NASDAQ PHLX LLCNOTICE OF ACCEPTANCE OF AWC

Certified, Return Receipt Requested
TO:

Instinet, LLC
Mr. Faron Webb
General Counsel
Worldwide Plaza
309 West 49th Street
New York, NY 10019

FROM:

Nasdaq PHLX LLC ("PHLX")
c/o Financial Industry Regulatory Authority ("FINRA")
Department of Enforcement
9509 Key West Avenue
Rockville, MD 20850

DATE:

April 11, 2018

RE:

Notice of Acceptance of Letter of Acceptance, Waiver and Consent No. 20130368360-03

Please be advised that your above-referenced Letter of Acceptance, Waiver and Consent ("AWC") has
been accepted on April 11, 2018 by the PHLX Review Council's Review Subcommittee, or by the
Office of Disciplinary Affairs on behalf of the PHLX Review Council, pursuant to PHLX Rule 9216. A
copy of 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 are reminded that Section I of the attached Letter of Acceptance, Waiver, and Consent includes anundertaking. In accordance with the terms of the AWC, a registered principal of the firm is required to
notify the Compliance Assistant, Department of Enforcement, 9509 Key West Avenue, Rockville, MD
20850, of completion of the undertaking.
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.

Instinet, LLC
Page 2

If you have any questions concerning this matter, please contact Michael W. Bautz, Senior Counsel,
at (646) 430-7032.

Robert A. Marchman
Executive Vice President
Department of Enforcement, FINRA
Signed on behalf of PHLX

Enclosure
FINRA District 10 — New York
Michael Solomon
Senior Vice President and Regional Director(Via email)David S. Sieradzki, Esq.
Counsel for Respondent
Schulte Roth & Zabel LLP
1152 Fifteenth Street, NW
Suite 850
Washington, DC 20005

NASDAQ PHLX LLCLETTER OF ACCEPTANCE, WAIVER AND CONSENT
NO. 2013036836003
TO:

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

Instinet, LLC, Respondent
Broker-Dealer
CRD No. 7897

Pursuant to Rule 9216 of Nasdaq PHLX LLC ("PHLX" or the "Exchange") Code of Procedure,
Instinet, LLC ("INCA" or the "Firm") submits this Letter of Acceptance, Waiver and Consent("AWC") for the 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 the Firm alleging violations based on the same factual findings describedherein.
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 PIILX, 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 PIILX:BACKGROUND
The Firm has been a broker-dealer registered with the Securities and Exchange
Commission (the "Commission") and PHLX since April 25, 1979. Both registrations
remain in effect. The Firm, among other things, provides market access and execution
services to institutional market participants ("Market Access Clients") for a wide variety
of products. In or about February 2007, INCA was acquired by Nomura Holdings, Inc.,
which shifted the majority of its global equities execution business to INCA in December
2012.
The Firm has no relevant disciplinary history.
SUMMARY
1.

In Matter 20130376217, the Trading Analysis Section ("Trading Analysis") of
FINRA's Department of Market Regulation ("Market Regulation") reviewed

STAR No. 20130368360 (incl. merged STAR Nos. 20130376217, 20130382620, 20130384257, 20130386900,
20130395417, 20140399233, 20140402026, 20140416803, 20140422166, 20140430948, 20140435161,
20140436283, 20150451541, 20150463006, 20150463452, 20150481875, 20150482156, 20160502382,
20160504175, 20160509709, 20160514500, 20160521544, 20160525489, 20160526107, 20170543142,
20170545607, 20170551643, 20170554299, 20170555223, 20170561010, 20160485810, and 20160512438)(MWB)potential layering, spoofing, and wash trades by the Firm's Market Access Clientsfrom July 17, 2013 through May 29, 2015, and the Firm's compliance with Rule15c3-5 of the Securities Exchange Act of 1934 ("SEA") (the "Market Access
Rule"). I
2.

In Matter No. 20150463452, the Market Manipulation Investigations Group ofMarket Regulation reviewed the Firm's layering and spoofing surveillances andexception reports in effect from April 2015 through April 2016, and the Firm's
compliance with the Market Access Rule.

3.

In Matter No. 20150482156, Trading Analysis reviewed the Firm's procedures,
systems and controls related to potential layering, pre-opening spoofing, intraday
spoofing, and wash trades in place from January 1, 2015 through May 31, 2017,
and the Firm's compliance with the Market Access Rule.

4.

The above matters were part of investigations conducted by Market Regulation on
behalf of the Exchange and other self-regulatory organizations, including The
NASDAQ Stock Market LLC; NASDAQ BX, Inc.; The NASDAQ Options
Market LLC; Cboe BZX Exchange, Inc.; Cboe BYX Exchange, Inc.; Cboe
EDGA Exchange, Inc.; Cboe EDGX Exchange, Inc.; Investors Exchange LLC;
NYSE Arca Options, Inc.; NYSE Arca Equities, Inc.; the New York Stock
Exchange LLC; NYSE American Equities LLC; NYSE American Options LLC;
BOX Options Exchange LLC; and FINRA (collectively, the "SROs"), to review
the Firm's compliance with the Market Access Rule and the supervisory rules of
the SROs, including Exchange Rules 707 and 748(b), (d), (g), and later (h),2during the period of August 2012 through at least November 2017 (the "Review
Period").

5.

As a result of Market Regulation's investigations, it was determined that, during
the Review Period, the Firm failed to establish, document, and maintain a systemof risk management controls and supervisory procedures, including written
supervisory procedures ("WSPs") and an adequate system of follow-up andreview, reasonably designed to manage the financial, regulatory, and other risksof its market access business.

6.

Specifically, during the Review Period, the Firm failed to ensure compliance withall regulatory requirements, including supervising client trading to detect andprevent potentially violative layering, spoofing, and wash trading in violation of
SEA Rules 15c3-5(b), (c)(2), and (c)(2)(iii), and Exchange Rules 707 and 748(b),(d), (g), and later (h).

The SEC adopted Rule 15c3-5 effective January 14, 2011. See 17 C.F.R. § 240.15c3-5, Risk Management
Controls for Brokers or Dealers with Market Access, 75 Fed. Reg. 69792 (Nov. 15, 2010) (Final Rule Release).
2

Exchange Rule 748(g) was renumbered as Exchange Rule 748(h), effective November 23, 2012.

2

FACTS AND VIOLATIVE CONDUCTApplicable Rules
7.

During the Review Period, SEA Rule 15c3-5(b) required broker-dealers thatprovide market access to establish, document, and maintain a system of risk
management controls and supervisory procedures reasonably designed to manage
the financial, regulatory, and other risks of their market access business.3

8.

During the Review Period, SEA Rule 15c3-5(c)(2) required market access brokerdealers to have regulatory risk management controls and supervisory procedures
reasonably designed to ensure compliance with all regulatory requirements to,among other things, prevent the entry of orders unless there has been compliancewith all regulatory requirements that must be satisfied on a pre-order entry basis
and restrict access to trading systems and technology that provide market accessto persons and accounts pre-approved and authorized by the market accessbroker-dealer.

9.

During the Review Period, SEA Rule 15c3-5(c)(2)(iii) specifically required
market access broker-dealers to have regulatory risk management controls andsupervisory procedures reasonably designed to restrict access to trading systems
and technology that provide market access to persons and accounts pre-approved
and authorized by the broker or dealer.

10.

During the Review Period, Exchange Rule 707 prohibited members and member
organizations from engaging in acts or practices inconsistent with just andequitable principles of trade.

11.

During the Review Period, Exchange Rule 748(b) required member organizations
to "provide for appropriate supervisory control . . . of the organization andcompliance with securities' [sic] laws and regulations, including the By-Laws andRules of the Exchange . . . ." Member organizations are required to "provide forappropriate written procedures of supervision and control; and . . . [e]stablish aseparate system of follow-up and review to determine that the delegated authority
and responsibility is being properly exercised."12.

During the Review Period, Exchange Rule 748(d) required "[e]ach person withsupervisory control . . . [to] reasonably discharge his duties and obligations inconnection with such supervision and control to prevent and detect insofar aspracticable, violations of the applicable securities laws and regulations, including
the By-Laws and Rules of the Exchange."

3 Rule 15c3-5 requires that, as gatekeepers to the financial markets, broker-dealers providing market access must
"appropriately control the risks associated with market access, so as not to jeopardize their own financial condition,that of other market participants, the integrity of trading on the securities markets, and the stability of the financial
system." 75 Fed. Reg. at 69792.

3

13.

During the Review Period, Exchange Rule 748(g), and later (h), required member
organizations to establish, maintain, and enforce written supervisory procedures
reasonably designed to prevent and detect violations of securities laws andregulations, including the Exchange's By-Laws and Rules.
Inadequate Supervision of Customer Trading
Access to Trading Systems

14.

Pursuant to the Firm's written "Know Your Customer" procedures, when opening
a new account, the New Account Sales Supervisor is required to obtain certain
account information, complete a New Account form and confirm, in writing, thenames of persons authorized to trade the account. However, from January 2013
through December 2013, the Firm failed to enforce this procedure.

15.

Specifically, for the account of two of its Market Access Clients, the Firm only
pre-approved and authorized the principals of the client. The Firm failed to preapprove the individual traders utilizing the Firm's MPID to access the market
through the clients and, therefore, did not know the identity of the underlying
trader.

16.

In addition, because the Firm did not know the identity of the underlying traders,it had no means of verifying its Market Access Client's representation that a
particular trader had been truly terminated or whether a disabled trader had been
given a new trader ID for the client to access U.S. markets via the Firm's systems
after the trader had been terminated.

17.

Accordingly, the Firm failed to have risk management controls and supervisory
procedures to restrict access to trading systems and technology that provide
market access to persons and accounts pre-approved and authorized by thebroker-dealer.

18.

The acts, practices, and conduct described above in paragraphs 14 through 17
constituted violations of SEA Rules 15c3-5(b) and (c)(2)(iii), and Exchange Rules
707 and 748(b), (d), (g), and later (h).
Wash Trading

19.

During the Review Period, the Firm had two systemic controls to detect potential
wash trading by its customers: (i) a system operated by its parent company,
Nomura Securities International; and (ii) its own proprietary alert system.

20.

However, the Firm was unable to determine if the noted exceptions were valid for
the Market Access Clients noted above. Specifically, for those Market Access
Clients, the Firm did not know the identity of the underlying trader utilizing its
MPID and, therefore, was unable to determine if the same trader was on bothsides of a transaction or if one trader was using multiple trader IDs to engage inwash trading.
4

21.

As a result, the Firm relied on its Market Access Clients to determine if beneficial
ownership had changed during the relevant trade and report the occurrence ofwash trading. However, the Firm took wholly inadequate steps to follow-up with
the Market Access Clients to verify that beneficial ownership had changed when awash trade exception was detected.

22.

The acts, practices, and conduct described above in paragraphs 19 through 21
constituted violations of SEA Rules 15c3-5(b) and (c)(2), and Exchange Rules
707 and 748(b), (d), (g), and later (h).
Equities Layering4 and Spoofing523.

During the Review Period, the Firm employed a proprietary alert system to detect
potential layering and spoofing by its Market Access Clients. For certain Market
Access Clients that previously had accounts with Nomura, the Firm also relied
upon a third-party surveillance operated by Nomura.

24.

However, the Firm's proprietary alert system improperly excluded potential
instances of layering or spoofing where a market participant enters and cancels aseries of orders that improve the National Best Bid ("NBB") or National Best
Offer ("NBO"), ignoring a significant number of non-bona fide orders entered aspart of a potential layering or spoofing strategy.

25.

For exceptions detected by the Firm's proprietary alert system, the Firm's
Compliance Department reviewed a sample and, where it was determined to benecessary, forwarded the exception to the relevant business side supervisor forfollow-up with the client.

26.

However, there were several deficiencies with the Firm's follow-up and review of
exceptions flagged by its proprietary surveillance systems. The Firm's WSPs
failed to describe the steps to be taken in addressing an exception. Specifically,
the Firm's WSPs: (i) did not describe the business side supervisor's role in thereview of layering exceptions; (ii) failed to document the steps requiring thesuspicious alerts to be sent to the business supervisor or describe the businesssupervisor's responsibility when receiving the client's response; (iii) failed to

4 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 anddemand. 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 limit orders that aresubsequently cancelled is to induce, or trick, other market participants to enter orders due to the appearance ofinterest created by the orders such that the trader is able to receive a more favorable execution on the opposite sideof the market.
5 Spoofing" is a manipulative trading tactic designed to induce other market participants into executing trades.
Spoofing is a form of market manipulation that generally involves, but is not limited to, the market manipulator
placing an order or orders with the intention of cancelling the order or orders once they have triggered some type ofmarket movement and/or response from other market participants, from which the market manipulator might benefit
by trading on the opposite side of the market.

5

provide guidance in conducting sampling; (iv) failed to outline that the businessside supervisor will investigate the alerts beyond any initial determinations byCompliance; and (v) failed to state where documentation of any such review will
be maintained.
27.

There were no WSPs to address exceptions detected by Nomura's third-party
surveillance system. In the absence of any written guidance, INCA personnel
engaged in an undocumented process whereby Nomura's Compliance Department
would forward layering exception reports to the Firm's Compliance Department
and the relevant business-side desk supervisor to follow-up with the relevantMarket Access Client. The business-side desk supervisor would review any
explanation or information provided by the relevant Market Access Client with
Compliance and take any further necessary action. The business-side desk
supervisor and the Firm's Compliance Department failed to take adequate action
to review the explanations provided by the relevant Market Access Client.

28.

As a result, six Market Access Clients were allowed to engage in potential
layering and spoofing unabated despite regularly appearing on the Firm's andNomura's exception reports.

29.

For example, from April 2013 through December 2013,6 a Market Access Clientof the Firm generated approximately 694 layering and spoofing exceptions on
Nomura's third party surveillance.

30.

Likewise, from January 2013 to on or about October 22, 2013,7 another Market
Access Client generated approximately 6,288 layering and spoofing alerts on the
Firm's proprietary surveillance system. During this time period, all the Firmclients, in total, generated approximately 10,107 layering and spoofing alerts.
Thus, the Market Access Client was responsible for approximately 60% of all the
Firm's layering and spoofing alerts.

31.

The acts, practices, and conduct described above in paragraphs 23 through 30
constituted violations of SEA Rules 15c3-5(b) and (c)(2), and Exchange Rules
707 and 748(b), (d), (g), and later (h).
Spoofing the Open by the Firm's Market Access Clients

32.

During the Review Period, the Firm had procedures and controls to detect
potential instances of spoofing prior to the open. Beginning in January 2014,
INCA had an exception report that identified any instance in which a customer
placed an order and cancelled the order prior to 9:30 a.m., where the cancellation
quantity exceeded 5% of the security's 30-day average daily volume ("ADV").

6 The Firm terminated the account on December 31, 2013.
7 The Firm terminated the account on October 22, 2013.

6

B.

33.

However, in certain instances when an exception was triggered, the Firm failed to
conduct an adequate follow up and review.

34.

For example, from April 7, 2015 through June 29, 2016, a Market Access Clientof the Firm generated approximately 279 pre-opening spoofing exceptions.
Despite the number of exceptions, the Firm failed to take adequate steps toaddress this Market Access Client's pre-opening activity.

35.

The acts, practices, and conduct described above in paragraphs 32 through 34
constituted violations of SEA Rules 15c3-5(b) and (c)(2), and Exchange Rules
707 and 748(b), (d), (g), and later (h).

The Firm also consents to the imposition of the following sanctions:1.

A censure;2.

A fine in the amount of $1,575,000 of which $59,700 is payable to PHLX;8 and3.

An undertaking requiring the Firm to address the Market Access Rule deficiencies
described in this AWC and to ensure that it has implemented controls andprocedures that are reasonably designed to achieve compliance with the rules andregulations cited herein.
a. Within 90 days of the date of the issuance of this AWC, INCA shall submit to
the COMPLIANCE ASSISTANT, DEPARTMENT OF ENFORCEMENT,
9509 KEY WEST AVENUE, ROCKVILLE, MD 20850, a written report,
certified by a senior management Firm executive, toMarketRegulationComp@finra.org that provides the following information:(i)a reference to this matter;(ii)

a representation that the Firm has addressed the deficiencies describedabove; and(iii)

the date this was completed.

b. Between 90 and 120 days after the submission of the written report, the Firm
shall submit a supplemental written report to FINRA to provide an update on
the effectiveness of the enhancements and changes made by the Firm to its
risk management controls and procedures as describe above.
c. The Department of Enforcement may, upon a showing of good cause and inits sole discretion, extend the time for compliance with these provisions.

8

The balance of the sanction will be paid to the self-regulatory organizations listed in Paragraph B.4.

7

4.

Acceptance of this AWC is conditioned upon acceptance of similar settlementagreements in related matters between INCA and each of the following selfregulatory organizations: The NASDAQ Stock Market LLC; NASDAQ BX, Inc.;
The NASDAQ Options Market LLC; Cboe BZX Exchange, Inc.; Cboe BYX
Exchange, Inc.; Cboe EDGA Exchange, Inc.; Cboe EDGX Exchange, Inc.;
Investors Exchange LLC; NYSE Arca Options, Inc.; NYSE Arca Equities, Inc.;
the New York Stock Exchange LLC; NYSE American Options LLC; NYSE
American Equities LLC; BOX Options Exchange LLC and FINRA.

The Firm agrees to pay the monetary sanction(s) in accordance with its executed Electionof Payment Form.
The Firm 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.
II.
WAIVER OF PROCEDURAL RIGHTSThe 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.
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
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. The Firm 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
in this provision affects the Firm's right to take legal or factual positions
in litigation 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.

9

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.

Respondent
Instinct, LLC

Date

By:
Name:
Title:

Gc-ne-144 Cp nSci

Reviewed by:

Schulte Roth B beYL.LP
1152 Fifteenth Street, NW Suite 850
Washington, DC 20005
Accepted by PHLX:

Robert A. Marchm
Executive Vice President
Department of Enforcement
Signed on behalf of PHLX, by delegatedauthority from the Director of ODA

10

ELECTION OF PAYMENT FORM
The Firm intends to pay the fine proposed in the attached Letter of Acceptance, Waiver andConsent by the following method (check one):
1:1

A Firm check or bank check for the fill amount

1:1
X

Wire transfer
Respectfully submitted,
Respondent
Instinet, LLC)11)1Ci
Date

By: PO-&-INAL-OTPName:

a_..,-,), Vie CA

Title: Ge-A57-4,-,...e G ,,,se. f

Billing and Payment Contact
Please enter the billing contact information below. Nasdaq MarketWatch will contact you withbilling options and payment instructions. Please DO NOT submit payment until Nasdaq has
sent you an invoke.
Billing Contact Name:
Billing Contact Address:
Billing Contact Email:Billing Contact Phone Number:STAR No. 20130368360 (incl. merged STAR Nos. 20130376217, 20130382620, 20130384257, 20130386900,
20130395417, 20140399233, 20140402026, 20140416803, 20140422166, 20140430948, 20140435161,
20140436283, 20150451541, 20150463006, 20150463452, 20150481875, 20150482156, 20160502382,
20160504175, 20160509709, 20160514500, 20160521544, 20160525489, 20160526107,20I70543142,
20170545607, 20170551643, 20170554299, 20170555223, 20170561010, 20160485810, and 20160512438)(MWB)