Market Maker Settles FINRA Charges for Inadequate Controls on Position Limits

A market maker specializing in exchange-traded products settled FINRA charges for failing to establish satisfactory procedures to prevent the entry of orders that exceeded appropriate sizes in light of the firm's capital.

According to the AWC, the firm’s written supervisory procedure set forth a maximum notional value position limit (i) for symbols in which the firm was a registered market maker, (ii) for symbols in which it was not and (iii) for manual orders. FINRA found that the firm "set thresholds that failed to meaningfully limit the financial exposure generated from the firm’s trading activity." As a result, FINRA found that the firm's position limits were unreasonable. (FINRA found, for example, that the firm set a daily maximum single order size limit of more than 100 percent of each symbol’s average daily volume - a limit too high to reasonably prevent the entry of erroneous orders.) FINRA stated that the firm failed to demonstrate how its daily maximum order size thresholds were reasonably aligned with the trading characteristics of each stock.

FINRA determined that the firm violated SEA Rule 15c3-5 ("Risk Management Controls for Brokers or Dealers with Market Access"), FINRA Rule 3110 ("Supervision") and Rule 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle the charges, the firm agreed to (i) a censure and (ii) pay a $50,000 fine.