Trading Center Settles FINRA Charges for "Order Protection" Rule Violations

A trading center settled FINRA charges for failing to ensure routed orders met inter-market sweep order ("ISOs") requirements and for failing to prevent prohibited trade-throughs of protected quotations. 

According to the AWC, the firm relied on an order management system with a coding error that caused the firm to send ISOs directly to an exchange where the firm was not a member. FINRA said the exchange rejected these orders and found that the firm failed to simultaneously route ISOs to execute against the full displayed size of protected quotes as required. FINRA found that this resulted in the firm routing and executing orders at prices inferior to the exchange's protected quote. FINRA further found that although the firm fixed the error after notification, a subsequent system update reintroduced the same coding error, leading to additional rejected ISOs and trade-throughs. During the relevant period, the firm sent 1427 ISOs which were rejected and which caused additional simultaneously routed ISOs to trade through protected quotes in 1770 instances.

FINRA found the firm failed to establish, maintain, and enforce written policies and procedures reasonably designed to prevent trade-throughs. FINRA found that, while the firm's procedures required the review of an exception report to identify rejected ISOs, the firm did not review this report for several months and, consequently, failed to detect that the exchange was rejecting its orders until contacted by the regulator. FINRA determined that these failures resulted in approximately 2880 instances where the firm traded through a protected quote.

FINRA concluded that the firm violated Rule 611 of Regulation NMS ("Order protection rule") as well as FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision"). 

The firm agreed to a censure and a $65,000 fine.