SEC manipulative trading charges

4 December,, Lagos – In another case of market spoofing, the US Securities and Exchange Commission has levied fraud charges against three Chicago-based traders. A set of twins and their friend; Behruz Afshar, Shahryar Afshar and former broker Richard Kenny. They are accused of dubiously circumventing market structure rules in a pair of options trading schemes. The allegations brought against these individuals involves mis-marking option orders, in an attempt to get execution priority and lower fees, as well as engaged in manipulative trading known as “spoofing” to generate liquidity rebates from an options exchange.

Beating the system

Basically, the SEC manipulative trading charges stems from the fact that these individuals devised mediums of beating the system. Options exchange rules states that a non-broker-dealer that places over 390 orders in options per day (on average) – whether executed or not – during any calendar month in a quarter will be designated as a “professional” for the next quarter. What the Afshar brothers did in connivance with Kenny was to alternate accounts over specific periods so as to entitle them to benefits of being a “customer”, when in-fact, they fit in the category of “professional”.

“We allege that the Afshar brothers and Kenny fraudulently mismarked their orders to obtain benefits that they were not entitled to receive, and engaged in spoofing to collect liquidity rebates.  This alleged scheme deceived the options exchanges, disadvantaged other market participants, and undermined the fair operation of the U.S. securities markets,” said Andrew Ceresney, Director of the SEC Enforcement Division.

Spoofing activities

They also devised models to spoof the markets using  All-Or-None (AON) options orders – hidden orders that must be executed in their entirety or not at all. They placed smaller, non-bona fide displayed orders in the same option series and price as the AON orders, but on the opposite side of the market. They had no actual intention to execute these smaller orders, therefore, altering the option’s best bid or offer prices.

These individuals have been found to violate Section 17(a) of the Securities Act as well as Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5. And will appear in a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine.

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