The New York Stock Exchange (NYSE) has censured and fined Credit Suisse Securities (USA) $150,000 after one of the algorithms used by the broker’s proprietary trading desk sent hundreds of thousands of erroneous messages to the bourse, freezing the order queue and delaying the close of five floor trading posts.
As a proprietary trading algorithm, the strategy in question, SmartWB, is not available for use by Credit Suisse clients and is unrelated to the firm’s Advanced Execution Services client-facing product line.
As a result of the incident, which took place on 14 November 2007, the exchange contends Credit Suisse Securities (USA) violated NYSE Rule 342 by failing to adequately supervise development and implementation of the SmartWB algorithm, particularly with respect to certain revisions to the algorithm that contributed to the incident.
The firm also breached NYSE Rule 401, governing good business practice, by failing to monitor the operation of SmartWB, which the exchange said was evidenced by the fact that Credit Suisse was unaware that the algo’s messages were being rejected by NYSE’s systems until the exchange’s regulation department informed it the following day.
The incident stemmed from a new feature added to SmartWB that allowed its users to manually modify the limit prices for unexecuted orders already sent to a market and for all future orders.
On 14 November 2007, beginning at around 15.40, SmartWB routed hundreds of thousands of cancel/replace requests to NYSE for orders that had been generated by the algorithm but never sent as a result of a programming issue with the new feature.
According to NYSE, the unusually large amount of cancel/replace messages contributed to an over-queuing of message traffic in all 975 securities traded at five posts on the NYSE trading floor. Messages, including new orders, order modifications and cancellation requests, were frozen in the queue and could not be immediately processed, meaning that the five posts could not be closed on time. They eventually closed between 16.10 and 16.27.
Significantly, said NYSE, the offending modification to SmartWB was made by a trader/programmer without any involvement or approval by an appropriate supervisor. Furthermore, the exchange said that Credit Suisse did not implement any safeguards into the algorithm that would have prevented the problem, pointing out that the hundreds of thousands of ‘reject’ messages from the exchange in response to SmartWB’s cancel/replace messages did not trigger an alert.
Credit Suisse Securities (USA) consented to the penalties imposed by NYSE.