## Facts

- Brut, LLC was a registered broker-dealer operating an alternative trading system (ATS) known as an electronic communications network (ECN) for Nasdaq and listed equity securities.
- Brut’s ECN permitted subscribers to enter orders at sub-increment prices not permitted in the consolidated public quotation system (e.g., $20.003).
- Brut transmitted its best bid and offer to the public quotation system, sometimes in “rounded” form to conform to permitted quoting increments (buy orders rounded down; sell orders rounded up).
- Nonsubscribers could access Brut’s publicly displayed quotations through Nasdaq’s SelectNet order-routing system by sending orders against those quotes.
- Brut’s system executed trades between two ECN subscribers at the actual (non-rounded) order price.
- For nonsubscribers trading against Brut’s rounded public quotes, Brut executed at the rounded price rather than the more favorable actual price associated with the underlying customer limit order on Brut’s system.
- The execution logic prevented customer limit orders routed to Brut from receiving the full price improvement reflected by the actual limit price and, as a result, interfered with market makers’ ability to satisfy limit-order display obligations through ECN routing.
- Brut filed Form ATS describing its ATS operations but did not disclose that nonsubscriber executions against rounded quotes would occur at rounded rather than actual prices.
- After the conduct was identified, Brut reprogrammed its system so that rounded orders would execute at their actual prices.

## Issues

1. Whether an ATS that rounds quotes for public display may execute nonsubscriber orders at the rounded price when the actual limit order price is more favorable.
2. Whether an ATS operator’s system design can “cause” market maker subscribers to violate the limit-order display rule.
3. Whether failing to disclose nonsubscriber rounded-price execution mechanics in Form ATS constitutes a willful, materially misleading filing.

## Decision

- The SEC instituted and simultaneously resolved a settled administrative and cease-and-desist proceeding based on Brut’s offer of settlement, which Brut submitted without admitting or denying the findings (except as to jurisdiction).
- The SEC found Brut caused violations of the limit-order display rule by executing nonsubscriber orders at inferior rounded prices rather than the actual prices of the underlying customer limit orders.
- The SEC found Brut willfully filed a materially misleading Form ATS by omitting its nonsubscriber rounded-price execution practice.
- The SEC imposed remedial sanctions and ordered Brut to cease and desist from committing or causing violations of the relevant Exchange Act provisions and rules.

## Legal Principles

- An ATS/ECN that relies on rounding for public quotation display must still execute against those quotations at the actual, more favorable limit order price when that price is the basis for the displayed interest.
- An intermediary’s trading-system programming and execution logic may constitute conduct that “causes” other regulated entities’ violations when the system makes compliance ineffective in practice.
- Form ATS disclosures must accurately describe core execution and pricing mechanics; omission of such mechanics can be materially misleading.
- “Willful” in this context is satisfied when the respondent intentionally files the document containing the material misstatement or omission, regardless of proof of improper motive.
- Remedial steps taken after detection may affect the sanctions imposed but do not negate liability for prior violations.

## Conclusion

The SEC determined that Brut’s ECN execution rules—executing nonsubscriber trades at rounded, inferior prices while executing subscriber trades at actual prices—caused limit-order display rule violations and that Brut willfully filed a materially misleading Form ATS by failing to disclose this execution practice; the SEC imposed remedial sanctions and a cease-and-desist order.


In re Brut, LLC, Exchange Act Release No. 48718, Admin. Proc. File No. 3-11320 (Oct. 30, 2003)