The SEC settled charges with a financial services firm for violating Section 15(c)(3) of the Exchange Act and Exchange Act Rule 15c3-5 (the "Market Access Rule") by maintaining ineffective trading controls. The failure to maintain effective trading controls led to erroneous orders being sent to the markets thereby causing "mini-flash crashes." The SEC Order alleged that the firm caused market disruptions on at least fifteen occasions from late 2012 to mid-2014. The Order stated that the financial service firms set the levels of its internal controls "so high that it rendered them ineffective."

The SEC Order determined that the firm failed to:

  • establish pre-trade risk management controls reasonably designed to prevent the entry of erroneous orders and orders that would exceed pre-set credit or capital limits for several of its trading desks;
  • establish required controls and procedures for fixed income securities;
  • adequately review the effectiveness of its risk management controls and supervisory procedures required by the Market Access Rule, particularly for preventing the entry of erroneous orders; and
  • comply with the Market Access Rule CEO certification requirements.

The firm agreed to: (i) pay a $12.5 million penalty; (ii) be censured; and (iii) cease and desist from further violations, as charged.

Commentary /StevenLofchie

This enforcement action reminds broker-dealers to continually review the effectiveness of their current compliance checks and exception reports. In particular, it is incumbent upon the firm to take the time necessary to review internal control procedures to determine whether an order should have been stopped before it hit the market.

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