FINRA imposes $250k fine on Virtu Americas
The fine stems from violations related to order execution and transaction reporting.
Virtu Americas LLC (f/k/a KCG Americas LLC) has agreed to pay a fine of $250,000 as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA). The fine stems from several violations related to order execution and transaction reporting.
In particular, during the period of January 1, 2015 through December 31, 2017, the firm’s policies and procedures provided that upon receipt of an order that would lock or cross the quote of another market participant, the firm execute the order internally, route the order to another market participant, or send an OTC Link message’ to the market participant whose quote would be locked or crossed, prior to entering the order that would lock or cross the market.
During the relevant period, firm customers submitted orders electronically in various ways. The firm’s order management systems routed certain of these customer orders to one of its trading systems, Knight Trading System (KTS). KTS handled quoting and trading customer orders in OTC Equity Securities and automatically displayed client limit orders that improved the price and/or size of the firm’s quotes, except in circumstances where the price of the limit order would lock or cross the market.
When the firm received a customer limit order that would lock or cross the market, KTS dropped the orders into a firm trader’s pending order queue for manual handling. In accordance with the firm’s policies and procedures, the trader could then execute the order internally, route the order to another market participant, send an OTC Link message to the market participant whose quote would be locked or crossed and wait for a response, or display the order. If the trader chose to display the order, the trader received an automated notification informing the trader that the order would lock or cross the market. If the trader displayed the order after receiving that notification, KTS would send an OTC Link message to the market participant whose quote would be locked or crossed, before the locking or crossing quote was displayed.
FINRA reviewed 190 of the firm’s quotations that locked or crossed the market in OTC Equity Securities during the relevant period. In 54 of those 190 quotations (approximately 28.4%), the firm failed to send an OTC Link message to the market participant whose quote was locked or crossed before displaying the quotation (and, in certain instances, failed to send an OTC Link message at all).
The firm’s policies and procedures for sending OTC Link messages after the firm received an order that would lock or cross the quote of another market participant were not reasonably implemented, FINRA concluded. As a result of its failure to account for these technological limitations in its different systems when it implemented these policies and procedures, the firm engaged in a pattern or practice of displaying locking or crossing quotations in OTC Equity Securities during the locked/crossed review period.
This way, the company violated FINRA Rules 6437(a) and 2010.
Further, FINRA has found that the firm violated limit order display rules.
FINRA reviewed a sample of 232 customer limit orders received by the firm during the period of January 1, 2015 through March 31, 2018. In 156 of those 232 instances, the customer limit order received by the firm would have improved the quoted market’s price or represented more than a de minimis size change but the firm failed to take immediate action to display the order.
Further, in 69 of the 156 instances, the orders would not have locked or crossed the market. The firm’s failure to immediately display these limit orders resulted from delays caused by either the manual handling of orders based on the firm’s specific risk-based exclusion criteria or system limitations that prevented the firm from immediately displaying (a) aggressively priced limit orders that pierced several price points, (b) orders with multiple components or (c) orders entered during a period of increased volume.
FINRA has also determined that firm violated Capacity Code rules.
During the period of December 31, 2009 through July 1, 2016, the firm made 1,062,828 reports of transactions in OTC Equity Securities, on behalf of a single customer, to the FNTRF with an incorrect capacity code of “A”, which represents an agency transaction, when the reports should have had the capacity code of “P”, which represents a principal transaction.
As a result of a separate coding error, on behalf of the same firm customer, principal contra capacity codes resulted in incorrect agency “A” contra capacity codes, on the corresponding trade reports.
FINRA has also noted the firm’s late reporting violations. During the period of January 1, 2017 through March 31, 2017, the firm failed to report 37 transactions in TRACE-Eligible Agency Debt Securities to TRACE within the time required by FINRA Rule 6730(a). During the period of April 1, 2017 through September 30, 2017, the firm failed to report 198 transactions in TRACE-Eligible Corporate Debt Securities to TRACE within the time required by FINRA Rule 6730(a).
The firm’s late trade reporting violations were the result of delays in the firm’s process of manually booking the executions to the firm’s clearance and settlement systems.
Also, FINRA has found that the firm inaccurately reported transaction execution time to TRACE.
During the period of January 1, 2017 through March 31, 2017, the firm failed to report the correct time of execution in 33 transactions in TRACE-Eligible Agency Debt Securities to TRACE. During the period of April 1, 2017 through September 30, 2017, the firm failed to report the correct time of execution in 198 transactions in TRACE-Eligible Corporate Debt Securities to TRACE.
Specifically, the firm did not input the actual execution time of the trades; it reported the times the firm input the trades to the firm’s clearance and settlement systems.
Finally, FINRA has identified failures related to the firm’s supervision of TRACE reporting.
During the period of January 1, 2017 through September 30, 2017, the firm failed to perform any supervisory review for its compliance with TRACE reporting requirements including the timeliness and accuracy of the reporting until FINRA staff inquired about the firm’s TRACE reporting. As a result, the firm failed to supervise transactions in TRACE-Eligible Securities to achieve compliance with the firm’s reporting obligations under FINRA Rule 6730.
Virtu Americas has agreed to a censure and fine of $250,000 (consisting of a fine of $100,000 for the Locked/Crossed violations; a fine of $100,000 for the Limit Order Display violations; $10,000 for the Capacity Code violations; $20,000 for the TRACE violations and $20,000 for the supervisory violations related to TRACE).
