US-based exchange Direct Edge faces sanctions by regulator the Securities and Exchange Commission for violations of US securities laws arising from weak internal controls that resulted in millions of dollars in trading losses and a systems outage.
Following an investigation into the events, the SEC found untested computer code changes on 8 November 2010 resulted in Direct Edge’s EDGA and EDGX trading platforms overfilling orders submitted by three members. The value of the unwanted trades was US$773 million, spread across 27 million shares in 1,000 stocks.
When some of the affected members refused to trade out of the overfilled shares, Direct Edge broke its own rules by using the routing broker’s error account to trade out the overfilled shares. The Commission also found that in resolving the overfilled trades, Direct Edge violated rules on short selling, failing to mark orders as short or mismarking orders as long. Direct Edge also failed to locate or document the availability of shares to borrow before selling them short.
In a second incident on 13 April 2011, an EDGX database administrator accidentally disabled database connections, causing an outage on the exchange. As a result, several members filed claims for more than US$668,000 in losses. Despite immediate internal alerts, EDGX waited 24 minutes after the outage to remove its quotations from public market data, violating the SEC’s Regulation National Market System by failing to immediately identify its quotations as manual quotations.
Following the SEC investigation, Direct Edge consented to an order censuring it and requiring its venues EDGA and EDGX to take remedial efforts to strengthen their information technology systems and controls and compliance procedures. Improvements required include the implementation of a risk management framework, hiring a corporate training director to train employees about US securities laws, as well as hiring a chief compliance officer to ensure that the company fulfils its regulatory and compliance obligations.
“Direct Edge understands and embraces the responsibilities that come with being a registered national securities exchange. Several months ago, we developed a comprehensive plan to ensure the fulfillment of our obligations in a sustainable, repeatable and demonstrable way,” Direct Edge said in a statement. “We have vigorously executed on this plan, with significant investments made to enhance our technology, personnel and processes. Our entire organisation stands committed to these efforts and conducting ourselves as a model exchange operator.”