A recent settlement has been reached regarding the violations of rules at the Cboe Exchange by X-Change Financial Access, LLC (XCHG) and a former floor broker. The settlement includes a censure and a monetary fine totaling $550,000, which will be jointly imposed with the aforementioned former broker.
During a specified review period from May 3, 2021, to November 4, 2022, the former broker was responsible for executing trades on behalf of a client identified as Firm A. This arrangement, initiated by a trader from Firm A, allowed the broker to have discretion in placing orders, granting him the ability to fill up to 20% of certain retail customer SPX options orders without explicit order communication from Firm A for each trade.
The arrangement permitted the broker to cross certain orders representing a portion of trades when the trading floor showed interest in executing the full order volume with Firm A. This approach did not require the broker to confirm orders with Firm A prior to execution, leaving the client uninformed until after the trades had been completed.
The actions taken by the broker during this period demonstrated a lack of proper representation of orders to the exchange, as trades were executed based on the informal arrangement rather than direct orders from Firm A. Approximately 800 trades were executed for Firm A without the necessary order confirmation.
Once the arrangement drew attention from the firm’s compliance officers, who also hold executive positions, they took immediate steps to halt the ongoing trading activities. Further investigations revealed that the broker exercised significant discretion over the trades executed, including decisions on which SPX options series to deal with and the volume of transactions.
Furthermore, XCHG did not maintain adequate written supervisory procedures or implement a system designed to prevent rule violations related to order handling or the responsibilities of floor brokers. The existing procedures were insufficient in ensuring that the brokers fully understood and adhered to the Exchange Rules, including prohibitions against brokers having discretion over orders and compliance with ensuring crowd interest and order priority.
In light of these rule breaches, XCHG has agreed to the sanctions, which include formal censure and the substantial fine. The incident underscores the importance of proper supervision and adherence to established protocols within trading environments, particularly concerning the processing and handling of orders to maintain fair practices in exchange operations.
This case serves as a reminder for financial firms to reinforce their compliance measures and ensure that all employees are well-informed about regulatory requirements to avoid similar situations in the future.