High Frequency Firm Receives Record $16 Million Penalty

By: Ryan Corbin , Fall 2014 Student Intern

refereeOn September 17, 2014, Latour Trading LLC, a New York-based high frequency trading firm, agreed to pay a record $16 million penalty to settle charges alleging violations of the net capital rule. Previously, the high for violations of the net capital rule was only $400,000. Additionally, Latour’s chief operating officer at the time, Nicolas Niquet, agreed to pay a $150,000 penalty to settle the charges against him.

According to the SEC’s order, a crucial step when calculating net capital is to take percentage deductions known as “haircuts.” The purpose of these haircut deductions is to account for market risk and to create a buffer of liquidity to protect against other risks associated with the securities business. If the proper haircut is not deducted, the broker-dealer’s net capital will be inflated.

In 2010 and 2011, Latour repeatedly miscalculated its net capital amounts by $2 million to $28 million through failing to take the proper haircut deductions. During this period, Latour’s trading at times accounted for as much as nine percent of the trading volume in equity securities for the entire U.S. market.

High frequency trading firms have seen more attention with the March 31, 2014 release of Michael Lewis’ book, “Flash Boys: A Wall Street Revolt.” In his book, Lewis contends that high frequency traders have rigged the stock market, profiting from speeds unavailable to others.

For the complete SEC press release regarding Latour’s $16 million settlement, please click here.