Spoofing Scandal Costs TD Securities Over $15 Million in Penalties
The U.S. Securities and Exchange Commission announced that TD Securities, a subsidiary of Toronto-Dominion Bank (TSX: TD) has been charged with market manipulation through an illegal trading strategy known as “spoofing” in the U.S. Treasury cash securities market. Additionally, the firm has been cited for failing to supervise its head of the U.S. Treasuries trading desk, who allegedly engaged in hundreds of illegal trades over a period of 13 months.
Spoofing is a deceptive trading strategy where traders place orders they have no intention of executing, only to cancel them once they achieve the desired market movement. This tactic creates a false impression of supply and demand, leading to advantageous trading conditions for the party initiating the spoof.
The SEC alleges that between April 2018 and May 2019, the former head of the U.S. Treasuries desk at TD Securities employed spoofing to manipulate U.S. Treasury cash securities prices.
“Manipulative and deceptive trading undermines the integrity of our markets,” said Mark Cave, Associate Director in the SEC’s Division of Enforcement. “Broker-dealers and other firms cannot ignore their employees’ manipulative conduct and must take meaningful steps to detect and prevent it.”
The order reveals that the former trader placed “non-bona fide” orders—orders with no intention of execution—on one side of the U.S. Treasury market. These orders were intended to shift market prices favorably for “bona fide” (legitimate) orders simultaneously placed on the opposite side. Once the bona fide orders were filled, the trader would cancel the non-bona fide orders, resulting in profitable trades for TD Securities.
In effect, this strategy artificially influenced market prices to generate profits for TD Securities, thereby compromising the integrity of the Treasury market. The SEC’s order also notes that TD Securities had insufficient controls in place to detect such illicit activities, and despite receiving warnings about potentially irregular trading activities, the firm failed to properly scrutinize the trader.
Regulatory response and penalties
TD Securities has agreed to a series of penalties from various regulatory bodies:
- The company has consented to a cease-and-desist order prohibiting future violations of antifraud provisions, and it has been censured. The firm is also required to pay $400,000 in disgorgement, prejudgment interest, and a civil penalty totaling $6.5 million.
- In a related settlement with the U.S. Department of Justice (DOJ), TD Securities has entered into a deferred prosecution agreement and agreed to pay a total monetary sanction exceeding $15 million. Of this amount, $400,000 will be credited to the SEC as disgorgement.
- Separately, TD Securities will pay a $6 million fine to the Financial Industry Regulatory Authority (FINRA) to resolve related charges.
Beyond the illegal trading activities, the SEC highlighted TD Securities’ failure in supervising the head of its U.S. Treasuries desk. The firm’s supervision mechanisms were found lacking in rigor, allowing the trader to engage in spoofing undetected.
Notably, the firm’s supervisory processes did not adequately monitor for or detect patterns of non-bona fide orders, a lapse that permitted the spoofing scheme to continue unabated for over a year.
This inadequate supervision came despite internal warnings and signals that should have triggered deeper scrutiny. Such failures led to a more significant enforcement action by regulatory authorities, emphasizing the importance of robust internal controls and proper oversight within trading desks.
Information for this briefing was found via the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
