Manipulative Trading: Inside the Practice of “Layering”

The securities industry became privy once again to a form of manipulative trading – termed “layering” or “spoofing” – through the Securities and Exchange Commission’s (“SEC’s”) recent charges against the Holmdel, N.J.-based firm Visionary Trading, LLC (“Visionary”). According to the SEC’s April 4, 2014 press release, Visionary Trading, its owner, Joseph Dondero, and other owners not only participated in manipulative “layering” trading, but also perpetuated registration violations, including operating an unregistered brokerage firm, and policies and procedures issues that failed to “prevent and detect the improper sharing of commissions between its registered representatives.” We will briefly focus in on the “layering” charges of this case in this blog post.

“Layering” is a process in which a trader places orders with no intention of having them executed, but rather to trick others into buying or selling a stock at an artificial price, with that price,  in turn, being driven by the orders that the trader later cancels. In the case of Visionary, Dondero and others in the company used layering to “induce other market participants to trade in a particular stock.”  Visionary, then, created greater order book depth and national market best-bid fluctuations through “false signals” which mimicked “true demand for the stock” in the placing and then canceling of the stock orders. The end result was Dondero and three other owners lining their pockets with phony orders placed at distorted prices at the entry of trades, a charge which the SEC states “did not allow him to evade detection.” This case serves as a warning for firms to carefully review trading practices to help prevent against manipulative trading and the act of layering. It is prudent to check instant messaging and other forms of communications and to periodically conduct forensic testing for fraudulent activities.

For further information on this and other related subjects, please contact us at info@jackolg.com  or (619) 298-2880.

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