When Surveillance Fails: The $1 Million Velocity Clearing Case
Case Overview
In September 2025 FINRA fined Velocity Clearing $1 million after they determined that Velocity failed to establish, maintain, and enforce an adequate supervisory system to monitor customer trading activity for potential market manipulation between December 2019 and June 2023. Specifically, FINRA alleges the firm violated rules 3110 and 2010, which require that firms implement effective supervision and maintain high standards of commercial conduct.
The Velocity Clearing enforcement action exposes a familiar weakness in compliance operations - the belief that installing a surveillance tool is enough to protect a firm from regulatory actions. Velocity had a surveillance system that generated alerts for potentially manipulative activity, but it was either poorly designed, poorly calibrated, or both, generating a high volume of false positives. FINRA also states that the alerts were not properly reviewed. The failure, therefore, was not in the absence of surveillance software, but in having the right software, proactively monitoring alerts and taking informed action when required.
Velocity Clearing, headquartered in Hazlet, New Jersey, offers services such as retail brokerage, lending, market making and proprietary trading. During this time, Velocity was using an automated surveillance system that was designed to identify potentially manipulative trading behaviors such as spoofing, layering, cross trades, wash trading, and prearranged trading. However, despite having such systems in place, critical surveillance features were turned off for long periods of time, and alerts were often not meaningfully reviewed.
Over the three and a half years covered in the settlement letter, Velocity’s surveillance system produced 150,000 alerts of potential manipulative trading activity. Of these, over 147,000 alerts were closed without any investigation, often on the same day they were created. A more thorough review, which firm apparently lacked the resources to conduct, would have revealed many of the alerts to be valid. In addition, Velocity's written supervisory procedures did not specify how alerts should be evaluated, documented, and escalated, nor did they offer criteria for identifying patterns of suspicious trading behavior across multiple alerts.
Velocity replaced its surveillance system in July 2023. The new system produced even more alerts—more than 15 million. FINRA states that the firm’s surveillance problems continued, as most alerts were still closed without investigation and millions went unreviewed as of early 2025.
FINRA Rules Violated
FINRA Rule 3110(a):
Each member shall establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.
FINRA Rule 3110(b):
Each member shall “establish, maintain, and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.
FINRA Rule 2010:
Each member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
Key takeaways:
The Velocity Clearing case was not caused by one failure, but rather a combination of structural and technological deficiencies that left the firm's surveillance system ineffective. Decoding the issues:
Alert Overload:
Velocity's surveillance system produced an incredibly large number of alerts, which eventually overloaded the firm's compliance function. Over a four-year period, the system produced about 150,000 alerts for potentially manipulative trading activity, most of which were not significantly investigated.
Too many alerts because of lack of model customization:
The firm relied on automated surveillance systems which appear to have been poorly calibrated. Calibration is the process of adjusting the alert parameters to reflect a firm's particular trading behavior, risk exposure, and client activity. In this case, the system seemed to generate alerts that were both excessive in volume and low in quality. Rather than tuning the system, the firm let the alert volume grow unchecked. The subsequent installation of a new system which produced more than 15 million alerts adds further to the possibility of poor calibration and lack of model customization.
Failure to prioritize alerts
Velocity may have lacked an effective mechanism to prioritize alerts based on severity and confidence of the alerts. All alerts were treated equally, regardless of their possible importance. As a result, over 147,000 alerts were closed without investigation, many of them on the same day. Compliance staff often closed hundreds or thousands of alerts in a single day, which is indicative of a mechanical, rather than analytical, review process. Without prioritization, the firm could not separate meaningful signals from noise, and surveillance was ineffective.
Lack of Structured Case Management Procedures:
Velocity lacked a clear and standardized process for handling surveillance alerts once they were generated. While alerts were reviewed, there was no defined workflow governing how they should be investigated, documented, or escalated.
Key gaps included:
No investigation framework or checklist
No consistent documentation standards
No escalation criteria for high-risk alerts
No secondary or supervisory review process
As a result, alerts were frequently closed without meaningful analysis, and there was no audit trail demonstrating how decisions were made. This indicates a breakdown in case management rather than just detection.
Lack of an Efficient Surveillance Framework
While inadequate manpower was a significant factor, the scale of failure indicates a deeper issue in how the surveillance function was structured.
A well-designed surveillance system should enable compliance teams to efficiently evaluate large volumes of alerts with limited resources. This includes providing tools for:
filtering and narrowing down alerts
aggregating related activity
highlighting high-risk patterns
enabling quick, informed decision-making
In Velocity’s case, the process appeared heavily dependent on manual review without sufficient system support. As a result, even a moderate increase in alert volume became unmanageable. This suggests that the failure was not solely due to insufficient staffing, but also the absence of a system designed to scale analysis and reduce manual effort.
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