Exchanges Fine Broker-Dealer for Mishandling Erroneous Orders
A broker-dealer settled parallel NYSE Arca and NYSE American ("the Exchanges") charges for failing to "establish, document, and maintain a system of risk management controls" reasonably designed to (i) prevent the entry of erroneous orders and (ii) supervise the review of potential erroneous orders post-transaction.
In separate Letters of Acceptance, Waiver, and Consent (see here and here), the Exchanges found that the broker-dealer executed a trade on behalf of a client that was fulfilled at various prices across multiple exchanges, with each exchange fulfilling orders at an increasing price until it could no longer do so, whereupon it was automatically routed to another exchange to complete the unfilled portion of the order. Ultimately, the trade was executed across 15 option exchanges. The Exchanges stated that "[t]his automated activity resulted in an aggregate of nearly 500 transactions and an overall price increase of roughly 312% — from the first execution price of $12.39 to $38.70."
The Exchanges determined that the broker-dealer did not have sufficient supervisory protocols in place to detect the market access control failure, causing its system to reenter the order until it was fulfilled. In addition, the Exchanges found that the broker-dealer failed to request relief for the order within the required 30-minute timeframe. While the broker-dealer eventually filed a Request for Order Relief, it did so after the deadline had passed. The Exchanges also determined that the broker-dealer did not have adequate policies regarding erroneous order review.
The Exchanges concluded that the broker-dealer violated SEA temp Rule 15c3-5(b) and Rule 15c3-5(c)(1)(ii) ("Risk management controls for brokers or dealers with market access"). Additionally, NYSE Arca determined that the broker-dealer violated NYSE Arca Rule 11.18(b)-(c) ("Supervision") and NYSE American determined that the broker-dealer violated NYSE American Rule 320 ("Offices — Approval, Supervision and Control").
To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a civil monetary penalty of $150,000, of which $10,000 was payable to each of the Exchanges, and (iii) undertakings to develop sufficient supervisory controls to prevent future violations. The remainder of the fine was directed at various other exchanges for similar violations.