X-Change Financial Access, LLC (XCHG) has reached an agreement to resolve allegations concerning violations of trading rules related to the Cboe Exchange. As part of the settlement, XCHG will receive a censure, along with a financial penalty shared with Brian Brown, a former floor broker for the firm, totaling $550,000.
The review period, which spans from May 3, 2021, to November 4, 2022, involved Brown acting as an Associated Person of XCHG during his tenure as a floor broker. Throughout this time, XCHG facilitated trades on behalf of a client known as Firm A under an arrangement initiated by a trader at Firm A. This setup allowed Brown the discretion to cross certain retail customer SPX options orders, effectively creating contra sides for up to 20% of the volume of these orders. Brown was led to believe that this agreement had been communicated with a compliance employee at Firm A prior to its execution.
Under this arrangement, XCHG received permission from Firm A to cross specific retail customer SPX options orders, bypassing the need for Brown to gather orders on an individual basis. Notably, Firm A was not informed of its role in executing these trades until after the actions had taken place.
However, concerns arose regarding XCHG’s execution practices. Brown’s actions as a floor broker did not adequately represent the orders to the trading crowd, and the participation of Firm A in these transactions was dictated more by the internal agreement than by formal order requests from them. During the reviewed period, approximately 800 trades were executed by XCHG in this manner without initially receiving orders from Firm A.
When the details of this arrangement came to the attention of the Compliance Chief Officer (CCO) and Chief Executive Officer (CEO) at XCHG, they promptly ceased these activities. Moreover, Brown was responsible for executing orders with the latitude to decide on the specific SPX options series to be utilized, as well as the quantity of contracts and whether the transactions were buys or sells.
Between February 4, 2021, and September 9, 2022, deficiencies in written supervisory procedures (WSPs) were identified. XCHG did not establish or enforce robust WSPs or systems intended to prevent or detect violations concerning order handling and the responsibilities of floor brokers. The inadequacies were particularly evident in ensuring that floor brokers were aware of and complied with exchange regulations prohibiting discretion on orders and ensuring proper crowd interest was met during trades.
In light of these violations, the firm has agreed to accept imposed sanctions, which include a formal censure and the aforementioned monetary fine.