UBS Dark Pool Operation Leads to SEC Charges

The Securities and Exchange Commission this week charged a UBS subsidiary with disclosure failures and other securities law violations related to the operation and marketing of its dark pool. UBS Securities agreed to pay more than $14.4 million, including a $12 million penalty—the SEC’s largest against an alternative trading system (ATS).

According to the SEC, UBS failed to properly disclose to all subscribers the existence of an order type—called PrimaryPegPlus (PPP)—that it pitched almost exclusively to market makers and high-frequency trading firms.  PPP enabled certain subscribers to buy and sell securities by placing orders priced in increments of less than one cent in violation of Regulation NMS. By doing so, UBS enabled PPP users to place sub-penny-priced orders that jumped ahead of other orders submitted at legal, whole-penny prices. 

UBS similarly failed to disclose to all subscribers a “natural-only crossing restriction” developed to ensure that select orders would not execute against orders placed by market makers and high-frequency trading firms.  This shield was only available to benefit orders placed using automated trading strategies called UBS algorithms. UBS did not disclose the existence of this feature to all subscribers until approximately 30 months after its launch.

“The UBS dark pool was not a level playing field for all customers and did not operate as advertised,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “Our action shows our continued commitment to policing the equity markets to ensure fairness and compliance with all laws and rules.”

The SEC outlined several other violations of the federal securities laws by UBS in its order instituting a settled administrative proceeding:

The Form ATS and amendments that UBS filed with the SEC included inconsistent and incomplete statements about the dark pool’s acceptance of sub-penny orders and the natural-only crossing restriction.  The filing also failed to attach certain required documents.

UBS violated requirements under Regulation ATS by unreasonably prohibiting subscribers from using the natural-only crossing restriction and failing to establish written standards for granting access to subscribers.

UBS failed to preserve certain order data for the dark pool from at least August 2008 to March 2009 and August 2010 to November 2010.

UBS violated confidentiality requirements under Regulation ATS by giving full access to subscribers’ confidential trading information to 103 employees who should not have had it, primarily information technology personnel.

UBS consented to the SEC’s order without admitting or denying the findings. The order censures the firm and requires payment of $2.2 million in disgorgement, $235,686.14 in prejudgment interest, and the $12 million penalty.