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Brokerage fined $1M over illicit trading strategy

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MARCY GORDON | September 13, 2010 02:10 PM EST | AP

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WASHINGTON — Market regulators have fined a New York-based brokerage firm $1 million for creating a false sense of demand for stocks that earned it profits.

Trillium Brokerage Services agreed to pay the fine but did not admit or deny the charges, the Financial Industry Regulatory Authority said Monday.

Nine traders and two officers at the firm were suspended from the securities industry for periods of six months to two years, FINRA said. They were also fined a total $802,500.

Trillium placed huge numbers of artificial orders to buy or sell, and then canceled them almost immediately, FINRA said. It was done to obtain beneficial prices on stocks 46,000 times in 2006 and 2007, FINRA said.

An official at FINRA, the brokerage industry's self-policing organization, said there could be more actions against "high-frequency" market activity that damages legitimate trading.

Federal regulators are probing such trading strategies, often referred to as "quote stuffing." The practice has become more prevalent as more firms rely on powerful computers to make frequent trades. Regulators are reviewing it to see if it creates the illusion of a greater trading volume, which could allow sellers to profit from the perception of rising demand.

The Securities and Exchange Commission Chairman hasn't identified "quote stuffing" as a factor in the May 6 market plunge that saw the Dow Jones industrials fall nearly 1,000 points in less than a half-hour. But the agency has been investigating possible problems generally caused by the practice.

In addition to the $1 million fine, Trillium agreed to give back about $173,000 in profits. FINRA said the firm reaped a total of around $575,000 in profits from the 46,000 instances of using the trading strategy on the Nasdaq Stock Market.

By using the strategy, Trillium's traders got "advantageous prices that otherwise would not have been available to them," FINRA said in a news release. "Other market participants were unaware that they were acting on the ... illegitimate orders entered by Trillium traders."

Richard Lawler, a lawyer representing Trillium, said he and the firm declined to comment.

The 11 individuals, including the firm's director of trading and its chief compliance officer, also didn't admit or deny FINRA's charges.