Earlier this month, the Securities and Exchange Commission (“SEC”) instituted public administrative and cease and desist proceedings against eBX, LLC (“eBX”), a broker-dealer registered with the SEC.  eBX operates LeveL ATS, an alternative trading system (“ATS”) known as a “black pool,” which is a proprietary market where traders may exchange large blocks of stock with minimum impact on the market.  Dark pools do not display quotations to the public, and instead provide subscribers with trade opportunities not available to investors using public markets.  The SEC found that LeveL ATS violated Regulation ATS under the Securities Exchange Act of 1934 by failing to protect the confidential trading information of its subscribers and failing to disclose to all subscribers that it allowed an outside firm to use its confidential trading information.

In anticipation of the SEC’s proceedings, eBX submitted an offer of settlement which the SEC agreed to accept, and which guided the sanctions imposed in the SEC’s Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities and Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order (the “Order”).  The SEC made two key findings in the Order.

First, the SEC found that eBX willfully violated Rule 301(b)(10) of Regulation ATS, which requires an ATS to establish adequate safeguards and procedures to protect subscribers’ confidential trading information.  The SEC found that although LeveL ATS informed subscribers, in its subscriber agreements and elsewhere, that their order flow would be kept confidential and would not be shared with outside entities, LeveL ATS instead allowed a third party service provider to have access to and record this order flow information.  The third party service provider then used such information for its own benefit in connection with a separate order routing business. 

Second, the SEC found that eBX willfully violated Rule 301(b)(2) of Regulation ATS, which requires an ATS to file an amended Form ATS with the SEC before implementing material changes to its operation or when the Form ATS on file becomes inaccurate.  The SEC found that LeveL ATS’s Form ATS failed to disclose that it authorized the third party service provider to use data relating to orders routed to LeveL ATS for the benefit of its order routing business.

In a footnote, the SEC cited Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) to explain that “[a] willful violation of the securities laws means merely ‘that the person charged with the duty knows what he is doing’” but that there “is no requirement that the actor ‘also be aware that he is violating one of the Rules or Acts.’”

Pursuant to these findings, the SEC imposed sanctions including (1) that eBx cease and desist from committing or causing any violation and any future violation of Rules 301(b)(2) and 301(b)(10) of Regulation ATS; (2) that eBX is censured; and (3) that eBX pay a civil money penalty in the amount of $800K to the U.S. Treasury.  The Director of the SEC’s Division of Enforcement stated: “[d]ark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information . . . . Many eBX subscribers didn’t get the benefit of that bargain – they were unaware that another order routing system was given exclusive access to trading information that it used for its own benefit.”