Jefferies LLC

Jefferies LLC fined a total of $200,000 for failing to take reasonable steps to establish that the intermarket sweep orders (ISOs) it routed met the requirements set forth in Rule 600(b)(30) of Regulation National Market System (Regulation NMS) of the Securities Exchange Act of 1934 (Exchange Act).

The findings stated that the firm’s electronic trading desk routed orders to trading centers that it marked as ISOs, but that did not meet the requirements of Regulation NMS because the desk failed to route additional limit orders to execute against other exchanges’ protected quotes.

The firm was notified of potential ISO routing issues through exchange surveillance, at which time the desk stopped routing ISOs. The desk failed to inform the firm’s compliance department that it intended to begin sending ISOs.

Moreover, the desk did not have any procedures regarding compliance with Regulation NMS and did not maintain firm-specific quotation data or conduct periodic reviews to test the effectiveness of its policies and procedures for preventing trade-throughs.

In addition, the firm failed to identify all protected quotations when determining which venues ISOs should be routed due to a coding issue.

The firm also mistakenly routed orders to trading centers that it marked as ISOs but, in fact, were immediate-or-cancel orders that did not qualify as ISOs.

Further, the firm failed to identify that a programing error within its order execution system was causing it to mismark orders and to fail to retain firm-specific quotation data that contributed to the firm’s inability to perform reasonable periodic reviews to test the effectiveness of its policies and procedures for preventing trade-throughs.

The findings also stated that the firm’s supervisory system was not reasonably designed to comply with Exchange Act Rule 611(c). The firm did not establish a supervisory system or written supervisory procedures (WSPs) that were reasonably designed to ensure that the desk did not route ISOs or, if it were to route ISOs, that such routing complied with Exchange Act Rule 611(c).

The firm did not initially implement any supervisory review of ISOs until later, and this review was not documented in its procedures until almost a year later. Even after the review was implemented, it was unreasonable given that the ISOs reviewed by the firm represented a small fraction of the ISOs the firm handled each day.

In addition, the firm’s programming errors and failure to maintain snapshot records of the market data supporting its routing of certain ISOs prevented it from performing a reasonable review of those ISOs for compliance with Exchange Act Rule 611(c).