Instinet, LLC
The findings stated that in certain instances, when the firm routed orders to various exchanges that it marked as ISOs, it failed to capture certain protected quotation data when it took the snapshots it used for making routing decisions due to multiple programming and system errors. As a result, the firm did not recognize, and thus did not route, additional ISOs necessary to execute against protected quotes displayed by certain market centers. The firm later corrected this issue by implementing updated code.
In addition, the firm experienced connectivity problems with direct market data feeds, resulting in its Smart Order Router (SOR) failing to capture quotation data from multiple exchanges when taking the snapshots it used for ISO-routing decisions. The firm took steps to address the connectivity issues by increasing its server capacity on two occasions and developed and implemented enhanced surveillance to detect and respond to connectivity issues.
Furthermore, the firm’s system logic would treat a quote as “stale” if it did not receive an ISO execution at a protected venue and would continue to treat the quote as stale until it received a quote update from that destination. As a result, the firm’s SOR would not re-route to any destination after a quote was marked stale and there was no quote update received from that destination. There was no limit to how long the firm would wait to re-route to the original exchange. At times, the firm waited more than one second before re-routing after a quote was marked stale. In at least one instance, the firm traded through a protected quotation it marked stale approximately three seconds after it did not receive an execution at that protected venue.
The findings also stated that the firm violated FINRA Rules 3110 and 2010 by failing to establish and maintain a supervisory system, including WSPs, reasonably designed to achieve compliance with Rule 611(c) of Regulation NMS. The firm’s supervisory system did not detect potential trade throughs caused by the fact that it waited more than one second before re-routing to a trading center’s protected quotation after receiving a partial-fill or no-fill response to an order seeking to execute against the trading center’s quotation at the same price.
The firm also ignored red flags in its supervisory system that should have alerted it of the need to address its connectivity issues to ensure that the ISOs it routed complied with Rule 611(c) of Regulation NMS. Despite experiencing data connectivity issues over multiple dates, the firm did not completely remediate the issues until after regulatory inquiries.
