Broker-Dealer Settles With Nasdaq Over Coding Error That Crashed a Stock

A broker-dealer settled Nasdaq claims that a coding error allowed a large erroneous order to reach the market and briefly crash a stock's price.

According to the AWC, the firm did not have in place risk controls reasonably designed to prevent erroneous orders from September 2020 to January 2023. The deficiency violated the SEC's Market Access Rule, Rules 15c3-5(b) and 15c3-5(c)(1)(ii) (risk management controls for brokers or dealers with market access), and Nasdaq Rule General 9, Sections 1(a) and 20(a) (regulation).

The firm had a safety check called the ADV control that was intended to pause customer orders larger than 40 percent of a stock's 20-day average daily volume. However, Nasdaq said that orders routed internally were not subject to that check. A coding error miscategorized one of the firm's algorithmic strategies as an internal route, even though the orders through that strategy were actually directed to public markets, according to the AWC. This error allowed orders to skip the ADV control. On January 11, 2023, the gap caused an order to sell 140,000 shares of a stock (which was 384 percent of the stock's 20-day average daily volume) to skip the ADV control and reach Nasdaq and other exchanges. The stock fell from $0.13 to $0.0002 per share in under a minute.

Nasdaq had to step in and cancel (break) 76 trades on the basis that they were clearly erroneous.

The firm reported that it added more conservative market-access controls after the event.

The firm agreed to a censure and a $70,000 fine. In background, Nasdaq cited a similar 2022 incident where the firm was fined $125,000 for related market-access control violations.