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"NASD will react quickly and aggressively when market participants attempt to distort market processes," said Stephen Luparello, NASD's Senior Executive Vice President for Market Regulation.
In October 2004, NASDAQ introduced the Modified Opening Process (MOP) so that markets would be unlocked and uncrossed at the open, thereby promoting the price discovery process. An NASD investigation found that during the first week of the MOP, eight Trillium traders and certain Schonfeld customers devised and implemented an impermissible trading strategy that allowed them to receive favorable executions in the MOP. Specifically, under the MOP, the first eligible orders submitted after 7:30 a.m. got the first available executions at 9:25 a.m. Thus, as soon after 7:30 a.m. as possible, in order to be first in line in the queue for executions at 9:25 a.m., the Trillium traders and Schonfeld customers entered two orders, a bid and an offer, in a same security, each of which crossed the market. At the time the traders and customers entered the orders, they did not know in which direction the market would move and thus did not know whether it would be beneficial to buy or sell the security. By placing orders simultaneously on opposite sides of the market in this fashion, the traders and customers were able to position themselves to obtain favorable executions regardless of whether the market moved up or down. The Trillium traders and Schonfeld customers never intended to both buy at the bid and sell at the offer. Rather, they intended to cancel one of the orders, either the bid or the offer, and leave only the order likely to get a favorable execution at 9:25 a.m. The strategy worked only if the traders and customers intended from the beginning to cancel one of the quotations. NASD rules prohibit the publication of non-bona fide quotations.
The non-bona fide orders - which were placed in over 1,000 different securities over two weeks - also adversely affected price discovery during the pre-open hours.
NASD also found that Trillium did not adequately supervise the activity of its traders during the MOP and that Schonfeld failed to supervise the activity of its retail day traders, who are not registered with NASD.
In concluding these settlements, the firms and traders neither admitted nor denied the charges, but consented to the entry of NASD's findings. The firms and individuals agreed to the following sanctions:
| Trillium Trading LLC | a censure, a $225,000 fine ($175,000 for supervision violations and $50,000 for improper quotation practices by its traders) and an undertaking to revise its written supervisory procedures |
| Schonfeld & Company LLC | a censure, a $175,000 fine (for supervision violations) and an undertaking to revise its written supervisory procedures |
| Imran Ahmad | a $10,000 fine and a two-month suspension |
| Feming Chan | a $20,000 fine and a two-month suspension |
| John R. Chinnock | a $10,000 fine and a four-month suspension |
| Cary S. Grill | a $10,000 fine and a one-month suspension |
| Zachary G. Hepner | a $10,000 fine and a three-month suspension |
| David B. Lazarus | a $10,000 fine and a two-month suspension |
| David E. Schwarz | a $10,000 fine and a one-month suspension |
| Nikolas Z. Vrettos | a $10,000 fine and a two-month suspension |
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2005, members of the public used this service to conduct more than 4.3 million searches for existing brokers or firms and requested more than 194,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.
("Copyright 2006 National Association of Securities Dealers, Inc.")
