NASD Regulation Fines J. P. Morgan $200,000 for Limit Order Violations
Nancy A. Condon
(202) 728-8379 (301) 590-6730
Washington, D.C.—NASD Regulation, Inc., announced today that it has censured and fined J. P. Morgan Securities, Inc., $200,000 for violations of the Securities and Exchange Commission (SEC) Limit Order Display Rule (Display Rule) continuing over a 21-month period, and for failing to establish, maintain, and enforce written supervisory procedures reasonably designed to achieve compliance with the Display Rule. NASD Regulation also found other violations relating to the handling of customer transactions including best execution and limit order protection violations.
For a period of 21 months, J. P. Morgan Securities failed to detect and then correct problems with its display of customer limit orders, despite being told of the problems found by NASD Regulation and assuring NASD Regulation that it would correct its systems and procedures to enable the firm to comply with the Display Rule. During this time, three separate examinations uncovered multiple violations of the Display Rule.
Moreover, shortly after the firm installed an upgraded system designed to enable it to comply with the Display Rule, the head trader of the OTC trading desk had the automatic execution and display systems disabled because of problems caused by the systems. The systems remained disabled without discovery by the firm’s compliance department until February 1999, when NASD Regulation staff informed the firm it was commencing an examination.
J. P. Morgan’s supervision of limit order display was an institutional failure. While the firm recognized the need for an improved supervisory system with respect to display of customer limit orders in October 1997, the 1998 and 1999 Market Regulation examinations revealed that the firm failed to establish, maintain, and enforce the written supervisory procedures. After the firm upgraded its order handling system in 1998, the employee responsible for reviewing the firm’s handling of customer limit orders performed initial spot checks of the new system, then stopped performing the review for limit order display. Consequently, the firm’s supervisory system did not detect that the display and execution features had been disabled.
Moreover, J. P. Morgan’s written supervisory procedures did not require that the reviews for limit order display be documented. Therefore, the firm’s management was not able to ensure that the reviews were being performed. Indeed, the firm only discovered that the automatic display and execution systems had been disabled and that the reviews for limit order display were not being performed when it started preparation for its February 1999 NASD Regulation examination.
In settling the matter, J. P. Morgan neither admitted nor denied NASD Regulation’s findings.
NASD Regulation also announced today an important new surveillance tool for Limit Order Display. The rollout of this important enhancement to its Advanced Detection System (ADS) will enable NASD Regulation to more effectively detect violations of the Display Rule. Over the past three years, the Market Regulation Department of NASD Regulation has developed and implemented the sophisticated data mining, and pattern recognition capabilities of ADS to detect potential instances of anti-competitive conduct and market manipulation and violations of rules governing execution quality and trade reporting, and other market-related requirements. The new system captures and reviews each customer limit order in each stock listed on The Nasdaq Stock Market® that is received by a Nasdaq® market maker or ECN and reported to the Order Audit Trail System (OATS) to ensure that the order was displayed to the marketplace in compliance with the rule. NASD Regulation recently reiterated the importance of reporting accurate information to OATS.
"Investors need to be confident that, when they place a limit order, firms have the systems and supervisory procedures in place to see that the orders are properly handled and executed. Enhancements to our surveillance systems, like the one announced today, enable NASD Market Regulation to protect investors by closely monitoring trading to ensure that firms comply with the SEC’s Limit Order Display Rule and the NASD Limit Order Protection Rule," said Mary Schapiro, President, NASD Regulation.
"Compliance with the Limit Order Display Rule is critically important for investors and for true price discovery. The NASDR is implementing an important new tool that will greatly enhance surveillance through the automated detection of violations" said Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations.
Today’s action was brought by NASD Regulation’s Market Regulation Department. In the past two years, NASD Regulation has brought 50 cases for limit order display violations.
Investors can obtain more information about NASD Regulation as well as the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999.
NASD Regulation oversees all U.S. stockbrokers and brokerage firms. NASD, Regulation, The Nasdaq Stock Market, Inc., and the American Stock Exchange® are subsidiaries of the NASD, the largest securities industry self-regulatory organization in the United States.