Virtu, one of the most active firms in the payment for order flow sector, has been hit with an enforcement by the Securities and Exchange Commission (SEC).
According to the SEC’s allegations, Virtu allowed access to material, nonpublic information (MNPI) which could have been used in an illicit manner.
The SEC’s complaint states:
“Defendants repeatedly — and falsely — told their institutional customers and the public that VAL used “information barriers” and “systemic separation between business groups” in order to safeguard these customers’ MNPI. In fact, VAL did not place this information behind information barriers that safeguarded MNPI. During a 15-month period, virtually all employees at VAL and its affiliate broker-dealers could access MNPI regarding its customers’ trades, which included the name of the customer, the name of the security purchased by the customer, the side (buy or sell), the execution price, and the execution volume.”
The complaint goes on to explain that such trading information could have benefited a trader who saw large institutional orders.
The complaint claims that for a 15 month period Virtu overstated their controls. The SEC described the action as “sending a strong message to firms” that need to do more to secure user data.
Carolyn M. Welshhans, Associate Director of the SEC’s Enforcement Division, said “Virtu allegedly painted a materially misleading picture as to the safeguards it had in place to protect its customers’ confidential information, even when customers specifically asked about the firm’s handling of their post-trade information.”
Payment for Order Flow is a method that is used to reduce commissions for individual stock orders. A broker may utilize the compensation for the order flow in place of commissions. It has been reported that brokers that route using payment for order flow still route solely on execution quality and price improvement. In 2020, there was approximately $11 billion in price improvement in zero commission trading in this US.
