
NYSE fines Morgan Stanley $300,000 for e-trading error and slams bank's procedures
LOSSES & LAWSUITS
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.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact [email protected] or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact [email protected] to find out more.
You are currently unable to copy this content. Please contact [email protected] to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email [email protected]
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email [email protected]
More on Regulation
Regulation
French regulator questions need for share trading equivalence
Esma’s reinterpretation ahead of Brexit reduces need for equivalence system, says AMF official
Receive this by email