Virtu, a prominent player in the payment for order flow industry, has been subjected to enforcement action by the Securities and Exchange Commission (SEC) due to alleged misconduct. The SEC claims that Virtu provided access to material, nonpublic information (MNPI) which could have been exploited for nefarious purposes.
According to the SEC’s complaint, Virtu misleadingly informed its institutional customers and the public that it employed “information barriers” and “systemic separation between business groups” to safeguard MNPI. However, it is alleged that Virtu did not implement these protective measures. Instead, the complaint reveals that almost all employees at Virtu, as well as its affiliate broker-dealers, had unrestricted access to MNPI relating to customers’ trades. This data included details such as the customer’s name, the securities purchased, the transaction side (buy or sell), the execution price, and the execution volume.
The complaint further explains that such trading information could have provided an advantage to a trader who had access to large institutional orders. Virtu is accused of overstating its controls for a 15-month period. The SEC views this enforcement action as a stern reminder to companies that they must do more to safeguard user data.
Carolyn M. Welshhans, Associate Director of the SEC’s Enforcement Division, emphasized that Virtu allegedly presented a misleading picture regarding the measures in place to protect customers’ confidential information, even when specifically questioned about the company’s handling of post-trade information.
Payment for Order Flow is a compensation method utilized to lower commissions for individual stock orders. Brokers may opt for this method instead of charging commissions. It has been reported that brokers routing trades using payment for order flow still prioritize execution quality and price improvement. In 2020, the US witnessed approximately $11 billion in price improvement through zero commission trading.
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