Electronic trading giant Interactive Brokers LLC has reached a settlement with Nasdaq, agreeing to pay a $475,000 fine.
The agreement followed an investigation by Nasdaq Enforcement into violations of Nasdaq General Rule 9, Sections 20(a) and 1(a) and the improper execution of five corporate actions between January 1, 2020, and June 2, 2021, caused by control failures.
During the period, Interactive Brokers' risk management controls and supervisory procedures were found to be inadequate to prevent the entry of erroneous orders in violation of Section
15(c)(3) of the Securities Exchange Act of 1934, Rules 15c3-5(b) and 15c3-5(c)(1)(ii), and Nasdaq General Rule 9, Sections 20(a) and 1(a).
According to FNG, the firm relied on three independent data providers to obtain corporate action information in accordance with its written supervisory procedures (WSPs). These procedures required confirmation of corporate actions from at least two of the three data sources. The automated system processed corporate actions based on this information and updated client accounts accordingly.
However, discrepancies occurred when the data sources provided conflicting information or when corporate actions were confirmed by only one source. In such cases, manual review by the firm's corporate actions team was required, resulting in delays or failures in processing the five corporate actions for the relevant period.
These deficiencies resulted in some instances where orders were executed at incorrect prices based on outdated information, and in two instances where customers were able to sell shares they did not own.
Interactive Brokers faced serious problems due to deficiencies in its supervisory procedures and systems identified in a recent regulatory examination.
First, the firm's Written Supervisory Procedures (WSPs) lacked clear guidance for manually analyzing and acting on corporate actions received from multiple vendors or containing conflicting information.
In addition, Interactive Brokers failed to timely correct a systemic issue that resulted in the rejection of pre-approved corporate actions, known as the "rejection issue," which caused delays in the processing of reverse stock splits and revealed gaps in the firm's protocols for correcting systemic issues.
During the relevant period, the firm used deficient warrant controls, including a reference price filter. However, deficiencies in the reference price calculation, in particular the absence of certain input data, resulted in warrants not being priced as intended.
The company became aware of this issue in approximately July 2020 and fully remediated it in June 2021. Interactive Brokers has taken steps to improve its reference price calculations to provide more accurate price limits for warrants, reflecting its commitment to addressing the regulator's concerns and improving its risk management practices.
