Firm Fined for Reliance on Stale Market Data
Commentary by Glen Barrentine
A firm settled FINRA and NYSE Chicago charges for failing to adhere to standards on the routing of intermarket sweep orders ("ISOs") and for failing to maintain an adequate supervisory system.
According to the separate Orders (see FINRA AWC and NYSE Chicago Order), the firm experienced significant delays in order routing due to increased message activity, partly caused by its migration to a new exchange trading platform. FINRA stated that these delays led to the use of outdated market data snapshots, resulting in 6,682 orders being routed at prices that were not in line with the current market conditions. As a result, FINRA and NYSE Chicago found that the firm failed to take reasonable steps to ensure that the ISOs it routed met the requirements outlined in Reg. NMS Rule 600(b)(31). ("NMS Security Designation and Definitions: Depth of Book Data").
The regulators recognized that the firm took corrective actions, including upgrades to its technology infrastructure to handle the increased message volumes and reduce processing delays. However, FINRA determined that the firm's supervisory system was inadequate because it did not have a process, including WSPs, to verify the accuracy of market data snapshots used for routing ISOs, which led to its failure to detect the delays that led to the routing errors.
FINRA found that the firm violated FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade"); Reg. NMS Rules 600(b)(31) and 611(c) ("Order Protection Rule"). Additionally, NYSE Chicago found that the firm violated their respective rules pertaining to ISOs.
To settle the charges, the firm agreed to (i) a censure and (ii) pay a total fine of $100,000.
Commentary
Technological and operational changes often have unanticipated adverse impacts on related regulatory functions. Firms making changes to their technology and operational environment must try to anticipate and test for possible adverse impacts before instituting such changes. Moreover, because the full impact of any change may not be identified in a test environment, firms should also monitor for adverse impacts once the technology or operational change goes live.