2015 saw shock allegations that well-known international brokerage EXANTE was involved in a major hacking and insider trading scandal, involving a large group of defendants across the US and Europe. In what has been described as ‘one of the largest financial hacking cases in history’, a group of investment funds were alleged to have used hacked financial announcements to net over $100 million in illicit profits. The high-profile case caused particular shockwaves in Malta, where the head office of EXANTE was based. The company was accused of using unannounced financial data to profit off of market moves when the information became public.
The 2015 filings involve a vast web of companies, most of which acted as investment funds. The allegations were lurid, but EXANTE insiders were initially confused by the filing. Not only were they not advised of any potential action against them, the filings included blatant falsehoods about the role of EXANTE in the market. Throughout the SEC filing, EXANTE is referred to as a ‘hedge fund’, which stunned industry insiders familiar with the company’s role as a leading execution-only broker.
Execution-only brokers provide market access for their clients, who in the case of EXANTE consist of professional investors at hedge funds, pension funds, and other pooled investment vehicles, as well as private professionally qualified individuals. To make matters worse, all EXANTE client assets were immediately frozen when the allegations became public, leading to a frantic scramble to clarify mistakes in the SEC listing, cooperate with regulators and the SEC, and win back full operationality for clients. EXANTE benefited from the considerable loyalty of their dedicated client base during this difficult period, but the filings still presented a major frustration for the rapidly-expanding business.
Fortunately for EXANTE, soon the SEC claims dismissed all allegations claiming EXANTE had acted as an investment fund during the scandal, thereby ending proceedings against the business. Some EXANTE clients remained under investigation as they had executed suspicious trades through their accounts, but EXANTE itself was cleared of involvement in the hacking and ensuing illegal trades.
The details of the original case are complex, involving two Ukrainian hackers who were able to illegally access private sections of major market news sites, such as PRNewswire and Market wired. Financial announcements such as corporate earnings are sent to these sites in advance, in order to leave time to prepare relevant articles and to release market news at agreed hours. By reading these in advance, the hackers were able to provide valuable – and unfair – trading advantages to a group of investment funds based in Russia, the USA, and France.
Some of these traders then executed suspicious trades in advance of corporate announcements, ranging from a few days before the data release to just hours. Given predictable market reactions to positive or negative news, these trades netted very significant profits for the funds involved. In some of these transactions, EXANTE was unknowingly used as the broker for market access. Given that EXANTE conform to high regulatory standards, being registered with the FCA in London, SFC in Hong Kong as well as CySec in Cyprus and the Maltese financial authorities, there is no insinuation that EXANTE was aware of these trades suspicious nature. Brokers have responsibilities to confirm source of funds and segregate client money, but in an execution only service they are not expected to investigate the rationale behind each client trade. Indeed, many of these trades simply resembled news plays or normal long equity investments in major companies, with no outward signs to cause suspicion.
Unfortunately, the SEC seemed not to understand – at least initially – the role of EXANTE, mischaracterising the company as a ‘hedge fund’. Hedge funds are specialised investment vehicles that attempt to create consistent, stable levels of profit in all market conditions, charging high fees when they meet targets. To do so, they take on considerable amounts of risk and open both long and short positions in the equity market. As an execution only broker, EXANTE never takes on proprietary risk, does not trade on its own account, and has no overall view on the market. Unlike an advisory broker, EXANTE does not provide trading advice or suggest trades to clients, instead focusing on providing a wide range of tradeable instruments and a single, multi-currency platform to deal them through.
Had this critical point about EXANTE been understood, the charges would never have been filed. One frustration of company insiders was that even the most cursory request or research into their regulatory approvals would have swiftly shown that EXANTE acts only as a broker rather than a proprietary trader. Once the mistake was understood, the SEC rapidly dropped the charges against EXANTE, proceeding instead with an investigation into the actual funds involved. Company spokesmen welcomed the announcement, praising the role of the SEC in limiting financial crime, and restating their commitment to work fully with the investigation to ensure market integrity.