 2016, the Attorney General resolved an investigation of Credit Suisse’s practices relating to the operation of its Crossfinder dark pool. The Attorney General found that Credit Suisse had made numerous misrepresentations regarding the operation of its dark pool, leading Credit Suisse clients to believe that they had the ability to avoid trading with high-frequency trading firms whose order flow Credit Suisse itself considered “opportunistic” and detrimental to institutional investors. Credit Suisse settled with the Attorney General for $30 million.
In December 2016, the Attorney General announced the resolution of an investigation of Deutsche Bank, which revealed that it too had engaged in fraud in connection with its electronic trading services, in particular in its order routing practices. Deutsche Bank settled with the Attorney General for $18.5 million and admitted that it violated New York State securities laws.
In March 2018, the Attorney General resolved an investigation of Bank of America Merrill Lynch, which found that the firm systematically concealed from its clients that it was secretly routing their orders for equity securities to electronic liquidity providers for execution in a process that employees referred to internally as “masking.” The firm also made other misleading statements that made its electronic trading services appear safer and more sophisticated than they really were. Bank of America Merrill Lynch settled with the NYOAG for a record $42 million penalty and admitted that it violated New York State securities laws.
As a result of the Attorney General’s investigations regarding electronic trading at major Wall Street financial institutions, four firms have now agreed to pay $130.5 million in penalties to the State of New York for their wrongful conduct.
The settlement announced today is the result of a joint effort by the New York State Office of the Attorney General and the SEC, and the $10 million penalty Credit Suisse will pay in connection with this matter will be divided evenly between the State of New York and the SEC. Attorney General Underwood appreciates the SEC’s collaboration on this matter.
The Credit Suisse RES matter was handled by Assistant Attorneys General Rebecca Reilly and Jonathan Zweig of the Investor Protection Bureau, overseen by Investor Protection Bureau Chief Cynthia Hanawalt, with notable contribution by Jonathan Werberg, Director of Research and Analytics. The Investor Protection Bureau is part of the Economic Justice Division, which is led by Executive Deputy Attorney General Manisha M. Sheth.
