E*Trade has agreed to pay $350,000 to settle charges that it failed to set up a system that would enable the firm to comply with securities laws and regulations related to detecting potentially manipulative trading among its customers, Finra said today.

In particular, according to a Finra filing, between February 2016 and November 2021 E*Trade relied on automated surveillance reports to detect various kinds of manipulative trading by customers. But with regard to wash trades, prearranged trading and marking-the-close, the reporting parameters were flawed enough to be inadequate, the filing said.

Officials at E*Trade could not be reached by press time.

Discovery of the non-compliance originated from reviews conducted by Finra’s Market Regulation Department, the filing said.

In the matter of wash trades and prearranged trading, E*Trade used multiple surveillance reports to detect that activity, but some of those reports had parameters that significantly impacted their ability to identify that kind of trading, especially in lower priced and thinly traded securities, Finra said.

“For example, the firm employed a surveillance report to identify potential wash sales, which it defined as ‘one or more transactions where there is no change in beneficial ownership.’ The surveillance system, however, flagged trades that met this definition only if the total principal value of the trade was more than $1,000, regardless of the price of the underlying security,” the filing stated. “Also, the firm’s surveillance reports would not detect either a potential wash sale or prearranged trade if the two sides of the transaction were executed more than one second apart, even though wash trades and manipulative prearranged trades could be executed more than one second apart.”

Similarly, the parameters set in marking-the-close activity were too restrictive, especially with lower-priced securities, Finra said. For example, the report would identify orders and trades that were entered and executed only in the final minute of the trading day, when in fact such trading could occur prior to that final minute.

In addition, E*Trade added three parameters to the report that had to exist simultaneously in order to raise a flag, the filing said: an aggregate end-of-day position greater than $10,000 for all accounts in a household, a total execution volume greater than 1% of the security’s 30-day average daily volume and execution volume of 20% or more as a percentage of the customer’s position.

Of the $350,000 fine, $144,500 will go to Finra, and the rest to Nasdaq, NYSE, Investors Exchange and Cboe EDGX Exchange for similar violations, the filing said.