Morgan Stanley & Co.
The findings stated that when onboarding new customers placing low touch orders, the firm’s procedures did not describe the process for placing new clients into client groups or how the firm determined which group to place customers into. The firm’s procedures also did not describe the process for establishing reasonable thresholds for orders priced more than a specified percentage away from a specified reference price (the “price away” control) or orders exceeding a pre-established maximum dollar amount for a single order (the “single order notional value” control) for the different customer groups.
Further, the firm did not document on a customerby-customer basis its rationale for why those thresholds were reasonable for each customer. With respect to high touch customers, the firm assigned single order notional value thresholds to traders on the desk. The firm rated traders in a low, medium, or high category based on each trader’s experience, which in turn determined the thresholds applied to high touch orders. The firm’s procedures did not document the rationale for why the limits were reasonable.
Further, the firm applied a standardized single order notional value threshold for high touch traders on one specific trading desk without a documented rationale, which permitted all traders on that desk to submit orders for up to the threshold without regard for the traders’ ratings or other characteristics. In addition, the firm did not provide any documented rationale or analysis justifying its standardized market impact limit control, which did not account for several hundred unique customers’ trading patterns or order history, including customers who manually entered orders.
Furthermore, the firm had no documented rationales for price away controls that exceeded exchange guidelines for clearly erroneous transactions for low touch customers provided with direct market access through a third-party, highspeed software. In addition, the firm’s market access controls applied soft blocks, or “hold limits,” to transactions that breached its risk management thresholds.
The firm’s procedures required that firm personnel review each paused order but did not require the personnel responsible for reviewing hold limit alerts to contemporaneously document the rationale for releasing the subject orders into the market after completion of the review process. The firm also had a system that permitted orders that had been manually reviewed and released and subsequently amended at a later time to be more conservative than the original order to be released without additional manual review. Such release without additional review was unreasonable to prevent the entry of erroneous orders.
The findings also stated that the firm failed to conduct reasonable reviews of the effectiveness of its market access controls and supervisory procedures. The firm’s procedures only required a review when single order threshold limits exceeded the maximum guidelines set by the firm. However, those guidelines were set at high levels and thus would not adequately identify individual customers with potentially unreasonable limits.
