FINRA and major exchanges allege that Deutsche Bank Securities, Citigroup Global Markets, JPMorgan Securities and Interactive Brokers broke provisions of the market access rule.
Deutsche Bank Securities Inc., Citigroup Global Markets Inc., J.P. Morgan Securities LLC, and Interactive Brokers LLC have been censured and fined a total of $4.75 million for violations of various provisions of the market access regulations (rule 15c3-5 of the Securities Exchange Act of 1934) and “related exchange supervisory rules,” according to a statement by the Financial Industry Regulatory Authority (FINRA).
FINRA is one of the censuring entities, along with the Nasdaq Stock Market, the New York Stock Exchange (NYSE), and the Kansas-based Bats Global Markets, acquired by Chicago Board Options Exchange Holdings, owner of the CBOE, in March of this year.
Of the $4.75 million total, which was “apportioned among FINRA and the Exchanges,” Deutsche Bank accrued the largest single fine, $2.5 million, and Citi was fined $1 million, while JPMorgan and Interactive Brokers were fined $800,000 and $450,000, respectively. The fines were assessed between May and July 2017, FINRA says.
In the customary formulation, Deutsche Bank Securities, Citigroup Global Markets, JPMorgan Securities and Interactive Brokers “neither admitted nor denied the charges but consented to the entry of FINRA’s and the Exchanges’ findings.”
The four firms allegedly ran afoul of a rule that requires broker-dealers that “access an exchange or an alternative trading system or provide their customers with access to these trading venues” to “adequately control the financial and regulatory risks of providing such access,” FINRA says, adding that the “purpose of this requirement is to prevent firms from jeopardizing their own financial condition and that of other market participants, while also ensuring the stability and integrity of the financial system and the securities markets.”
Specifically, FINRA and the exchanges found that the firms, which “collectively provided market access to numerous clients that executed millions of trades per day,” did not meet “one or more provisions” of rule 15c3-5 of the Securities Exchange Act of 1934.
For example, according to FINRA and the exchanges, they failed to “implement financial and regulatory risk management controls and procedures reasonably designed to prevent the entry of erroneous or duplicative orders”; or failed to “prevent the entry of orders that exceeded appropriate pre-set credit or capital thresholds”; or failed to “supervise customer trading to detect and prevent potentially violative and manipulative activity.”
Additionally, FINRA and the exchanges say, the “firms were found to have failed to comply with their obligations under the supervisory rules of FINRA and the Exchanges to establish and maintain a reasonably designed system, including written supervisory procedures, to supervise the activities of their customers.”
When determining the “appropriate sanction in the four matters,” FINRA and the exchanges say they considered, among other things, the “number of erroneous orders that were entered on the Exchanges by the firms, potentially manipulative trading activity that went undetected by the firms, the market impact (both real and potential) of the underlying violative activity, the extent to which red flags were present, the firms’ disciplinary histories, the nature of the supervisory failures, the breadth and duration of the firms’ overall failures, remediation of the problematic conduct, and cooperation provided during the course of the investigations.”
“It is important that firms have reasonable market access procedures in place to appropriately monitor for errors and risks that can be harmful to the integrity of our securities markets,” FINRA and the exchanges say in a joint statement.
FTF News contacted media representatives at all four firms for comment.
Interactive Brokers declined comment, as did Deutsche Bank.
A JPMorgan spokesperson offered the following statement: “We are glad to put this matter behind us. As always, we are committed to having appropriate controls in place in order to satisfy regulatory requirements.”
From Citi, there was no reply.
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