## Facts

- Trillium Brokerage Services, LLC (a FINRA member proprietary trading firm) and certain associated persons resolved an enforcement matter through a Letter of Acceptance, Waiver and Consent (AWC) dated August 5, 2010.
- From November 1, 2006 through January 31, 2007, Trillium, acting through proprietary traders, used a high-frequency “layering” strategy on NASDAQ and NYSE Arca.
- Traders placed bona fide limit orders at or improving the best bid or offer and, on the opposite side of the market, entered numerous large non-bona fide orders at prices outside the best bid or offer to create apparent buy- or sell-side pressure.
- After other market participants reacted and executed against Trillium’s bona fide orders, Trillium traders promptly canceled the non-bona fide orders and repeated the pattern, including by switching sides.
- The conduct occurred more than 46,000 times over roughly three months and generated about $575,000 in profits, with approximately $173,000 retained by the firm after trader payouts.
- FINRA found Trillium’s supervisory system and written supervisory procedures were not reasonably designed to prevent or detect the manipulative activity.

## Issues

1. Whether the repeated entry and rapid cancellation of non-bona fide orders to influence other traders constituted manipulative, deceptive, or fraudulent conduct.
2. Whether publishing quotations without reasonable cause to believe they were bona fide, and for a manipulative purpose, violated FINRA/NASD quotation rules.
3. Whether the firm failed to establish and maintain reasonable supervision and written procedures to detect and prevent the improper trading.

## Decision

- FINRA accepted the AWC in which respondents neither admitted nor denied the findings but consented to their entry and to sanctions.
- FINRA found Trillium and associated traders engaged in layering and violated NASD Rules 2110, 2120, 3310, and IM-3310.
- FINRA found Trillium failed to maintain adequate supervisory systems and procedures reasonably designed to prevent and detect the misconduct (including under NASD Rule 3010).
- The firm was censured, fined $1,000,000, and ordered to disgorge $173,000.
- Individuals were sanctioned with fines, disgorgement, and suspensions ranging from six months to two years.

## Legal Principles

- Entering orders without intent to execute, for the purpose of creating a false appearance of market depth or buying/selling interest, constitutes manipulative and deceptive conduct prohibited by NASD Rule 2120.
- Publishing quotations without reasonable grounds to believe they are bona fide, or for a manipulative purpose, violates NASD Rule 3310 and IM-3310.
- Trading activity that uses deceptive practices to obtain prices unavailable in a fair market violates the obligation to observe high standards of commercial honor and just and equitable principles of trade under NASD Rule 2110.
- Member firms must maintain supervisory systems and written procedures reasonably designed to detect and prevent manipulative order-entry patterns; failure to do so supports supervisory liability and related sanctions.

## Conclusion

FINRA imposed firm-level and individual sanctions after finding that a high-frequency layering strategy relied on non-bona fide orders to mislead market participants and that the firm’s supervision and procedures were insufficient to detect and prevent the misconduct.


Trillium Brokerage Servs., LLC, AWC No. 20070076782-01 (FINRA 2010)