Flow Traders US LLC has agreed to pay a $50,000 fine as part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From at least August 2019 through April 2023, Flow Traders failed to establish, document and maintain financial risk management controls and supervisory procedures that were reasonably designed to prevent the entry of orders that exceeded appropriate pre-determined capital limits in the aggregate for the company .
The firm’s written supervisory procedures (WSPs) set a maximum notional value limit for symbols in which the firm was a registered dealer, for symbols in which it was not and for manual orders. In practice, the maximum position limit set for each individual equity symbol during the review period was less than the maximum amounts set out in the company’s WSPs. However, even these tighter position limits were absurd.
For most securities reviewed during this period, Flow Traders used less than five percent of the company’s daily maximum position limit per symbol. These pre-determined capital thresholds were unreasonable because they were set too high, and Flow Traders failed to demonstrate how the thresholds were reasonably designed to substantially limit the financial exposure arising from the company’s overall trading activity. In April 2023, the company revised its pre-defined capital limits and related supervisory procedures.
By failing to establish, document, and maintain financial risk management controls and supervisory procedures reasonably designed to prevent the entry of orders that exceeded the appropriate predetermined capital limits in the aggregate for the firm, Flow Traders violated § 15(c)( 3 ) of the Exchange Act, Rules 15c3-5(b) and (c)(1)(i) and FINRA Rules 3110 and 2010.
Also, from at least August 2019 to April 2023, Flow Traders failed to establish, document and maintain financial risk management controls and supervisory procedures that were reasonably designed to prevent the firm from entering erroneous orders. The company’s WSPs set a maximum notional value per order for symbols in which the company was a registered dealer, for symbols in which it was not and for manual orders.
In practice, the company’s actual limits for each symbol were less than the maximum amounts set in the WSPs. However, even these narrower limits were unreasonable.
For most of the securities sampled during this period, Flow Traders set a daily maximum single order size limit of more than 100 percent of each symbol’s average daily volume. The limits were unreasonable because they were set too high to reasonably prevent the entry of erroneous orders, and Flow Traders failed to demonstrate how the daily maximum order size limits were reasonably aligned with the trading characteristics of each symbol.
By failing to establish, document, and maintain financial risk management controls and supervisory procedures reasonably designed to prevent the entry of erroneous orders, Flow Traders violated § 15(c)(3) of the Exchange Act, Exchange Act Rules 15c3-5 (b) and (c)(1)(ii), and FINRA Rules 3110 and 2010.
In addition to the fine, the company agreed to a reprimand.