Virtu Financial is preparing for legal action from the US Securities and Exchange Commission (SEC) following a dispute over the firm’s trading data safeguards – but the firm says that it plans to “defend itself vigorously”.
In an SEC filing on 28 July, Virtu said the company has been liaising with the SEC in connection with an investigation into the firm’s “internal information access barriers”.
Virtu said it has cooperated with the investigation and engaged in settlement discussions but has been unable to reach a settlement and, as a result, received a Wells Notice from the regulator, to which it has responded.
According to the filing, Virtu maintains that it has “reasonable” procedures and controls in place to protect data, and intends to defend itself against the suit, which pertains to the period between January 2018 and April 2019.
But according to Virtu’s 10-Q filing in May, the SEC investigation coverage period (Jan 2018 to Apr 2019) predates Virtu’s acquisition of ITG (which occurred on 31 March 2019) and its data analytics franchise.
Relatedly, the SEC fined ITG $20.3 million in December 2015 due to information being disseminated related to the dark pool but also because ITG operated an undisclosed proprietary trading desk which actually used this confidential information.
In May, a Virtu spokesperson outlined the reason behind the investigation: “The probe focuses on whether there were possible weaknesses in the firm’s back-office systems that theoretically could allow certain users access to post-trade data greater than what the firm said its policies allowed.”
A Virtu spokesperson told Best Execution: “The SEC’s lawsuit focuses on hypothetical internal access to data in 2018 and early 2019 – but does not allege actual inappropriate access or use of client data. As a result of this hypothetical internal access between 2018 and early 2019 – a period that pre-dates Virtu’s integration with ITG, the SEC is alleging that our policies and procedures were not reasonably designed and our public statements to the contrary on these matters were therefore misleading. We strongly disagree.
“Importantly, there is no evidence and there are no allegations of improper internal access or use of any data.
“We believe that the claims by the SEC are meritless, and we will vigorously defend the allegations.”
Virtu said it had voluntarily told the regulator about the issue three years ago, and that officials at the time had found no evidence that data was improperly accessed. The firm handed over 30,000 documents to the regulator at that time.
The suit comes amid wider regulatory scrutiny in the US, Virtu said. “There has recently been an increased focus by regulators on anti-money laundering and sanctions compliance by broker-dealers and similar entities, as well as an enhanced interest on suspicious activity reporting and transactions involving microcap and low-priced securities,” the firm outlined in the SEC filing.
“In addition, there has been increased regulatory, congressional and media scrutiny of US equities market structure, the retail trading environment in the US, wholesale market making and the relationships between retail broker-dealers and market making firms.”
Virtu launched its own lawsuit against the SEC last year, with a Freedom of Information Request, as part of its ongoing dispute with the regulator over its plans for drastic market structure reforms, specifically around retail broker activity, which could impact Virtu’s operations significantly if passed.
The SEC action is yet another blow for Virtu, however, thanks to an already challenging year which saw a 26% decline in trading income for Q2 as the market slowdown wiped 17% off its total revenues.
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