- Cantor Fitzgerald, a financial services firm, has been found to repeatedly fail to identify and report customers who are classified as "Large Traders" as per Section 13(h) of the Exchange Act and its associated rules. This failure occurred from August 9, 2017, to May 12, 2023.
"Large Traders" are market participants who make substantial transactions in national market system (NMS) securities, either by volume or market value.
- Both Large Traders and broker-dealers are required to provide information to the SEC to help them assess the impact of their activity on the securities markets, reconstruct trading activity after periods of unusual market volatility, and analyze significant market events for regulatory purposes.
Cantor Fitzgerald, being a Large Trader itself and providing brokerage services to many Large Traders, was required to file Forms 13H on an annual basis.
- However, Cantor Fitzgerald failed to do so during the relevant period. In fact, over a nine-year period, from October 2011 until March 28, 2021, Cantor only filed an initial Form 13H and did not file any subsequent required annual Forms 13H.
Additionally, Cantor Fitzgerald failed to maintain records for persons that it had reason to know met the definition of a Large Trader but were unidentified as one.
- Specifically, Cantor failed to conduct daily and monthly reviews of Large Trader activity throughout the relevant period.
- As a result, Cantor failed to identify over 100 accounts with significant daily and monthly trading activity.
- These failures negatively impacted the SEC’s ability to analyze Large Trader activity and the accuracy and completeness of Cantor’s submission of electronic blue sheet data to the SEC.Background:
Rule 13h-1, was established in October 2011 to create a reporting system for Large Traders.
- Large Traders are defined as those who trade two million shares or $20 million in a single day, or 20 million shares or $200 million in a month, in U.S. securities markets.
- Large Traders are required to file Form 13H, providing the SEC with information about their business, regulatory status, affiliates, governance, and broker-dealers where they have an account.
- After receiving Form 13H, the SEC assigns each Large Trader a unique identification number (LTID), which the Large Trader must provide to its broker-dealers.
Broker-dealers are required to keep records of transactions made through Large Trader accounts.
- They also need to maintain records for Unidentified Large Traders, which include the trader's name, address, account opening date, and tax identification numbers.
- Broker-dealers must report Large Trader and Unidentified Large Trader transactions to the SEC upon request through the electronic blue sheets (EBS) system.
- From April 26, 2021, broker-dealers were required to report certain account information regarding account holders with a LTID or an Unidentified LTID number to the CAT.Cantor Fails to File Annual Forms 13H:
- Despite Cantor Fitzgerald being a longstanding Large Trader, it repeatedly failed to file annual Forms 13H.
- From the inception of Rule 13h-1 in October 2011 until March 2021, Cantor only filed one initial Form 13H in November 2011 and did not file any subsequent required annual Forms 13H until March 2021.
When Cantor started filing annual Forms 13H in March 2021, it repeatedly failed to include multiple affiliates of Cantor as Large Traders.
- This error was not corrected until around May 12, 2023.
Furthermore, from the implementation of Rule 13h-1 in October 2011, Cantor did not file a Form 13H-Q for any quarter for the next eight years.
- It was only after an inquiry from the SEC's Examination staff in April 2019 that Cantor filed a Form 13H-Q for the first time on April 16, 2019.
- Despite being informed of deficiencies by the Examination staff after the April 2019 Exam, Cantor failed to make any Form 13H filings in 2020.
In fact, since it first filed an initial Form 13H in November 2011, Cantor did not file an annual Form 13H until nine years later, on March 29, 2021.
- This filing was made after receiving an additional inquiry from the SEC's Examination staff shortly before the filing.Cantor Fails to Keep Records and Report Over 100 Large Traders:
- Cantor failed to identify customers whose transactions equaled or exceeded the identifying activity level, and did not treat these persons as Unidentified Large Traders or notify them of their potential reporting obligations.
In June 2019, Cantor informed the SEC's Examination staff that it would establish additional monitoring policies and procedures to comply with Rule 13h-1.
- However, when the Examination staff conducted a follow-up review in March 2021, Cantor had still not established these monitoring procedures.
After several requests from the SEC's Examination and Enforcement staff, Cantor conducted a multiyear review for accounts that should have been assigned a Large Trader Identification Number (LTID) or recognized as an Unidentified Large Trader.
- Based on this review, Cantor identified over 100 accounts that required remediation.Penalty?
Censure and $1.4 million fineHow could this impact GameStop?
For a company like GameStop, which has been at the center of significant market volatility and trading activity, particularly with large volumes of trades being made, the actions of broker-dealers can have a substantial impact. If Large Traders were not properly identified or reported, it could potentially obscure the true nature of trading activity in GameStop's stock.
Now, let's consider the role of Large Traders. These are entities or individuals who conduct a substantial amount of trading activity. Their actions can significantly influence the price of a security. If a Large Trader decides to buy a large volume of GameStop shares, it could drive up the price. Conversely, if a Large Trader sells a large volume of shares, it could drive down the price.
However, if a broker-dealer like Cantor Fitzgerald is failing to properly identify and report Large Traders, it distorts this picture.
Let's say Large Traders are selling substantial amounts of GameStop shares, but these trades are not being properly reported due to the broker-dealer's failure to comply with Rule 13h-1. In this case, the selling activity of these Large Traders would be hidden.
Without the visibility of Large Traders' selling activity, it might appear as though the price decrease is primarily or solely due to retail investors selling their shares.
This could create a misleading narrative that retail investors are SELLLING and driving the price down--now where have we seen this narrative before?!!?!?TLDRS:
- Cantor Fitzgerald repeatedly failed to identify and report "Large Traders" (entities or individuals conducting substantial trading activity) from August 2017 to May 2023.
- This failure obscured the true nature of trading activity in the securities market.
- Cantor was required to file annual Forms 13H, providing the SEC with information about their business and trading activity. However, Cantor only filed one initial Form 13H in November 2011 and did not file any subsequent required annual Forms 13H until March 2021.
- Cantor also failed to maintain records for unidentified Large Traders and did not monitor daily and monthly reviews of Large Trader activity, resulting in over 100 accounts with significant trading activity going unnoticed.
- These failures impacted the SEC's ability to analyze Large Trader activity and the accuracy of Cantor's submission of electronic blue sheet data to the SEC.
- If Large Traders are selling substantial amounts of GameStop shares but these trades are not being properly reported, it could create a misleading narrative that retail investors are driving the price down, when in fact, Large Traders could be playing a significant role.
- Cantor Fitzgerald was censured and fined $1.4 million for these violations.