The Securities and Futures Commission (SFC) has reprimanded and fined Instinet Pacific Limited (IPL) $17.3 million after resolving concerns over IPL’s breaches of the Code of Conduct in relation to its electronic and algorithmic trading systems and alternative liquidity pool (ALP)(Notes 1 & 2).
In November 2016, the SFC and IPL jointly engaged independent reviewers to review IPL’s electronic and algorithmic trading systems and ALP. The review findings revealed that IPL failed to ensure:
reasonable controls were in place to prevent its algorithmic trading system from generating and passing erroneous and disorderly orders to the market on three occasions between December 2014 and January 2016 (Note 3);
non-proprietary orders received execution priority over proprietary orders in its ALP before May 2016 (Note 4);
compliance with documentary requirements of the Code of Conduct, including:
the incident reports concerning its electronic trading system did not contain the minimum details as required (Note 5);
the access log for its ALP was not adequately maintained (Note 6);
the guidelines for its ALP was not sufficiently comprehensive, accurate and up-to-date (Note 7); and
the documentation on the design, development, risk management controls, order cancellation function, pre-trade risk controls as well as smart order router controls of its electronic and algorithmic trading systems and ALP was not sufficiently comprehensive (Note 8).
In reaching the resolution, the SFC took into account all relevant circumstances, including that IPL:
involved their senior management in the liaison with the SFC about the regulatory concerns;
took the initiative to bring this matter to a conclusion by cooperating with the SFC to address the regulatory concerns in the disciplinary action; and
engaged independent reviewers to conduct a review of the SFC’s regulatory concerns and identify the deficiencies in its internal controls.