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Virtu Canada Corp. is suing Traynor Ridge Capital Inc., the Toronto-based hedge fund that was placed under a cease trade order Monday after its founder died, alleging Traynor failed to deliver money for trades it asked Virtu to execute, resulting in losses of at least $5-million.

Virtu, a trading firm that executes orders on behalf of investment management clients, alleges that it placed 26 buy orders for Traynor in September and October, but never received the required money before the trades settled a few days later. Because Virtu was on the hook, the trading firm started selling the positions – but by then the market had moved and Virtu realized losses “in excess of $5-million,” an amount Virtu said is “not material.”

Virtu expects its losses on these failed trades to increase as more positions are unwound, according to the lawsuit, and is suing Traynor to recoup the money. Traynor has not replied to a request for comment.

Virtu did not disclose the stock positions or the total amount purchased for Traynor, but did say in its lawsuit that the positions were in both Canadian dollars and U.S. dollars.

“Traynor is fully responsible for all the losses, including any costs, sustained by Virtu in relation to the failed trades as expressly agreed to in the customer agreement,” Virtu alleges. The trading firm is suing for breach of contract, with final damages to be determined.

Late Monday the Ontario Securities Commission placed Traynor, which has $95-million in assets under management, under a cease trade order. The commission disclosed that its founder, Chris Callahan, had died and that Traynor appeared to be in “serious financial difficulty.”

The OSC said that during the week of Oct. 23, three unnamed “introducing” firms executed trades for Traynor, but when they turned to their own unidentified “carrying” brokers to collect payment, the carrying broker could not recoup the costs of the trades. As a result, the three dealers have potential losses amounting to approximately $85-million to $95-million, the OSC said.

The OSC did not provide details of the trades, but Virtu’s lawsuit fills in some of the holes.

For example, Virtu said its trades are held at two carrying brokers: Fidelity Clearing Canada and CIBC World Markets Inc.

As well, in a statement to The Globe and Mail, Virtu said it is working to “resolve the misconduct that took place at Traynor,” adding that its exposure was not material to the company’s overall financials. “We are keeping the principals at Traynor Ridge in our thoughts and prayers at this difficult time for them,” the statement said.

Virtu also disclosed in its lawsuit that the majority of its unpaid trades, known as failed trades, were executed for Traynor between Oct. 11 and Oct. 20.

As a market maker, Virtu executes trades on behalf of Traynor but it interacts with the fund’s prime brokerage to transfer money. (A prime brokerage is akin to a hedge fund’s bank.)

On Oct. 20, Virtu reached out to Traynor’s prime brokerage, CIBC World Markets Inc., to see whether CIBC had any instructions to settle the payment of the trade. Virtu was told CIBC had no instructions from Traynor.

Virtu then attempted to reach Traynor through telephone calls, e-mails, Bloomberg chats and in person by going to Traynor’s offices, but could not get through. In response, Virtu began to close out the failed trades on Oct. 24 to mitigate losses, and notified Traynor it would be held liable for all losses as a result of the failed trades.

Virtu also said Traynor added more prime brokerages during the month of October. Virtu has executed trades for Traynor since 2020, but until early October Traynor allegedly allocated all trades to CIBC. After Oct. 6, Traynor provided additional prime accounts at TD Securities Inc. and BMO Capital Markets. Shortly after, Virtu faced the majority of its failed trades.

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