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NEWSLETTERS & ALERTS
Deficient Supervision of Market Access Leads to $625K Fine
by Howard Haykin
The New York Stock Exchange, NYSE Arca, and NYSE American hit Lime Brokerage with a combined $625,000 fine for its failure to establish, document, and maintain a system of risk management controls and supervisory procedures, including written supervisory procedures ("WSPs") and an adequate system of follow-up and review of customer activity, reasonably designed to manage the financial, regulatory, and other risks of its market access business.
APPARENT SUPERVISORY FAILURES. Between November 2013 and May 2018 (the “Relevant Period”), Lime failed to reasonably supervise its market access business and customers with respect to three distinct 3 areas:
FAILURE TO PREVENT THE ENTRY OF ORDERS EXCEEDING REASONABLY DESIGNED PRE-SET CREDIT THRESHOLDS. Staff identified several deficiencies with respect to the Firm's application of client credit limits during the Relevant Period. These included failing to:
- decrement credit limits across trading servers;
- implement appropriate credit limits after identifying the decrementing error; and,
- establish and maintain reasonable WSPs (Written Supervisory Procedures and Processes) for implementing credit limits.
FAILURE TO ESTABLISH. MAINTAIN, AND ENFORCE CONTROLS REASONABLY DESIGNED TO PREVENT THE ENTRY OF ERRONEOUS ORDERS. Staff identified several deficiencies with respect to the Firm's implementation of pre-trade controls to prevent erroneous orders. Specifically, the deficiencies concerned the Firms:
- rate limit controls;
- duplicative order controls; and,S
- boundary price checks.
FAILURE TO MONITOR FOR POTENTIAL MANIPULATIVE ACTIVITY. Lime was responsible for establishing, implementing, and maintaining adequate risk management controls and supervisory procedures, including WSPs, and a system of follow-up and review reasonably designed to:
- investigate red flags and monitor the trading activity of its customers;
- detect and prevent suspicious and potentially manipulative trades; and,
- ensure that all trades entered under the Firm's market participant identifiers complied with applicable federal securities laws and regulations and the rules of the respective exchanges.
EXAMPLES OF WHAT WENT WRONG.
Example 1: Trading across multiple trading servers. A client, approved for a $500 million credit limit, was inadvertently allowed a $2 billion credit limit because it was configured to trade on 4 separate and distinct trading clusters or servers. Then, after discovering the configuration error, Lime failed to promptly implement necessary changes.
Example 2:Failure to follow its own WSPs. While the client in Example 1 had only $8 million in cash equity, it was approved for a $500 million credit limit.
Example 3: Inaccurate rate limits and burst rates. Lime's rate limits and burst rates controlled how many new or cancel-and-replace orders an account could submit to the market per second, and were applied on an account by account basis. However, Lime did not include cancelled orders as messages in the rate count – which enabled certain clients to send large numbers of cancellation orders through Lime’s infrastructure (and to the market) over short periods of time.
Example 4: Duplicative orders. While the firm had the capability to implement an in-line pre-trade block on potentially duplicative orders, it did not do so – as a result, it was permitting potentially duplicative orders to enter the market.
Example 5: Failure to respond to red flags. Between October 2014 and December 2017, one client triggered Lime's surveillances over 50,000 times - >400 of those alerts concerned marking the close or open; >13,000 concerned possible spoofing or layering. Nonetheless, the firm appeared to have reached out to the client in only a small number of instances regarding this potentially violative trading, and in those “rare instance,” the firm accepted at face value the clients’ general responses and descriptions.
For further details on Case No. 2016-01-06-00002, click any of the following: