NYSE fines Morgan Stanley $300,000 for e-trading error and slams bank's procedures

NEW YORK - The New York Stock Exchange (NYSE) has fined US investment bank Morgan Stanley $300,000, after its order-routing system failed to prevent an erroneous transaction to buy $10.8 billion of stocks, instead of the intended $10.8 million.

On September 1, 2004, a customer contacted Morgan Stanley to unwind part of a swap. A Morgan Stanley affiliate was the counterparty to the swap, and had hedged its exposure by maintaining a short position in shares underlying the trade. As a portion of the swap was unwound, a Morgan Stanley trader tried to buy a basket of stocks to cover some of the firm's short position.

The trader entered an agency order on behalf of the firm, to buy 100,000 units of the basket to cover a portion of the short position. But the system used to create the basket built in a multiplier of one thousand, so the trader created a basket with a value of $10.8 billion. As a result, erroneous orders for around 677 million shares were transmitted for execution. Around 82 million shares with a market value of $875.3 million were traded before the firm cancelled the order.

The error caused significant market disruption, and NYSE has accused the bank of having inadequate features in place to validate order accuracy and establish limits or prohibitors to prevent orders exceeding pre-set parameters. The bank was also adjudged to have inadequate procedures for training, supervision and control of traders.

Morgan Stanley consented to the $300,000 fine without admitting or denying guilt, and has subsequently established pre-set trade limitations for each of its traders. It now requires each trader, upon seeing a red warning light, to make a manual computer entry to verify and acknowledge that a trade will exceed a pre-set limit.