Exchange 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.
The 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.
The resulting volatility in the affected stocks caused one intraday auction that was triggered by the bourse’s automatic volatility guards.
“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."