Nasdaq OMX fines Morgan Stanley amid greater algo scrutiny
operator Nasdaq OMX Stockholm has fined Morgan Stanley 400,000 Swedish kroner (€43,864) for an algo coding error that resulted in unusual volatility on its order book.
case relates to an incident on 30 November last year when a Morgan Stanley
algorithm rapidly submitted a large number of orders and executed a large
number of trades in Stockholm-listed shares shortly after the market open.
resulting volatility in the affected stocks caused one intraday auction that
was triggered by the bourse’s automatic volatility
“As part of [the algo trading
error] a great number of orders were submitted where the buyer and seller in
the trades that followed was the same legal person. Such orders and trades
cannot be considered as genuine,” read a statement from the exchange.
Although Nasdaq OMX Stockholm
said it immediately spotted the trading pattern, it was unable to contact the
trader responsible, contravening its rules.
It added that Morgan Stanley
did not have the technical and administrative arrangements in place to prevent
cause of the market disturbance.
"This is a classic
example of how algorithms and direct market access needs the appropriate
systems and controls. It highlights the need for real-time monitoring because
if you can't monitor it in real time, then you can't control it,” said Matthew
Coupe, director of sales, EMEA at surveillance software provider Redkite.
The fine for Morgan Stanley
comes at a time when there is increased pressure on the monitoring of automated
trading in Europe, following guidelines by the European Securities and Markets
Authority (ESMA) that came into force at the start of May.
The ESMA guidelines require
brokers to establish a governance process for developing or buying algorithms,
rolling out the live use of the algorithm in a cautious fashion and ensuring
staff have the necessary expertise to run and monitor the behaviour of
algorithms. There are also guidelines related to pre-trade risk controls for
direct market access.
Redkite, Kinetic join forces
In light of the new
guidelines, Redkite has teamed up with Kinetic Partners, a global consultancy,
to offer a regulatory and trading surveillance solution.
The partnership will combine
Kinetic’s advisory services with Redkite’s software in order to help firms
comply with the ESMA guidelines and avoid enforcement action.
Kinetic’s risk and compliance team
includes Monique Melis who led the UK’s Financial Services Authority (FSA)
transaction monitoring unit for four years and Simon Appleton who spent 13
years at the FSA’s monitoring for marketing abuse unit.
“A key focus of the ESMA
guidelines relates to market abuse controls, demanding that asset managers,
brokers, trading platforms and exchanges are required to have sufficient tools
to allow them to monitor the activities of their participants, and the end
users if applicable, for suspicious or illegal activity,” sad Melis. “Redkite
has already implemented a series of market leading actionable alerts, including
ping orders, quote stuffing, momentum ignition and advanced layering, to ensure
financial institutions comply with today’s requirements."