NASDAQ PHLX LLCNOTICE OF ACCEPTANCE OF AWC

Certified, Return Receipt Requested
TO:

Clearpool Execution Services, LLC
Mr. Peter Discenza
Chief Compliance Officer
17 State Street
38th Floor
New York, NY 10004

FROM:

Nasdaq PHLX LLC ("PHLX")
do Financial Industry Regulatory Authority ("FINRA")
Department of Enforcement
15200 Omega Drive, Suite 300
Rockville, MD 20850

DATE:

July 10, 2019

RE:

Notice of Acceptance of Letter of Acceptance, Waiver and Consent No. 2014042373807

Please be advised that your above-referenced Letter of Acceptance, Waiver and Consent ("AWC") has
been accepted on July 10, 2019 by the PHLX Review Council's Review Subcommittee, or by the Officeof Disciplinary Affairs on behalf of the PHLX Review Council, pursuant to PHLX Rule 9216. A copyof the AWC is enclosed herewith.
You are again reminded of your obligation, if currently registered, immediately to update your Uniform
Application for Broker-Dealer Registration ("Form BD") to reflect the conclusion of this disciplinary
action. Additionally, you must also notify FINRA (or PHLX if you are not a member of FINRA) inwriting of any change of address or other changes required to be made to your Form BD.
You will be notified by the Registration and Disclosure Department regarding sanctions if a suspension
has been imposed and by Nasdaq's Finance Department regarding the payment of any fine if a fine has
been imposed.

Clearpool Execution Services, LLC
Page 2

If you have any questions concerning this matter, please contact W. Kwame Anthony, Senior Counsel,
at (646) 430-7030, or Elyse D. Kovar, Senior Counsel, at (646) 430-7050.

W. wame Anthony
Elyse D. Kovar
Senior Counsel
Department of Enforcement, FINRA
Signed on behalf of PHLX

Enclosure
FINRA District 10 - New York
William St. Louis
Senior Vice President and Regional Director(Via email)Michael D. WolkCounsel for RespondentSidley Austin LLP
1501 K Street, N.W.
Washington, D.C. 20005
Michael R. Trocchio
Counsel for RespondentSidley Austin LLP
1501 K Street, N.W.
Washington, D.C. 20005

NASDAQ PHLX LLCLETTER OF ACCEPTANCE. WAIVER AND CONSENT
NO. 2014042373807
TO:

Nasdaq PHLX LLC
do Department of Enforcement
Financial Industry Regulatory Authority ("FINRA")RE:

Clearpool Execution Services, LLC, Respondent
Broker-Dealer
CRD No. 168490

Pursuant to Rule 9216 of the Nasdaq PIILX LLC ("PHLX" or the "Exchange") Code ofProcedure, Clearpool Execution Services, LLC ("Clearpool" or the "firm") submits this Letter ofAcceptance, Waiver and Consent ("AWC") for the purpose of proposing a settlement of thealleged rule violations described below. This AWC is submitted on the condition that, if
accepted, PHLX will not bring any future actions against the firm alleging violations based on
the same factual findings described herein.
I.
ACCEPTANCE AND CONSENTA.

The firm hereby accepts and consents, without admitting or denying the findings, andsolely for the purposes of this proceeding and any other proceeding brought by or on
behalf of PHLX, or to which PHLX is a party, prior to a hearing and without an
adjudication of any issue of law or fact, to the entry of the following findings by P1ILX:BACKGROUND
The firm is a broker-dealer headquartered in New York, New York. The firm has 37
registered representatives, provides electronic trading solutions, and serves as anindependent agency broker-dealer. Clearpool has been a FINRA member since April 8,
2014, was a PHLX member from July 31, 2014, to August 3, 2015, and became a PHLX
member again on September 1, 2017. Clearpool's F1NRA and PHLX registrations remainin effect.
RELEVANT PRIOR DISCIPLINARY HISTORY
The firm does not have relevant disciplinary history.
SUMMARYIn Matter No. 20140423738, FINRA's Department of Market Regulation, Quality ofMarkets team (the "Staff'), on behalf of PHLX and ten other self-regulatory

STAR No. 20140423738 (EK and KA)

organizations,' identified and reviewed potentially manipulative trading activity by aforeign, unregistered proprietary trading fund ("Fund X")2 that was an affiliate andcustomer of Clearpool. From July 2014 to August 3, 2015, Clearpool executed Fund X's
trades and introduced its order flow to other broker-dealers for execution. Fund X tradedthrough more than 1,000 foreign, unregistered individual traders, and triggered thousandsof surveillance alerts at FINRA and multiple exchanges for potential manipulative trading
known as "layering" and "spoofing." Despite being on notice of potentially manipulative
trading by Fund X, Clearpool terminated the trading access of hundreds of individual
traders, but continued to execute and introduce orders from Fund X.
As a result, from July 31, 2014, to August 3, 2015, when it initially terminated its PHLX
registration, Clearpool failed to establish and maintain a system of supervision that was
reasonably designed to prevent and detect violations of securities laws and regulations, inviolation of PITLX Rules 748 and 707.
FACTS AND VIOLATIVE CONDUCT
Layering and Spoofing
1. Layering is a form of market manipulation that typically includes placement of multiple
limit orders on one side of the market at various price levels that are intended to create
the appearance of a change in the levels of supply and demand. In some instances,layering involves placing multiple limit orders at the same or varying prices acrossmultiple exchanges or other trading venues. An order is then executed on the opposite
side of the market and most, if not all, of the multiple limit orders are immediately
cancelled. The purpose of the multiple orders that are subsequently cancelled is to induce,or trick, other market participants to enter orders due to the appearance of interest createdby the orders such that the trader is able to receive a more favorable execution on the
opposite side of the market.
2. Similar to layering, spoofing is a form of manipulative trading which involves a market
participant placing non-bona fide orders, generally inside the existing national best bid oroffer, with the intention of briefly triggering some type of response from another market
participant, followed by cancellation of the non-bona fide order, and the entry of an orderon the other side of the market.
Rules Governing Clearpool's Supervisory Obligations
3. PHLX Rule 748(b) requires member organizations to provide for appropriate supervisory
control of the organization and compliance with securities laws and regulations, including
the Exchange's By-Laws and Rules. Member organizations are required to provide for
1 The ten self-regulatory organizations include The Nasdaq Stock Market LLC, Nasdaq BX, Inc., FINRA, Cboe
BZX Exchange, Inc., Cboe BYX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., NYSE
Arca, Inc., the New York Stock Exchange LLC, and NYSE American LLC.

2 The fund is anonymous in this AWC since it is not a party to this AWC.

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appropriate written procedures of supervision and control, and to establish a separate
system of follow-up and review to determine that the delegated authority andresponsibility is being properly exercised. PHLX Rule 748(d) requires each person withsupervisory control to reasonably discharge his duties and obligations in connection withthe organization's supervision and control to prevent and detect, insofar as practicable,
violations of the applicable securities laws and regulations, including the Exchange's ByLaws and Rules. PHLX Rule 748(h) requires member organizations to establish,
maintain, and enforce WSPs, and a system for applying such procedures, reasonably
designed to prevent and detect, insofar as practicable, violations of securities laws andregulations, including the Exchange's By-Laws and Rules.
4. Pursuant to PHLX Rule 707, members shall not engage in conduct inconsistent with justand equitable principles of trade.
Clearpool's Supervisory Deficiencies with Respect to Layering
5. Clearpool was formed in or about May 2013. At that time, the two long-time business
partners that previously formed Fund X, provided Fund X's investment, and owned 100
percent of Fund X's investment manager, also owned 76 percent of Clearpool (the"Original Controlling Owners"). Over time, however, the other owners of Clearpool
increased their ownership interest in Clearpool while the ownership interest of theOriginal Controlling Owners decreased. In September 2016, the last of a series oftransactions occurred, extinguishing the remaining ownership of the Original Controlling
Owners in Clearpool.
6. Prior to Clearpool's commencement of operations, Fund X initially traded through anunaffiliated broker-dealer. In or about June 2014, Fund X opened an account with
Clearpool, becoming one of Clearpool's first customers. In July 2014, Clearpool beganproviding market access to Fund X and introducing Fund X's order flow to unaffiliatedbroker-dealers. Fund X accounted for the majority of Clearpool's revenue during theperiod of 2014 through 2015.
7. When Clearpool began executing and introducing orders by Fund X, Clearpool was on
notice of regulators' concerns regarding potentially manipulative trading by foreign
traders who traded for Fund X's predecessor, another foreign proprietary trading firm
owned by the Original Controlling Owners. In August 2014, FINRA filed a complaint
against an unaffiliated broker-dealer for supervisory violations that included trading
activity by Fund X's predecessor. The same day, a Clearpool senior officer circulated a
copy of the complaint to Clearpool's owners. Two months prior to FINRA's complaint,
the SEC had charged the same unaffiliated broker-dealer with failing to adopt andimplement controls that were reasonably designed to prevent manipulative layering,
including by traders of Fund X's predecessor. Despite being on notice of the foregoing,
Clearpool continued to execute and introduce Fund X's orders. Later, in 2014 and 2015,
the SEC, FINRA, and multiple exchanges collectively fined the unaffiliated broker-dealer
over $4.2 million for, among other things, failing to prevent and detect layering andspoofing by traders from the predecessor of Fund X.

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8. From the time that Clearpool began to provide market access to Fund X, Clearpool was
obligated to have in place reasonable supervisory systems and controls to ensure that its
market access business complied with applicable securities laws, regulations, and PHLX
rules. Clearpool instituted a supervisory system intended to achieve compliance, but
Clearpool's supervisory deficiencies described herein, and the firm's termination of
trading access to individual Fund X traders rather than Fund X itself, allowed thepotentially violative trading to continue. As a result, beginning in approximately July
2014, and continuing to August 3, 2015, Fund X's trading through Clearpool generated
thousands of layering and other manipulation alerts at FINRA and multiple exchanges,
and generated thousands of alerts in Clearpool's proprietary surveillance systems.
9. Specifically, from approximately July 2014 through January 2015, Clearpool used a
proprietary system to perform certain pre-trade checks designed to block potentiallymanipulative orders and to generate exception reports that identified potentiallymanipulative trading on the day after a trading day (T+1). Despite the pre-trade checks,
Clearpool's exception reports detected significant numbers of indicators for potential
manipulation. Clearpool's reviews of the exception reports were not reasonably designed
to detect and prevent manipulative activity. No matter how many alerts were generated
on a report, Clearpool only reviewed the exceptions relating to the five securities with themost trading events and relating to the five securities with the lowest average daily
trading volume. Clearpool terminated individual traders' ability to trade for Fund X, butallowed hundreds of other traders with Fund X to continue trading through Clearpool.
Fund X continued to generate thousands of layering and other manipulation alerts at
FINRA, multiple exchanges, and in Clearpool's proprietary surveillance systems.
10. Clearpool's written procedures were also deficient in that they failed to explain how to
select the sample to be reviewed and how to review the exception reports, such as how to
identify manipulative trading.
11 Beginning in February 2015, Clearpool replaced its first system of pre-trade checks witha real-time surveillance system. In June 2015, Clearpool implemented a feature in its
real-time surveillance system that automatically imposed trading limitations or blocks on
a trader once the trader's activity had crossed pre-set scoring thresholds for suspicious
activity. Clearpool, however, set these scoring thresholds at levels that did not prevent
further problematic trading, as Fund X continued generating layering surveillance alerts
at FINRA, multiple equity exchanges, and even in Clearpool's systems. In or about
March 2016, Clearpool modified its real-time surveillance scoring thresholds, and thenumber of exceptions decreased.
12. In addition to the disciplinary actions referred to in paragraph 7 above, Clearpool knew
about ongoing potentially violative behavior by Fund X through its receipt of regulatoryinquiries about Fund X from FINRA and multiple exchanges. Yet, Clearpool continued to
execute Fund X's trades, which resulted in potential layering activity from July 31, 2014,
to August 3, 2015.

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13. For the reasons set forth in paragraphs 8-12, from July 31, 2014, to August 3, 2015,
Clearpool failed to establish and maintain a system of supervision that was reasonably
designed to prevent and detect violations of securities laws and regulations, in violationof PHLX Rules 748 and 707.
B.

The firm also consents to the imposition of a censure and total fine of $473,000, of which$43,000 is payable to PHLX. The balance is paid to the following self-regulatoryorganizations: The Nasdaq Stock Market LLC, Nasdaq BX, Inc., Cboe BZX Exchange,
Inc., Cboe BYX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange,
Inc., FINRA, NYSE Arca, Inc., the New York Stock Exchange LLC, and NYSE
American LLC. Acceptance of this AWC is conditioned upon acceptance of similar
settlement agreements in related matters between the firm and these self-regulatoryorganizations.
The firm agrees to pay the monetary sanctions upon notice that this AWC has been
accepted and that such payments are due and payable. It has submitted a Payment
Information form showing the method by which it proposes to pay the fine imposed.
The firm specifically and voluntarily waives any right to claim that it is unable to pay,
now or at any time hereafter, the monetary sanctions imposed in this matter.
The sanctions imposed herein shall be effective on a date set by FINRA staff.
II.
WAIVER OF PROCEDURAL RIGHTS

The firm specifically and voluntarily waives the following rights granted under PHLX's Code ofProcedure:A.

To have a Formal Complaint issued specifying the allegations against the firm;B.

To be notified of the Formal Complaint and have the opportunity to answer the
allegations in writing;C.

To defend against the allegations in a disciplinary hearing before a hearing panel,to have a written record of the hearing made and to have a written decision issued;andD.

To appeal any such decision to the PHLX Review Council and then to the U.S.
Securities and Exchange Commission and a U.S. Court of Appeals.

Further, the firm specifically and voluntarily waives any right to claim bias or prejudgment of the
Chief Regulatory Officer, the PHLX Review Council, or any member of the PHLX Review
Council, in connection with such person's or body's participation in discussions regarding theterms and conditions of this AWC, or other consideration of this AWC, including acceptance orrejection of this AWC.

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The firm further specifically and voluntarily waives any right to claim that a person violated theex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144, inconnection with such person's or body's participation in discussions regarding the terms andconditions of this AWC, or other consideration of this AWC, including its acceptance orrejection.

OTHER MATTERS
The firm understands that:A.

Submission of this AWC is voluntary and will not resolve this matter unless anduntil it has been reviewed and accepted by FINRA's Department of Enforcement
and the PHLX Review Council, the Review Subcommittee, or the Office ofDisciplinary Affairs ("ODA"), pursuant to PHLX Rule 9216;

B.

If this AWC is not accepted, its submission will not be used as evidence to prove
any of the allegations against the firm; andC.

If accepted:

D.

1.

This AWC will become part of the firm's permanent disciplinary recordand may be considered in any future actions brought by PHLX or any
other regulator against the firm;

2.

PHLX may release this AWC or make a public announcement concerning
this agreement and the subject matter thereof in accordance with PHLX
Rule 8310 and IM-8310-3; and3.

The firm may not take any action or make or permit to be made any publicstatement, including in regulatory filings or otherwise, denying, directly or
indirectly, any finding in this AWC or create the impression that the AWC
is without factual basis. The firm may not take any position in any
proceeding brought by or on behalf of PHLX, or to which PHLX is aparty, that is inconsistent with any part of this AWC. Nothing in thisprovision affects the firm's right to take legal or factual positions inlitigation or other legal proceedings in which PHLX is not a party.

The firm may attach a Corrective Action Statement to this AWC that is astatement of demonstrable corrective steps taken to prevent future misconduct.
The firm understands that it may not deny the charges or make any statement thatis inconsistent with the AWC in this Statement. This Statement does notconstitute factual or legal findings by PHLX, nor does it reflect the views of
PHLX or its staff.

6

The undersigned, on behalf of the firm, certifies that a person duly authorized to act on its behalf
has read and understands all of the provisions of this AWC and has been given a full opportunity
to ask questions about it; that it has agreed to the AWC's provisions voluntarily; and that nooffer, threat, inducement, or promise of any kind, other than the terms set forth herein and theprospect of avoiding the issuance of a Complaint, has been made to induce the firm to submit it.

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Date

Respondent
Clea
By.
Name:

ereA ..

Title:CC°)kSteafv2/4-

Reviewed by:Michael D. WolkCounsel for RespondentSidley Austin LLP
1501 K Street, N.W.
Washington, D.C. 20005(202) 736-8807
mwolk@sidley.com
Michael R. Trocchio
Counsel for RespondentSidley Austin LLP
1501 K Street, N,W.
Washington, D.C. 20005(202) 736-8070
mtrocchio@sidley.com

1/ial
Date

W. K ame Anthony, Senior Counsel
Elyse D. Kovar, Senior Counsel
Department of Enforcement
Signed on behalf of PHLX, by delegatedauthority from the Director of ODA

7

PAYMENT INFORMATION
The fine amount will be reflected on an upcoming invoice and will be direct debited from theaccount for your firm that PHLX currently has on file. Please DO NOT submit payment at thistime
Please inform your finance or applicable department of this forthcoming debit.
If you would like to arrange for an alternative method of payment, please enter the billing
contact information below and PHLX's Billing Department will contact you. Otherwise, pleaseleave thefollowing information blank.
Billing Contact Name:
Billing Contact Address:
Billing Contact Email:Billing Contact Phone Number:

Respectfully submitted,

Respondent
Clearpool Execution Services, LLC

al-00,
Date

By:
Name: E77 ilg
Title:STAR No. 20140423738 (EK and KA)

CC 0) 16C Cr)? 4