Nasdaq OMX Fines Morgan Stanley for Electronic Trading Error
May 16, 2012
The Disciplinary Committee of Nasdaq OMX Stockholm has fined Morgan Stanley International 400,000 Swedish crowns (nearly US$56,000) for botched direct market access trading.
The incident, the exchange said, was driven by a Morgan Stanley client’s coding error in its algo trading software.
According to the committee’s decision, the incident in question took place on November 30. On that morning, immediately after the market’s opening, Morgan Stanley reportedly submitted large numbers of orders and executed substantial numbers of trades in four of the exchange’s order books: SSAB A, SSAB B, ATCO A and ATCO B.
Morgan Stanley reportedly entered approximately 25,000 orders in the four order books and generated around 34,000 executions until the activity stopped, according to the committee.
During the first 15 minutes of trading, the number of shares traded in these four order books was over 150% of the volume traded in the same order books the whole previous day.
Morgan Stanley represented around 50% market share in the four order books and around 30% to 35% of the Swedish market during the first 15 minutes. The relevant order books incurred unusual volatility and during the period one intraday auction was triggered by one of the exchange’s automatic volatility guards.
According to the decision, the trading pattern was immediately observed by the exchange’s Trading Surveillance, quickly becoming clear to officials that an incident of some sort had occurred. Other market participants also reportedly reacted immediately on the extraordinary trading activity since the disturbance affected other parties.
Trading Surveillance, according to the decision, sought contact with the Morgan Stanley trader whose user-ID had been used to submit the orders but was unable to reach him. However, contact was ultimately established with a compliance officer on the Morgan Stanley trading desk. Eventually the order entries were stopped by Morgan Stanley’s own monitoring system, not—according to Morgan Stanley—due to contact from the exchange.
The order flow, according to the decision, was stopped approximately 11-minutes after the opening of the market.
According to the decision, the unintentional DMA trading was a result of an error on the part of a Morgan Stanley client. The client had reportedly made a change to its software and as a result of a bug in its data feed, or a fault in their parsing of the data feed messages, the algorithm component of the client’s system sought to actively share trades (buying on the offer, selling on the bid) in rapid succession.
According to Nasdaq, because a number of orders were submitted in which the buyer and seller was the same legal person, these trades cannot be considered genuine. Consequently, Morgan Stanley violated the exchange’s Nordic Member Rules (NMR) where it is stated that all orders must constitute genuine orders and trades.