Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, April 19, 2012

SEC Charges OX Trading & optionsXpress with Registration Violations

The SEC charged OX Trading LLC, a Chicago-based securities dealer affiliated with online brokerage firm optionsXpress, with violating the registration provisions of the securities laws when it continued trading operations after delisting from the Chicago Board Options Exchange (CBOE) and deregistering with the SEC, apparently to avoid an audit.  In administrative proceedings against OX Trading LLC, optionsXpress, and their former CFO Thomas E. Stern, the SEC alleged that OX Trading operated as an unregistered dealer from October 2009 to November 2010 and illegally transacted in securities while not a member of a national securities association or national exchange from March 2009 to November 2010.

Earlier this week, the SEC charged optionsXpress and Stern for their roles in a naked short selling scheme.

OX Trading, which originally registered with the SEC in 2008, was created to provide price improvement on orders from optionsXpress customers and to profit from those trades. According to the SEC’s order, a CBOE examiner conveyed to Stern in early 2009 that OX Trading was required to have an annual audit based on its CBOE membership status. Despite CBOE’s request, Stern refused to pay for an audit and subsequently terminated OX Trading’s CBOE membership on March 2, 2009. Nonetheless, OX Trading continued to conduct the same trading through a customer portfolio margin account at optionsXpress.

According to the SEC’s order, OX Trading and optionsXpress became wholly-owned subsidiaries of The Charles Schwab Corporation in September 2011.

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Setting aside the alleged fabrication/backdating issue for now, the charge seems to hinge on whether an internal price improvement desk is required to register as a broker dealer. From what I read, OX Trading had no customer accounts and was "responding" to customer orders, not soliciting customer orders. On the other hand, they were extremely high volume. Is there any guidance in the regulations on when a unit like this must be organized as a BD? Stern seems to argue that there isn't and he made a call based on his experience. Thoughts, anyone?

Posted by: Optionfool | Apr 19, 2012 1:46:04 PM

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