In the Matter of Brut, LCC

Brut, LLC (defendant) was a broker-dealer and alternative trading system registered with the Securities and Exchange Commission (SEC) (plaintiff). Brut operated the Brut ECN System (Brut ECN), an electronic communications network (ECN). Brut ECN permitted market makers who subscribed to Brut’s services to display orders for securities anonymously. The limit-order-display rule of the Securities Exchange Act of 1934 (Exchange Act) required market makers to display on the public quotation system any customer limit order that was priced better than the market maker’s public quote. The requirement could be satisfied by delivering the limit order to an ECN that complied with the ECN-display-alternative rule. If the market maker’s quote was at a nonstandard price increment, Brut was permitted to round the quote to the nearest quote increment allowed. Buy orders were rounded down, and sell orders were rounded up. Even if Brut rounded orders for display purposes, it was required to execute quoted orders at the actual, non-rounded prices. Brut ECN was programmed to execute rounded orders at non-rounded prices if the transaction was between two Brut subscribers and at rounded prices if the transaction was between nonsubscribers. Brut did not disclose in the Form ATS it filed prior to commencing operations as an alternative trading system that its system would execute nonsubscribers’ orders at rounded prices instead of the better, actual prices. After the SEC discovered that Brut was incorrectly executing rounded orders, Brut reprogrammed its system to execute all rounded orders at their actual prices. The SEC instituted public administrative and cease-and-desist proceedings, alleging that Brut caused its market-maker subscribers to violate the limit-order-display rule and willfully filed a materially misleading Form ATS.