A broker-dealer settled charges brought by NYSE Arca, Inc. ("NYSE Arca") and Nasdaq Stock Market, LLC ("Nasdaq") charges for violating the market access rule while electronically routing shares to the two exchanges.

In their letters of acceptance, waivers and consent, the exchanges alleged various violations of SEA Rule 15c3-5 (commonly known as the "Market Access Rule").

The Market Access Rule requires that broker-dealers establish, document and maintain risk management controls and supervisory procedures that are designed to manage the risks associated with market access. The exchanges found that from 2017 to 2021, the broker-dealer violated various provisions of the Market Access Rule by:

  1. failing to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to prevent the entry of erroneous orders;
  2. failing to establish risk management controls to prevent the entry of orders that exceed appropriate pre-set credit thresholds; and
  3. failing to establish written supervisory procedures detailing the broker-dealer's process in conducting its annual review of Rule 15c3-5 controls and failing to conduct an adequate review of those controls (Rules 15c3-5(b) and (e)).

To settle the charges, the broker-dealer agreed to accept sanctions by both exchanges, which included fines totaling $960,000.

Commentary Steven Lofchie

It is notable that the exchanges brought this enforcement action without the involvement of FINRA enforcement staff and that the exchanges collaborated on the action.

As noted in a press release on the action, the SEC approved in 2019 Nasdaq's request to conduct investigative and enforcement functions previously performed by FINRA. NYSE reassumed its market surveillance, investigation and enforcement role from FINRA in early 2016.

This joint investigation may serve as notice of the exchanges playing a much larger role in their self-policing, rather than relying on FINRA, and of greater cooperation between the exchanges in monitoring member trading.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.