Wall Street Access
The findings stated that the firm handles large, not-held orders from broker-dealers and executes the trades as principal on a net basis. When the execution is at a price that is lower than a protected bid or higher than a protected offer, the firm relies on the Outbound ISO Exception of Regulation NMS. The firm relies on its order management system (OMS) to route ISOs when executing trades that would trade through a protected quote at another venue. The firm experienced three separate systems issues with the OMS, which resulted in approximately 1,900 trade-throughs. The findings also stated that the firm failed to establish and maintain a supervisory system, including WSPs, reasonably designed to prevent trade-throughs.
After receiving a warning from FINRA, the firm revised its WSPs and processes to require the responsible principal to review its Reg NMS ISO Orders Report, which indicated whether an ISO was filled, cancelled, or rejected and to monitor executions in real time to identify tradethroughs. However, the firm only reviewed the report at month’s end. Accordingly, when a venue began to reject ISOs due to a configuration issue with the OMS, the firm did not timely detect the issue which resulted in approximately 170 trade throughs.
The reconfiguration of the OMS to resolve the reject issue introduced a second issue that caused the firm not to route 1,600 ISOs to the venue as the OMS did not mark the destination code for the outbound ISOs. Although the firm revised its Reg NMS ISO Orders Report after receiving a warning from FINRA, the report did not identify whether the ISOs were received and executed as intended by the venues to which it directed the ISO.
After receiving an inquiry from FINRA, the firm learned that the OMS provider had recently resolved this issue but the previous ISOs failed to be executed as intended, which caused the firm to trade-through protected quotes approximately 1,300 times, and the firm failed to identify these trade-throughs. The firm experienced a separate destination code issue with other venues that began to quote NMS stocks, but the firm’s OMS did not have destination codes for the new exchanges and, therefore, the firm did not route ISOs to these exchanges.
Although the firm detected this issue, it continued to use ISOs for both of its market participant identifiers and to avail itself of the Outbound ISO Exception for approximately five months after it discovered that those ISOs did not comply with the Outbound ISO Exception. As a result, the firm 1,248 ISOs that were not routed to the new venues.
In total, this issue caused approximately 430 trade-throughs. Ultimately, the firm hired an additional operations employee who assists with Rule 611 compliance and the Reg NMS ISO Orders Report is now reviewed on a daily basis.
