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E*Trade fined by FINRA

On Behalf of | Jan 18, 2022 | FINRA |

The Financial Industry Regulatory Authority is a self-governing agency that was established to protect investors in Pennsylvania and around the country from stock market manipulation. On Jan. 13, FINRA announced that the trading platform E*Trade has agreed to pay a $350,000 fine for permitting lax oversight that allowed manipulative trading to take place. E*Trade, which is owned by Morgan Stanley and employs more than 2,000 registered representatives in its 40 branches, has agreed to pay the fine, but the company has not admitted to any negligence or wrongdoing.

Wash trades, prearranged trading and marking the close

According to FINRA, E*Trade’s supervisory procedures were not strong enough to detect or prevent investors from manipulating the price of stocks by engaging in activities including wash trading, prearranged trading and a practice known as marking the close. Wash trading is buying and then immediately selling stocks to manipulate the market, prearranged trades are executed on terms that have been arranged in advance, and marking the close involves buying securities just before the end of trading in order to drive up the closing price. These shortcomings came to light during a routine review.

Inadequate oversight

This review uncovered policies that only flagged stock trades worth more than $1,000 even if the securities being bought or sold were worth far less and limited investigations into suspicious late trades to transactions that took place during the last minute of trading. The company also had no system in place to detect trades made over a very short period of time to temporarily boost the price of a stock. E*Trade will pay about half of the fine to FINRA, and the rest of the money will be divided between NYSE Arca, NASDAQ, Cboe EDGX Exchange and Investors Exchange.

Investors lose out

Disclosures like these reveal that self-regulation may not be enough to protect small investors from market manipulation and fraud. It takes Morgan Stanley just a few minutes to earn the money needed to pay the E*Trade fine, which raises questions about FINRA’s ability to meet its mandate. Fines like this may attract the attention of headline writers, but they will do little to create a level playing field in the securities market.

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