FINRA Fines Morgan Stanley $1 Million for Market Access Violations
The Financial Industry Regulatory Authority announced that it has censured and fined Morgan Stanley & Co LLC $1 million for violating market access rules.
According to FINRA, from August 2019 through June 2023, Morgan Stanley failed to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial risks of its market access business activity, including controls designed to prevent the entry of erroneous orders. Additionally, during the same time period, the firm failed to conduct reasonable reviews of the effectiveness of certain of its market access controls and supervisory procedures.
FINRA stated that Morgan Stanley sends certain orders to the market via “low touch” or “high touch” order handling. Low-touch orders flow electronically through the firm’s trading infrastructure to the market without handling or other interaction by firm traders. High-touch orders, by contrast, are manually handled by a trader who determines how to handle an order based on a variety of factors, including customer instructions, trader discretion and more.
FINRA continued that, when onboarding new customers placing low-touch orders, the firm placed those customers into groups, which determined the order controls that would apply to each customer. However, 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.
Further, the firm’s procedures did not describe the process for establishing reasonable thresholds for orders priced more than a specified percentage away from a specified reference price, known as the price away control, or orders exceeding a pre-established maximum dollar amount for a single order, known as the single-order notional value, for the different customer groups.
Additionally, FINRA stated that the firm did not document on a customer-by-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 rather than by customer group as it did for low-touch customers, reflecting the fact that each trader determines how to access the market. 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.
In addition, the firm did not provide any documented rationale or analysis justifying the standardized market impact limit, or MIL, control, nor did it have any documented rationales for price-away controls that exceeded exchange guidelines for clearly erroneous transactions for low-touch customers provided with direct market access through the third-party, high-speed software.
As a result of these lapses, Morgan Stanley violated, among other rules, FINRA Rule 15c3-5, which requires broker-dealers with market access to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory and other risks of this business activity. The rule also requires firms to conduct reasonable reviews of the effectiveness of these controls and procedures.
FINRA did state that Morgan Stanley remediated the issues by June 2023.
Earlier this year, Morgan Stanley was fined $400,000 for trade confirmation disclosure failures. In February, the firm was fined $1.6 million for municipal securities violations and other related failures.
Headquartered in New York City, Morgan Stanley & Co LLC has approximately 4,200 registered representatives and approximately 40 branch offices. The firm provides services to corporate and broker-dealer customers and institutional investors and acts as a broker-dealer, providing market access and execution services to market participants for a wide variety of products.
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