Well-known global broker EXANTE found itself in the midst of an international scandal in 2015, somewhat nonplussed as to how they had got there. Following that year’s filing of SEC charges naming the broker as a hedge fund involved in insider trading, company insiders scrambled to correct the mistaken characterisation they had suffered, resulting in frozen client assets and a flurry of negative press. These efforts were quickly rewarded as the SEC cleared EXANTE of all charges, correcting their mistaken identification of the broker as an investment fund, while continuing their investigation into the actual funds listed.
First, the filings: the SEC opened an investigation into a large group of funds, operating across Europe and the US, who were alleged to have profited from illicitly obtained insider information. The allegations were complex, but involved a duo of Ukrainian hackers who managed to gain access to internal parts of financial news websites Marketwired and PRNewswire. These services provide updates on corporate earnings and other sensitive market information to the general market. In order to do so, they receive statements shortly before they are due to become public, which they then hold until the official announcement time before releasing to the general market.
Somehow, these two hackers were able to access the private sections of the website where this information is stored pre-release, accessing highly sensitive information with an enormous market value. This data was then shared with a group of investment funds who used their unfair advantage to time trades before market announcements were made, netting over $100 million in profits as a group. Needless to say, insider trading in this fashion is illegal almost everywhere, and funds found to be involved in such dealings face stiff penalties.
The SEC fillings listed a large group of hedge funds and other investment funds, some of who were EXANTE clients. The problem was, EXANTE was described as a ‘hedge fund’, and accused of being responsible for trades executed through their platform by other clients. Of course, EXANTE is an execution-only broker and so does not trade on its own account or advise clients on where to invest their money. It is not at all clear how the SEC was able to make such a basic mistake, which could have been immediately rectified by contacting EXANTE directly – no attempt to do so was made before the filing – or by checking the details of their Maltese license.
Despite their shock, EXANTE insiders were sure they would swiftly clear the name of their business, given the inaccurate nature of the filings. Execution brokers cannot benefit from insider trades, as they receive a flat spread based on the volume traded – whether clients make a profit on their positions or not, it is opening and closing them that creates profits for brokers. The 2015 filings implied that EXANTE took positions and profited during the scandal, an impossibility given their business model and licenses.
As soon as EXANTE cleared all allegations, the company set back to work servicing their long-term clients. The whole debacle put considerable stress on the business, as the SEC initially froze all client assets while the allegations were investigated. EXANTE was swift to share all relevant information with the SEC to assist in their investigation, whilst stressing that very few of their clients were implicated in the investigation, and highlighting that the business itself had done nothing wrong. This argument was accepted by the SEC, who responded by dropping the charges against EXANTE.
The investigation into those real hedge funds that had carried out insider trades continued, by the SEC was satisfied that EXANTE had no part in the scandal itself. It is very unusual for a broker to be implicated in insider trading, given it is an activity that only creates profits for proprietary traders. EXANTE has continued to grow and develop since the mistaken filing, expanding into new markets and adding products to its range of over half a million tradable securities. But in a reputation-led business any negative coverage presents a serious problem, and the battle to clear EXANTE’s name continues even though they have been cleared of all wrongdoing. Financial news reports tended to focus on the details of the original filing, rather than the more mundane corrections issued later, resulting in a persistent headache for the innocent broker.
EXANTE spokesmen were quick to praise the work of the SEC, pointing out their vital role in fighting global financial crime. EXANTE conforms to some of the most exacting regulatory standards worldwide, being listed by the SFC in Hong Kong, the FCA in London, CySec and the Maltese regulator. These listings give clients peace of mind that their money is held in compliance with the strongest FCC regulations available, an advantage compounded by EXANTE’s own commitment to client privacy and the highest standards of customer service. Hopefully this episode will continue to recede into the past as the future brings further growth, and a deepening of the relationship between EXANTE and their global client base.