The United States Financial Industry Regulation Authority, or FINRA, had recently imposed Jefferies LLC, formerly known as Jefferies Execution Services, with a $215,000 fine. This fine is part of a settlement imposed on the firm due to violations of FINRA’s rules.

Direct Market Access Without Supervision

JefEx offered its clients direct market access to various securities exchanges during the time of the 1st of January, 2014, and the 28th of February, 2015. However, the firm failed to properly implement a reasonably sufficient supervisory system or a written supervisory procedure to monitor for potentially illegal activities. Activities like potential spoofing or layering by the exchange’s direct market access clients were not adequately monitored or reported within this timeframe.

Both FINRA and other exchanges had their surveillance services identify over 150,000 separate instances of potential layering activities within JefEx’s order flow. These instances were recorded through the timeframe above, with the highest concentration (97%) going through October 2014 to February 2015.

JefEx Already Notified

JefEx actually started to receive multiple notifications about the potential layering happening on exchange back in November of 2014. Since then, JefEx began to develop a layering surveillance system, but the system itself wasn’t implemented until the 11th of February, 2015.

After the surveillance system was successfully implemented, JefEx successfully identified one broker-dealer client in particular, only referred to as “Client A.” This client was suspected of participating in layering activities and subsequently had its account terminated on the 13th of February, 2015. Client A had placed around 24 million orders between September 2014 and February 2015, accounting for 6% of JefEx’s direct market access order flow during this time.

Handling The Errors

JefEx also updated the written supervisory procedures as well in order to reflect the integration of the exchange’s spoofing and layering surveillance system. JefEx took this further, making use of a third-party surveillance system from a dedicated service provider since August 2016. The company achieved full integration of this system in the last portion of 2017

Through this entire process, the firm has violated a number of regulatory rules. JefEx violated NASD Rules 3010(a) and (b) with its conduct prior to December 2014. The company also broke FINRA Rules 3110(a) and (b) for conduct after December 2014 and in 2010

Hopefully, the exchange has learned its lesson, and it will stay on the straight and narrow as specified by FINRA. The move could’ve been avoided, and it’s cost the company $215,000 to pay for that mistake.