J.P. Morgan Securities

J.P. Morgan Securities LLC was fined a total of $750,000 for findings that its financial risk management controls and supervisory procedures were not reasonably designed to prevent certain erroneous orders that exceeded appropriate price or size parameters, on an order-by-order basis or over a short period of time, or that indicated duplicative orders. The findings stated that the firm’s market access controls failed to prevent five erroneous orders routed to exchanges and alternative trading systems. For each of the orders, the firm’s trading desks applied fixed single order quantity limits and static single order notional value limits depending on the specific desk, trader, and/or client. Each of these single order quantity and single order notional value limits applied static limits regardless of security and thus failed to consider the individual characteristics of the security.

Except for one desk’s single order quantity control, the firm’s single order quantity, single order notional value, and average daily value thresholds were too large to be effective, and the firm failed to provide any documented rationale for why it set them at such levels. Moreover, many of the size controls triggered “soft blocks” when applicable thresholds were reached. In contrast to a “hard block” that generally prevents an order from being submitted by automatically rejecting it, a soft block pauses an order until the block is overridden, or the order is cancelled back or modified. However, the firm’s WSPs did not address how to handle, document and review soft block overrides. Accordingly, the firm’s controls that relied on soft blocks did not prevent the entry of certain erroneous orders. The firm later implemented changes to its supervisory requirements relating to soft blocks that included tracking and reviews of soft block overrides and adding compliance trainings and updates to its WSPs on the handling of soft blocks.

In addition, the firm failed to provide any documented rationale for why it set its limit price thresholds at levels greater than the definition of a clearly erroneous transaction. Furthermore, the firm did not have a reasonable duplicative order control. The firm did apply a risk control that checked orders with the same symbol, side, and quantity. This control triggered a hard block if more than 50,000 order messages with the same symbol, side, and quantity were sent within two seconds. However, the 50,000-order threshold that was applied separately to each of the firm’s connections to external venues was too high to be effective. The firm provided no documented rationale supporting why such a high threshold was reasonable. As of July 2022, the firm had implemented additional controls to prevent the entry of orders that—based on price and/or size of the order relative to the market—could potentially lead to unintended market impact.