A manual input error on Nasdaq OMX Stockholm which caused an erroneous trade by a sponsored access client has exposed pre-trade risk management failures, as well as a lack of clarity on European automated trading guidelines.
On Monday, exchange member ABN AMRO Clearing Bank was fined SEK300,000 (around US$46,000) after a fat-finger error by one of its sponsored access client caused an inflated sell-order to be posted on Nasdaq OMX Stockholm.
The sponsored access client put in a negative value of -5,000 shares in the volume field for a sell order, which its own trading system erroneously converted to more than 294 million shares. This order, for shares in Swedish manufacturer SKF, was sent to the market despite constituting around 70% of outstanding SKF shares and resulted in the execution of 800,000 shares.
Matthew Coupe, director of regulation and market structure at risk and compliance software provider NICE Actimize, believes this event signalled a lack of comprehensive pre-trade risk monitoring.
He added it highlighted a grey area in guidelines on automated trading from the European Markets and Securities Authority (ESMA) about where precisely responsibility for such errors lies.
“While the ESMA guidelines show that the exchange member is responsible for pre-trade risk under sponsored access, it also states the exchange is responsible for keeping an orderly market, which includes sponsored access provisions,” Coupe said.
The ESMA guidelines on automated trading became effective last May and were designed as a comprehensive regime for the operation of electronic trading systems by trading venues and brokers, and apply to all instruments defined under MiFID.
However, Nasdaq OMX said its circuit breakers relate to price fluctuations and that the definition and monitoring of volume limits is the responsibility of its members’ risk systems.
“In this case ABN AMRO has accepted responsibility for the DMA client’s system in that it has been implemented correctly with regard to pre-trade risk controls. This control, for which ABN AMRO in their role as provider of DMA execution services holds responsibility, has failed,” said Joakim Strid, head of trading surveillance at Nasdaq OMX Nordic.
“The ABN AMRO order prices did not deviate significantly from the market price, which is why they were not activated. When it comes to pre-trade controls, responsibility for the size of the order lies with the member,” Strid added.
However the event has clearly shown a failure of pre-trade risk controls at the broker level and exposes a lack of exchange-level controls.
According to Coupe, market participants must continuously adapt risk checks to real-time data and longer venue trends and said the error probably related to procedures and controls as opposed to the underlying technology.
“The industry needs to start reviewing practice and controls for monitoring flow in an effective way to make sure there is market stability to instil investor confidence,” Coupe said.
Meanwhile, ABN AMRO has stated that it accepts responsibility for the incident in line with its role as an exchange member.
“We have since worked closely with both Nasdaq OMX, as well as other parties in the infrastructure chain, to ensure that this kind of client order issue cannot occur again,” a statement from the broker read.