Instinet, LLC

• Instinet, LLC was fined a total of $1.2 million for failing  to establish and maintain a supervisory system, including WSPs, reasonably designed to identify potentially manipulative trading by its clients. The findings stated that:

  • The firm only surveilled for potential pre-market spoofing activity by two clients and excluded its other clients. The firm did not surveil for any other potentially manipulative trading during pre-market.

  • The firm implemented marking the close surveillances with unreasonable parameters at various times.

  • Furthermore, the firm implemented ramping surveillance patterns set at unreasonably high thresholds that in certain instances did not consider that ramping could occur with fewer trades.

  • The firm’s surveillance parameters through one of its proprietary systems only identified potential wash sales if both the buy and sell order were routed to the same market destination.

  • The firm did not configure its system to capture client activity across multiple Terminal IDs, which were assigned to each client, thus potentially missing coordinated manipulative trading activity among different traders at the same client.

  • The firm’s layering and spoofing surveillance excluded any potential non-bona fide orders that joined or improved the National Best Bid or Offer (NBBO).

The findings also stated that the firm’s review of its surveillance alerts was not reasonably designed to identify potentially manipulative trading activity. The firm failed to reasonably supervise first-level reviewers who closed substantially all of the premarket spoofing alerts with a disposition of no further action. In addition, the firm failed to have reasonably designed WSPs regarding timeframes to complete supervisory reviews for its surveillance alerts. Relatedly, the firm failed to timely perform second-level reviews of thousands of alerts due to insufficient staffing in its sales and trading supervision department.

 Further, the firm’s process of tracking clients’ authorized traders terminated by the firm for engaging in potentially manipulative or suspicious trading activity was not reasonable because the firm did not have a reasonable process for confirming such authorized traders’ access had been terminated. In addition, the firm did not consider alerts generated by each client in the aggregate to evaluate the client’s overall trading activity.

Furthermore, the firm failed to reasonably supervise clients placed on heightened surveillance. The firm’s WSPs did not explain the criteria or process used for assigning such a risk rating or for placing a client on heightened surveillance, including how such designations were to be considered when conducting surveillance reviews of the client. The firm also maintained no documentation supporting its analysis for why these clients presented heightened risk. Moreover, the firm did not inform its first-level reviewers that the two clients had been placed on heightened surveillance, which would have been important for the reviewers to consider when reviewing the clients’ trading activity.

The firm’s surveillance reviews and procedures were unreasonable and its WSPs relating to its surveillance for manipulation were inaccurate or incomplete. The findings also included that the firm failed to establish, document, and maintain financial risk management controls and procedures reasonably designed to limit financial risks associated with providing market access to its clients. FINRA found that the firm failed to establish and maintain reasonably designed credit limits and procedures. Due to a coding issue, the firm’s pre-order entry controls did not prevent clients from entering orders that exceeded the client’s aggregate credit limit where the firm trader manually directed an order to a trading center and included account allocation instructions.

 Further, the firm’s periodic assessment and documentation of client credit limits was unreasonable. Moreover, the firm did not have a reasonable process for documenting and evaluating a client’s aggregate credit limit. FINRA also found that the firm failed to establish and maintain reasonably designed erroneous order controls. The firm failed to establish and maintain reasonably designed ADV controls, absent other reasonable controls and failed to establish and maintain reasonably designed price and size controls for limit orders.