The largest regulating body in the US financial industry, the Financial Industry Regulatory Authority (FINRA), has officially fined Virtu Americas LLC, formerly known as KCG Americas LLC. The fine comes in regard to various violations and failures that happened on Virtu’s part.

Improper Priority of Orders

The core part of these allegations focuses primarily on the methodology that the broker used in the priority of pending orders and executions. In particular, during the time period of May 2013 to September 2019. Virtu did not seem to have any form of written execution methodology when it came to its OTC equity securities that were executed outside of the automated Manning system and were otherwise manually handled.

To put it in perspective, FINRA managed to discover that the firm made use of manual OTC orders 35% of the time. This, as one would expect, left it outside the exchange’s Manning system and left it without any form of written documentation that adequately addressed priority requirements. When one considers Virtu’s size in the OTC industry, the lack of a written document describing methodology when it comes to manually executed orders brings significant risk.

Improper OTC Order Handling

When one puts the violations for the order flow aside, FINRA had discovered certain other offenses. The firm found that specific types of orders for NMS securities were manually handled before its market open. This accounts for particular orders in Nasdaq-listed securities, as well as things like stop orders. The move allows for the market maker to gain an advantage in trading price, while simultaneously reducing the fair price given to the clients.

Giants Setting Bad Examples

While the motivation of it is unclear, FINRA considers it irrelevant. The regulator views these violations as something that disrupts the standards of market trading in the US, something all regulators seek to uphold for investor interest. What’s particularly bad about this case, is the sheer size of Virtu when it comes to the OTC markets, being the largest OTC market maker in many respects. Virtu serves as a wholesale market maker for more than 10,000 different types of OTC securities and hosts a trading desk of 25 staff members.

The trading firm markets for over 25,000 different kinds of financial instruments, doing so across 235 various venues spread across 36 countries across the globe. The firm is in a constant state of quoting both buy and sell prices for other parties to trade against. The firm profits out of the bid-offer spread, making use of high-frequency trading (HFT) strategies to do so.