small order execution system (soes)

Case Study

In January 2002 the Securities and Exchange Commission charged iCapital Markets LLC, formerly Datek Securities Corporation, with securities fraud and violations of the SEC's broker-dealer reporting provisions. According to the charge, Datek Securities had for at least five years executed proprietary trades through the Nasdaq Stock Market's Small Order Execution System (SOES), which Nasdaq designed for small public customers. Until 2001 broker-dealers were prohibited from using SOES to trade for their own accounts. SOES served as the only Nasdaq trading system offering automatic execution at the best available price. The SEC charged that Datek fraudulently utilized SOES to execute millions of trades using nominee accounts to hide its proprietary trading. From 1995 through March 1998 the firm's trades constituted over 30% of all SOES trades. As punishment for misusing the Small Order Execution System, the SEC censured iCapital and ordered the firm to pay a $6.3 million penalty. iCapital consented to the order without admitting or denying the findings.