The Blotter: JPMorgan gets "whale" of a fine

Also: Knight Capital hit for $12 million for roiling market

The SEC’s also finds that an internal Knight Capital system generated 97 automated emails that went to a group of personnel. The emails referenced the router and identified an error before the markets opened on Aug. 1. These messages were caused by the code deployment failure, but Knight Capital did not act upon them on Aug. 1.  Although Knight Capital did not design these messages to be system alerts, they provided an opportunity to identify and fix the problem before the markets opened. 

The SEC’s order charges Knight Capital with violating the market access rule in the following ways:

  • Did not have adequate controls at a point immediately prior to its submission of orders to the market, such as a control to compare orders leaving the router with those entered.
  • Relied on financial risk controls that were not capable of preventing the entry of orders that exceeded pre-set capital thresholds for the firm in the aggregate.
  • Did not link the account that received the executions on Aug. 1 to automated controls concerning the firm’s overall financial exposure.
  • Did not have adequate controls and procedures for code deployment and testing for its equity order router.
  • Did not have sufficient controls and written procedures to guide employees’ responses to significant technological and compliance incidents.
  • Did not adequately review its business activity in connection with its market access to assure the overall effectiveness of its risk management controls and supervisory procedures.  Its assessment largely focused on compiling an inventory of existing controls and ensuring they functioned as intended, instead of focusing on such risks as possible malfunctions in its automated order router.  The firm also reacted to prior events too narrowly and did not adequately consider the root causes of previous incidents.
  • Did not have an adequate written description of its risk management controls.
  • Did not certify in its 2012 annual CEO certification that Knight Capital’s risk management controls and supervisory procedures complied with the market access rule.

The SEC also charges Knight Capital with violations of Rules 200(g) and 203(b) of Regulation SHO, which require the proper marking of short sale orders and locating of shares to borrow for short sales. The SEC’s order requires Knight Capital to pay a $12 million penalty and retain an independent consultant to conduct a comprehensive review of the firm’s controls and procedures to ensure compliance with the market access rule. Without admitting or denying the findings, Knight Capital consented to the SEC’s order, which censures the firm and requires it to cease and desist from committing or causing these violations.

UTAH

NFA fines Interbank FX $600,000 for failure to report trade data and keep accurate books and records

National Futures Association (NFA) issued a $600,000 fine against Interbank FX LLC (Interbank), an FCM and forex dealer located in Salt Lake City, Utah. The decisionis based on a complaint filed on Oct. 15, 2013 and a settlement offer submitted by Interbank.

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