FINRA Fines JPMorgan Securities $750,000 for Compliance Lapses

The Financial Industry Regulatory Authority (FINRA) May 16 issued JPMorgan Securities a censure and a $750,000 fine for having in place risk management controls and supervisory procedures that were not reasonably designed and, thus, failed to prevent five erroneous market orders, FINRA announced.

According to FINRA’s order, “from January 2019 to July 2022, the firm’s financial risk management controls and supervisory procedures were not reasonably designed to prevent certain erroneous orders that exceeded appropriate price or size parameters, on an order-by-order basis or over a short period of time, or that indicated duplicative orders.”

Compliance Lapses
Thresholds set too large: For each order, the firm’s trading desks applied fixed single order quantity limits ranging from 100,000 to 9,999,999 shares, “depending on the specific desk, trader, and/or client involved in each order,” FINRA said. The firm also applied “static single order notional value limits ranging from $25 million to $500 million. Each single order quantity and single order notional value limit “applied static limits, regardless of security and, thus, failed to consider the individual characteristics of the security,” the order stated.

“The firm further applied average daily volume limits ranging from 25 to 50 percent based on the specific desk, trader, and/or client,” FINRA said. “With the exception of one desk’s single order quantity control, the firm’s single order quantity, single order notional value, and average daily value thresholds were too large to be effective, and the firm failed to provide any documented rationale for why it set them at such levels.”

No supervisory procedures for soft blocks: FINRA also said many of the size controls triggered “soft blocks” when applicable thresholds were reached. A “soft block” pauses an order until someone overrides the block or the order is cancelled back or modified, whereas a “hard block” generally prevents an order from being submitted by automatically rejecting it.

“For most of the relevant period, however, the firm’s written supervisory procedures did not address how to handle, document, and review soft block overrides,” the order stated. “Accordingly, the firm’s controls that relied on soft blocks did not prevent the entry of certain erroneous orders.”

Single order limit price thresholds were too high: FINRA said that certain limit price thresholds also were set too high to be effective. “In particular, the limit price controls generally exceeded the numerical guidelines for clearly erroneous transactions,” the order stated. “The firm failed to provide any documented rationale for why it set its limit price thresholds at levels greater than the definition of a clearly erroneous transaction.”

Compliance Fixes
According to the order, J.P. Morgan Securities has since “implemented changes to its supervisory requirements relating to soft blocks that included tracking and reviews of soft block overrides and adding compliance trainings and updates to its written supervisory procedures on the handling of soft blocks.”

FINRA said the firm has also since “implemented additional controls to prevent the entry of orders that—based on price and/or size of the order relative to the market—could potentially lead to unintended market impact

(This news/press release has not been altered by, apart from the headline, and has been obtained from a syndicated source:-