[ by Howard Haykin ]

Morgan Stanley & Co., LLC, was charged with violating NYSE and NYSE Amex Equities rules pertaining to the entry and cancellation of MOC, LOC and CO orders.  under tNa member organization of both the NYSE and NYSE Amex Equities exchanges,  Morgan Stanley agreed to settle the charges and to the joint sanctions imposed by the 2 exchanges. 

NYSE Regulation’s Division of Enforcement commenced an investigation pursuant to a referral from NYSE Regulation’s Division of Market Surveillance and notified Morgan Stanley in writing on 8/26/09 that it was investigating potential violations of NYSE Rules 123C and 342 related to the transmission and execution of certain orders to the NYSE.  Later, Market Regulation, as Enforcement’s successor, notified Morgan Stanley that it was referred additional violations of NYSE Rule 123C by letter dated 2/14/11. 

Deadlines for Entering and Canceling \NYSE and NYSE Amex Equities MOC and LOC Orders.  Market on Close ("MOC") and Limit on Close ("LOC") orders are designed to purchase or sell listed securities at the closing price, provided trading in the respective securities has not been halted before the close. MOC orders are executed in their entirety at the closing price;  LOC orders with limit prices better than closing prices are guaranteed an execution, unless there is a trading halt.

To minimize excess market volatility, the exchanges established a deadline of 3:40 p.m. for the entry of all MOC orders in all stocks on all trading days except for those orders entered to offset imbalance publications. Between 3:40 and 3:50 p.m., MOC orders are irrevocable, except to correct a legitimate error (e.g., side, size, symbol, price or duplication of an order).  After 3:50 p.m., cancellation or reduction in size of MOC orders will not be permitted for any reason, including in case of legitimate error.

LOC orders may be entered on any trading day, in any stock during the trading day, up to 3:40 p.m. As with MOC orders, between 3:40 p.m. and 3:50 p.m., LOC orders may be entered only to offset published imbalances.  LOC orders may not be canceled or reduced in size except to correct a legitimate error, or when a regulatory trading halt is in effect at or occurs after 3:40 p.m   After 3:50 p.m. cancellation or reduction in size of LOC orders will not be permitted for any reason, including in case of legitimate error.

As part of NYSE Euronext’s acquisition of the Amwx on 10/1/08, the Amex adopted NYSE Rules 1—1004 as its own rules, including NYSE Rule 123 C, subject to any changes that were necessary to apply those rules.

Exchange Findings and Allegations. Violations were noted in the following situations:

• On 25 trade dates during the First Review Period, Morgan Stanley entered 303 MOC or LOC orders after the 3:40 p.m. or 3:50 p.m. deadlines when there were no published imbalances;
• entered 60 MOC or LOC orders after the deadlines on the same side of the published imbalance; and,
• canceled 630 MOC or LOC orders after the deadlines.

• On 2 trade dates during the Second Review Period, Morgan Stanley entered 10 LOC orders and one MOC order after the prescribed deadlines when there were no published imbalances.

Beginning 3/1/10, NYSE Rule 123C was amended to change the deadline for entering MOC and LOC orders to 3:45 p.m. The NYSE also created a new order type, the Closing Offset ("CO") order, which is a limit order that “is eligible for execution in the closing transaction when there is an imbalance of orders to be executed on the opposite side of the market from the CO order and there is no other interest remaining to trade at the closing price on the same side of the CO order.”  NYSE rules do not set a deadline for entering CO orders; they can be entered on either side of the market at any time before the close.

• On 3/1 and 3/2/190, Morgan Stanley canceled a total of 604 CO orders after the deadline.

Supervision Violations. Beyond violating the rules by failing to abide by Exchange deadlines, Morgan Stanley also was cited for having a deficient system of supervision - including its WSPs - that failed to ensure the firm would abide by the stipulated deadlines. 

Morgan Stanley attributed certain of the violations described above to a misunderstanding that resulted in its personnel’s belief that they could enter MOC and LOC orders to offset imbalances published pursuant to Rule 123C(6).

During the Second Review Period, Morgan Stanley’s system of supervision was deficient in that it did not have any mechanism in place to prevent late entries of MOC or LOC orders that would have violated NYSE Amex Equities Rule 123C. 

Furthermore, at least as early as August 2008, Morgan Stanley became aware that it had been entering or cancelling MOC or LOC orders after the prescribed deadlines:  (i) certain of its late entries and cancellations were flagged by its exception reports;  (ii) from August 2008 through April 2009, Market Surveillance sent Morgan Stanley multiple regulatory requests seeking documents and information regarding possible violations of NYSE Rule 123C that it had identified. Generally, each regulatory request sought documents and information about a different group of potential violations. During that period, Morgan Stanley performed certain measures in an attempt to prevent subsequent late entries and cancellations of MOC and LOC orders.

Notwithstanding these attempts, as set forth in paragraphs 8 and 9, it violated NYSE Rule 123C and  NYSE Amex Equities Rule 123C through February 2009, and as set forth in the report, it violated NYSE Rule 123C again in March 20 2010.

Upon becoming aware of its violations, it was incumbent on Morgan to take reasonable action to prevent future violations.  But the firm maintained a deficient system of supervision with respect to compliance with NYSE Rule 123C and NYSE Amex Equities Rule 123C, and by failing to take reasonable remedial action upon learning of late entries and cancellations of MOC and LOC orders, Morgan Stanley violated, yet another set of rules - NYSE Rule 342 and NYSE Amex Equities Rule 342.

Hearing Officer's Imposed Penalties. Morgan Stanley agreed to a $150,000 fine.

For further details, go to:  [NYSE Hearing Board Decision 12-NYSE-6, 8/10/12, posted September 2012].