proprietary traders. Between Jan. 1, 2009 through Dec. 31, 2011, Hold Brothers' largest account, Demostrate LLC and an affiliate, Trade Alpha, were day-trading firms wholly owned and funded by Hold Brothers' principals. Demostrate and Trade Alpha engaged traders and trading groups in various foreign countries, primarily China, to trade its capital. FINRA found that Demostrate and Trade Alpha were controlled by, or under common control with, Hold Brothers. Demostrate and Trade Alpha used sponsored access relationships with Hold Brothers to connect to U.S. securities exchanges to manipulate the prices of multiple securities. FINRA uncovered hundreds of instances where the foreign day traders used spoofing and layering activities to induce the trading algorithms of unwitting market participants to provide the traders with favorable execution pricing that would not otherwise have been available to them in the absence of the day traders' illicit spoofing and layering activities. Generally, spoofing is a form of market manipulation which involves placing certain non-bona fide order(s), usually inside the existing National Best Bid or Offer (NBBO), with the intention of triggering another market participant(s) to join or improve the NBBO, followed by canceling the non-bona fide order, and entering an order on the opposite side of the market. Layering involves the placement of multiple, non-bona fide, limit orders on one side of the market at various price levels at or away from the NBBO to create the appearance of a change in the levels of supply and demand, thereby artificially moving the price of the security. An order is then executed on the opposite side of the market at the artificially created price, and the non-bona fide orders are immediately canceled. FINRA also found thousands of instances where Demostrate or Trade Alpha traders engaged in pre-arranged trades and wash sales. Hold Brothers also failed to establish and maintain a supervisory system and written procedures that were reasonably designed to supervise the firm's trading activities. FINRA found that numerous "red flags" indicative of suspicious trading were not detected or investigated. This included broad categories of significant suspicious trading, involving patterns of spoofing, layering, pre-arranged trading, and wash trading. In addition, FINRA found that Hold Brothers' AML policies, procedures, and internal controls were inadequate and failed to detect suspicious
proprietary traders. Between Jan. 1, 2009 through Dec. 31, 2011, Hold Brothers' largest account, Demostrate LLC and an affiliate, Trade Alpha, were day-trading firms wholly owned and funded by Hold Brothers' principals. Demostrate and Trade Alpha engaged traders and trading groups in various foreign countries, primarily China, to trade its capital. FINRA found that Demostrate and Trade Alpha were controlled by, or under common control with, Hold Brothers. Demostrate and Trade Alpha used sponsored access relationships with Hold Brothers to connect to U.S. securities exchanges to manipulate the prices of multiple securities. FINRA uncovered hundreds of instances where the foreign day traders used spoofing and layering activities to induce the trading algorithms of unwitting market participants to provide the traders with favorable execution pricing that would not otherwise have been available to them in the absence of the day traders' illicit spoofing and layering activities. Generally, spoofing is a form of market manipulation which involves placing certain non-bona fide order(s), usually inside the existing National Best Bid or Offer (NBBO), with the intention of triggering another market participant(s) to join or improve the NBBO, followed by canceling the non-bona fide order, and entering an order on the opposite side of the market. Layering involves the placement of multiple, non-bona fide, limit orders on one side of the market at various price levels at or away from the NBBO to create the appearance of a change in the levels of supply and demand, thereby artificially moving the price of the security. An order is then executed on the opposite side of the market at the artificially created price, and the non-bona fide orders are immediately canceled. FINRA also found thousands of instances where Demostrate or Trade Alpha traders engaged in pre-arranged trades and wash sales. Hold Brothers also failed to establish and maintain a supervisory system and written procedures that were reasonably designed to supervise the firm's trading activities. FINRA found that numerous "red flags" indicative of suspicious trading were not detected or investigated. This included broad categories of significant suspicious trading, involving patterns of spoofing, layering, pre-arranged trading, and wash trading. In addition, FINRA found that Hold Brothers' AML policies, procedures, and internal controls were inadequate and failed to detect suspicious
FINRA-Presentation-Notes-Enforcement.docx