A firm settled FINRA charges for supervisory deficiencies in relation to the execution of trades in National Market System ("NMS") stock at prices lower than those of a protected bid or higher than those of a protected offer (i.e., "trade-throughs").
In a Letter of Acceptance, Waiver and Consent, FINRA alleged that the firm's supervisory procedures were not reasonably designed to ensure compliance with Regulation NMS Rule 611 ("Order Protection Rule"). Specifically, FINRA found, among other things, that the firm's supervisory system:
- did not include written policies and procedures providing for periodic reviews of quotation data;
- failed to detect repeated occurrences of reliance on outdated quotation data;
- failed to detect the improper configuration of a third-party market data feed by one of its trading desks, an error that resulted in the desk relying on an inaccurate national best bid and offer for certain transactions;
- did not include written policies and procedures sufficient to ensure compliance with the exception under NMS Rule 611 that allows trade-throughs effected by a trading center that, at the same time, routes an intermarket sweep order (or "ISO") to "execute against the full displayed size of a protected quotation in the NMS stock that was traded through" (i.e., "the Outbound ISO Exception"); and
- required a manual review of trades with an unreasonably limited sample size.
The firm's supervisory deficiencies led it to execute over 100,000 potential trade-throughs. As a result, FINRA determined, the firm violated NMS Rule 611, NASD Rule 3010 and FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure, (ii) a $175,000 fine and (iii) an undertaking to revise its supervisory system so that its policies and procedures are "reasonably designed to achieve compliance with Rule 611."
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