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NASDAQ PHLX LLCLETTER OF ACCEPTANCE, WAIVER AND CONSENT
NO. 2017053210204
TO:Nasdaq Phlx LLC
c/o Department of Enforcement
Financial Industry Regulatory Authority (“FINRA”)

RE:

Sagetrader, LLC, Respondent
Member Firm
CRD No. 137862

Pursuant to Rule 9216 of Nasdaq Phlx LLC (“Phlx”) Code of Procedure, 1 Sagetrader, LLC (the“Firm” or “Respondent”) submits this Letter of Acceptance, Waiver and Consent (“AWC”) forthe purpose of proposing a settlement of the alleged rule violations described below. This AWC
is submitted on the condition that, if accepted, Phlx will not bring any future actions against theRespondent alleging violations based on the same factual findings described herein.
I.
ACCEPTANCE AND CONSENT
A.

Respondent 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 adjudicationof any issue of law or fact, to the entry of the following findings by Phlx:
BACKGROUND
The Firm became a FINRA member on May 19, 2006, and a Phlx member on July 3,
2017. The Firm is headquartered in San Francisco, CA, maintains one other branch
office, and employs eight registered persons. The Firm has no relevant disciplinary
history.
SUMMARY
Sagetrader failed to reasonably supervise for potentially manipulative trading on its
platforms. Since becoming a Phlx member on July 3, 2017 through December 31, 2019(the “Relevant Period”), Sagetrader provided routing and execution services to domestic
and foreign entities, which were comprised of hundreds to thousands of individual daytraders. The automated surveillance system that the Firm used to detect potentiallymanipulative trading such as layering, spoofing, wash trades and marking the close did
not surveil for marking the open until October 2018. In addition, the Firm’s review of thesurveillance alerts was unreasonable. Sagetrader had limited staff and other resources to1

Series 9000 of The Nasdaq Stock Market LLC Rules are incorporated by reference into Phlx Rule General 5,Section 3, and are thus Phlx Rules and thereby applicable to Phlx members, member organizations, persons
associated with member organizations, and other persons subject to the Exchange’s jurisdiction.

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sufficiently review and resolve alerts for potentially manipulative trading, which, by
2018, totaled more than 500,000 alerts per year. Further, the Firm’s guidance to andsupervision of the assigned reviewers was unreasonable.
In addition, Sagetrader failed to properly register 11 individuals with Phlx, and failed tohave reasonably designed written supervisory procedures (“WSPs”) to achievecompliance with Phlx registration requirements during the Relevant Period.
As a result, Sagetrader violated Phlx Rules 748, 707, 611(a), 612(a), 613(a), 1210,1220(a)(2), 1220(b)(2), and Phlx General 4, Sections 1.1210, 1.1220(a)(2) and1.1220(b)(2).
FACTS AND VIOLATIVE CONDUCT
1. This matter originated from surveillance conducted by FINRA.
Sagetrader’s Business Model
2. During the Relevant Period, Sagetrader provided routing and execution services todomestic and foreign customers, which were comprised of hundreds to thousands ofday traders. The Firm’s customers used Sagetrader’s market participant identifiers(MPIDs) to route orders to an alternative trading system and to exchanges.
Sagetrader Onboarded New Customers that Generated Red Flags for Potentially
Manipulative Trading
3. From 2013 through 2017, Sagetrader onboarded an increasing number of customers,
which caused a corresponding increase in trading activity through the Firm. Tradingon the Firm’s platform increased from more than 67 million orders per year in 2015
to more than 200 million orders per year in 2017. The number of shares traded by theFirm’s customers increased from roughly 3.7 billion shares per year in 2015 to morethan 18.9 billion shares per year in 2017.
4. The trading activity conducted by some of these customers generated “red flags” forpotentially manipulative trading. More specifically, the Firm’s automated surveillanceof customers’ trading generated hundreds of thousands of internal surveillance alerts
for potentially manipulative trading. Since July 2017, approximately 67 percent of
those internal alerts were generated by three Firm customers that each included
hundreds of foreign-based day traders. The Firm classified one of these customers as“high risk.” This customer generated more than 125,000 internal surveillance alerts
for potentially manipulative trading from July 2017 until mid-May 2018, when it
stopped using the Firm for routing and execution services.
Sagetrader Failed to Reasonably Supervise for Potentially Manipulative Trading
5. Phlx Rule 748, now General 9, Section 20, requires members and member
organizations to establish, maintain, and enforce WSPs, and a system for applying         such procedures, to supervise the types of business(es) in which the member ormember organization engages in and to supervise the activities of all registeredrepresentatives, employees, and associated persons. The WSPs and the system forapplying such procedures shall reasonably be designed to prevent and detect, insofar
as practicable, violations of the applicable securities laws and regulations, including
the By-Laws and Rules of the Exchange. The duty to supervise under the above rules
includes the responsibility to reasonably investigate red flags that suggest misconduct
may be occurring and to act upon the results of such investigation. A violation of Phlx
Rule 748 is also a violation of Phlx Rule 707, now General 9, Section 1(c), which
requires members, member organizations, and persons associated with or employed
by a member or member organization to not engage in conduct inconsistent with justand equitable principles of trade. 2
6. Sagetrader’s supervisory system, including WSPs, for potential manipulative tradingon its platforms was not reasonable in several respects.
7. First, the Firm’s automated surveillance generated post-trade alerts for potential
spoofing, layering, wash trades, and marking the close throughout the Relevant
Period, but its automated surveillance did not surveil for marking the open until
October 2018.
8. Second, Sagetrader’s review of the alerts was not reasonable during the Relevant
Period. For example, the Firm had limited staff and other resources to sufficiently
conduct the initial review and analysis of the alerts, which, by 2018, totaled morethan 500,000 alerts per year.
9. Further, the Firm’s first-level reviewers were permitted to close surveillance alerts forpotentially manipulative trading without any oversight or supervision by a Firmprincipal. One of these assigned reviewers, who was responsible for reviewing
approximately 73 percent of the Firm’s alerts from July 2017 through June 2018, and100 percent of the alerts thereafter, did not have sufficient experience or training in
identifying potentially manipulative trading when he was hired.
10. Third, Sagetrader’s WSPs failed to provide reasonable guidance on how to review forpotentially manipulative trading. The Firm’s WSPs directed reviewers to seek
customer explanations for alerts “of concern.” Based on their analysis, the reviewers
could close the alert if it did not “appear to be egregious,” but were supposed to
escalate “significant alerts” to the alert review committee. There was no guidance as
to what constituted a “significant” alert that required escalation. Nor was there any
guidance as to what rendered alerts “of concern” or how to determine whether an alert
appeared to be egregious.
11. Fourth, the Firm’s supervisory system was unreasonable, because while the Firm
focused on resolving individual alerts generated by each separate trader at each2

As of February 3, 2020, Phlx Rules 748 and 707 were renumbered as Phlx General 9, Sections 20 and 1(c),respectively.

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customer, and terminated some individual traders, the Firm did not have a system inplace to consider the total alerts generated by multiple traders at the same customer inorder to evaluate the aggregate regulatory risk presented by a customer’s overalltrading activity.
12. Fifth, the Firm had identified one customer during the Relevant Period as “high risk,”
which, according to the Firm, required “enhanced” surveillance. But the Firm had nosystem or procedures for conducting “enhanced” surveillance and, in fact, did not doso.
13. Finally, the Firm did not routinely document the alert reviews it conducted, and forthe alert reviews that it did document, the documentation was not always sufficient.
14. Therefore, Sagetrader violated Phlx Rules 748 and 707.
Sagetrader Did Not Comply With Phlx Registration Requirements
15. Phlx General 4, Section 1.1210 and its predecessors, Phlx Rules 1210, 611(a) and613(a), provide that each person engaged in the securities business of a member shallbe registered with Phlx as a representative or principal in each category of registration
appropriate to his or her functions and responsibilities. A principal, pursuant to Phlx
General 4, Section 1.1220(a)(1) and its predecessors, Phlx Rules 1220(a)(1) and,611(b), includes those actively engaged in the management of the member’ssecurities business, which includes those having managerial decision-making
authority with respect to the member’s securities business and management-level
responsibilities for supervising any aspect of such business. Such principals shall be
required to register as a general securities principal, pursuant to Phlx General 4,Section 1.1220(a)(2) and its predecessors, Phlx Rules 1220(a)(2) and 612(a), unlesstheir functions are addressed by another principal registration category not applicablein this matter. 3
16. In addition, Phlx General 4, Section 1.1220(b)(2) and its predecessors, Phlx Rules
1220(b)(2) and 613(a), require a representative to register as a general securities
representative, unless their functions are addressed by another representative
registration category not applicable in this matter.
17. During the Relevant Period, the Firm did not register five employees as generalsecurities principals and general securities representatives. The Firm also did notregister one other employee as a general securities principal and five other employees
as general securities representatives during the Relevant Period. Therefore, the Firm
violated Phlx General 4, Sections 1.1210, 1.1220(a)(2) and 1.1220(b)(2), and Phlx
rules 1210, 1220(a)(2), 1220(b)(2), 611(a), 612(a) and 613(a).

3Phlx General 4, Section 1 superseded the Phlx 1200 rule series on June 7, 2019. The Phlx 1200 rule series
superseded Phlx Rules 611-613 on Oct. 1, 2018.

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18. The Firm also failed to establish, maintain, and enforce WSPs, and a system forapplying such procedures, to prevent and detect, insofar as practicable, violations ofPhlx registration requirements. Specifically, the Firm had no supervisory system orWSPs in place to prevent and detect, insofar as practicable, violations of Phlx
registration and qualification requirements. Therefore, the Firm violated Phlx Rules
748 and 707.
B.

Respondent also consents to the imposition of the following sanctions:
1. A censure;
2. A $775,000 fine, of which $89,583.33 shall be paid to Phlx;4 and3. An undertaking to review and revise the Firm’s supervisory system,
including its WSPs, with respect to the findings described above
concerning the Firm’s supervision for potentially manipulative trading by
customers and compliance with Phlx registration requirements. Within 90
business days of the notice of acceptance of this AWC, a registeredprincipal of the Respondent shall submit to Compliance Assistant, FINRA
Department of Enforcement, 15200 Omega Drive, Third Floor, Rockville,
MD 20850, a signed, dated letter, or an e-mail from a work-related
account of the registered principal to EnforcementNotice@FINRA.org,
providing the following information: (i) a reference to this Matter No;(ii) a representation that the Firm has revised its supervisory system,
including WSPs, to address the above findings in this matter concerning
the Firm’s supervision for potentially manipulative trading by customers
and compliance with Phlx registration requirements; and, (iii) the date(s)the updates to the Firm’s supervisory system and WSPs were implemented
and registration deficiencies of Firm personnel were corrected.
Acceptance of this AWC is conditioned upon acceptance of parallel settlementagreements in related matters between BYX, BZX, EDGA, EDGX, FINRA, Nasdaq,
BX, and NYSE Arca.
Respondent agrees to pay the monetary sanction(s) in accordance with its executed
payment form.
Respondent specifically and voluntarily waives any right to claim that it is unable to pay,
now or at any time hereafter, the monetary sanction(s) imposed in this matter.
The sanctions imposed herein shall be effective on a date set by FINRA staff.

4 The remainder will be paid to Cboe BYX Exchange, Inc (BYX); Cboe BZX Exchange, Inc. (BZX); Cboe EDGAExchange, Inc. (EDGA); Cboe EDGX Exchange, Inc. (EDGX); FINRA; The Nasdaq Stock Market LLC (Nasdaq);
Nasdaq BX, Inc. (BX); and NYSE Arca, Inc. (NYSE Arca).

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WAIVER OF PROCEDURAL RIGHTS
Respondent specifically and voluntarily waives the following rights granted under Phlx’s Codeof Procedure: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 theallegations 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 Exchange Review Council and then to the U.S.
Securities and Exchange Commission and a U.S. Court of Appeals.

Further, Respondent specifically and voluntarily waives any right to claim bias or prejudgmentof the Chief Regulatory Officer, the Exchange Review Council, or any member of the Exchange
Review Council, in connection with such person’s or body’s participation in discussions
regarding the terms and conditions of this AWC, or other consideration of this AWC, including
acceptance or rejection of this AWC.
Respondent further specifically and voluntarily waives any right to claim that a person violated
the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144,
in connection 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.
III.
OTHER MATTERS
Respondent 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 Exchange 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 Respondent; and         C.

D.

If accepted:
1.

This AWC will become part of the Respondent’s permanent disciplinary
record and may be considered in any future actions brought by Phlx or any
other regulator against the Respondent;

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.

Respondent may not take any action or make or permit to be made any
public statement, including in regulatory filings or otherwise, denying,directly or indirectly, any finding in this AWC or create the impressionthat the AWC is without factual basis. Respondent may not take any
position in any proceeding brought by or on behalf of Phlx, or to which
Phlx is a party, that is inconsistent with any part of this AWC. Nothing inthis provision affects the Respondent’s right to take legal or factual
positions in litigation or other legal proceedings in which Phlx is not aparty.

Respondent may attach a Corrective Action Statement to this AWC that is astatement of demonstrable corrective steps taken to prevent future misconduct.
Respondent understands that it may not deny the charges or make any statementthat is 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 orits staff.

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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 the Firm has agreed to the AWC’s provisions voluntarily; and that
no offer, 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.
 _____________
Date_________________________________
Sagetrader, LLC
Respondent
By: ______________________________
 
Print Name: _______________________
      
Title: _____________________________

Reviewed by:_______________________
Susan Light
Counsel for Respondent
Katten Muchin Rosenman LLP50 Rockefeller PlazaNew York, NY 10020-1605

Accepted by Phlx:_________________
Date____________________________________
Dawn E. Faris
Senior Counsel
Department of Enforcement
Signed on behalf of Phlx, by delegatedauthority from the Director of ODA