FINRA fines Morgan Stanley for erroneously submitting 380m reports to OATS
Erroneous programming resulted in the firm reporting 384,830,864 Cancel/Replace Reports to OATS that it was not required to report between February 1, 2015 and May 11, 2016.
Morgan Stanley & Co. LLC has agreed to pay a fine of $300,000 fine as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA).
Between January 2011 and July 2019, Morgan Stanley erroneously submitted approximately 380 million reports to the Order Audit Trail System (OATS) that it was not required to report and submitted more than 400 million reports to OATS with inaccurate data.
The firm’s OATS reporting violations resulted from several unrelated instances of faulty programming logic that occurred on different desks and systems over several years. Starting in January 2011, the firm’s Convertible Bond, Program and Swap Trading Desks implemented programming logic that caused its system to incorrectly report a Cancel/Replace (CR) Report to OATS any time a non-material change was made to a customer order (a CR Report is only required for material changes to the terms of an order, i.e., price or quantity). This faulty logic impacted 7,459,169 reportable order events (ROEs) on these three desks between January 2011 and September 2016.
The firm began implementing a series of fixes to its OATS reporting logic in August 2016 and fully remediated its over-reporting issue in November 2017.
Furthermore, beginning on February 1, 2015, the firm’s Alternative Trading System (ATS) also over-reported CR Reports. Internal updates to an algorithm that routed orders to the firm’’s ATS resulted in CR Reports being unnecessarily reported to OATS. This erroneous programming resulted in the firm reporting 384,830,864 CR Reports to OATS that it was not required to report between February 1, 2015 and May 11, 2016.
In December 2016 and July 2017, the firm implemented logic specific to two new systems that caused the firm to over-report CR Reports between December 2016 and April 2019. This issue caused the firm to report 32,371 CR Reports that it should not have reported.
The firm resolved this issue in July 2019.
The February 2015 programming change to the firm’s ATS also resulted in order events being reported to OATS out of sequence. In accordance with the requirements of FINRA Regulatory Notice 14-07 (February 14, 2014), the firm started reporting its ATS order flow under a unique MPID. The OATS reporting logic used to submit this order flow inadvertently generated incorrect timestamps for order modifications (CR Reports), which in turn caused the subsequent Route (RT) reports to be incorrectly reported with the order identifier of the original order instead of the new order identifier generated by the CR Report.
In total, the firm submitted 424,412,081 CR reports to OATS with an incorrect order receipt time.
The firm resolved this issue on February 22, 2016.
In addition, starting in October 2011, the implementation of faulty programming logic caused the Program Trading desk to report the Seller Option (SLR) Special Handling Code instead of the Next Day (ND) or Same Day (SD) Special Handling Codes. This erroneous logic impacted 1,572 New Order (NW) Reports. Also, starting in April 2016, the firm implemented erroneous logic that resulted in the failure of its Program Trading and Cash Trading desks to submit the Counter Party Restriction (CPR) Special Handling Code on 7,420 NW Reports.
The firm corrected the logic in July 2019.
The erroneous reports constituted separate and distinct violations of FINRA Rules 7450 and 2010.
Morgan Stanley’s written supervisory procedures (WSPs) required firm personnel to review FINRA’s OATS website for unmatched executions and routes, late submissions, rejected ROEs, inter-firm mismatches and FORE status on a daily basis. The firm’s WSPs also stated that the firm was to hold monthly compliance meetings to review all data in FINRA monthly report cards.
The firm’s supervisory system, including its written supervisory procedures did not, however, include a review for reporting violations that could only be identified from a comparison to its books and records. For example, the firm’s supervisory reviews would not have identified instances where the firm either over or under-reported data to OATS or reported incorrect timestamps or Special Handling Codes to OATS. T
Thus, Morgan Stanley violated FINRA Rule 3110 (for conduct on or after December 1, 2014) and FINRA Rule 2010 and NASD Rule 3010 (for conduct prior to December 1, 2014).
In addition to the fine, Morgan Stanley has consented to the imposition of a censure.
