FINRA 'discipline' Alert! "From the start of its Consolidated Audit Trail (CAT) reporting obligation on June 22, 2020, through the present, Instinet failed to timely and accurately report data for tens of billions of order events to the CAT."
CAT reporting requirements:
Wut Mean?:
- All proprietary trading, including market-making, falls under CAT reporting.
- FINRA relies heavily on CAT data for its automated market surveillance to detect potential market manipulations and violations.
- Proper, timely reporting ensures a quality regulatory audit trail and assists in accurate market event reconstruction.
Instinet failed to timely and accurately report data for tens of billions of order events:
Wut Mean?:
- Instinet was mandated to start reporting order data to the CAT Central Repository from June 22, 2020.
- Instinet hired a third-party vendor for CAT reporting, but their internal data specifications were inadequate for proper CAT-format reporting.
- In June 2020, Instinet informed FINRA that they foresaw CAT reporting issues starting June 22, 2020.
As predicted, Instinet faced substantial reporting issues from the onset.
- Between June 22, 2020, and November 6, 2020, Instinet missed reporting over 5.2 billion equities and options order events, about 17% of their CAT reporting responsibility for that time.
By late October 2020, they reported 2.7 billion late order events, but the remaining 2.5 billion weren't reported until March 2021, up to nine months later.
- On October 26, 2020, Instinet introduced new code to address some reporting errors.
- Separate from the data conversion problem, Instinet had late reporting issues for at least 26 billion events between November 2020 and December 2022, approximately 8% of their CAT obligation for that duration, due to factors like the reporting agent's processing capacity constraints.
Order data translation issues led Instinet to report inaccurate data for billions of orders.
- By January 2023, they pinpointed roughly 180 different CAT reporting mistakes, including errors in share quantity, handling directives, codes, flags, and timestamps.
- For example, from June 2020 to October 2021, Instinet provided incorrect CAT data for about 32 billion order events concerning special handling codes.
- As a result, Instinet broke FINRA Rules 6830, 6893, and 2010.
Instinet failed to reasonably supervise its compliance with its CAT reporting obligations:
Wut mean?:
From June 22, 2020, Instinet's supervisory system was not up to the mark for CAT reporting compliance.
- They only started reviewing the accuracy of CAT data in Q3 2021 and did so just quarterly, which was inadequate given the sheer volume of their reports.
Instinet ignored warning signs of its CAT reporting issues.
- They knew about the problems in 2020 but only acted after FINRA expressed concerns in 2021.
- Even then, their attempts to rectify the issues were delayed and incomplete.
Penalty?:
Why might they do this?
Why would Instinet fails to correctly report its order and trade data on BILLIONS of orders?!?!? To me, it could potentially be attempting to hide or inadvertently cover up a range of improper or illegal activities! For example:
- Market Manipulation: like "pump and dump" schemes.
- Front-running: Where they execute orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers.
- Layering or Spoofing: Placing and then canceling orders that they never intended to execute in order to create a false sense of demand or supply, thereby manipulating the price.
- Wash Sales: Selling a security at a loss and then quickly buying it back to create the appearance of trading volume..
- Mismatching Orders: Deliberately mismatching buy and sell orders to benefit a particular party....
- Improper Reporting of Short Sales: Not correctly reporting or misreporting short sales...
- Hiding Conflicts of Interest: Misreporting could obscure transactions that would reveal a conflict of interest between a Instinet and another party.
- Avoiding Regulatory Requirements or Thresholds: Manipulated data might help them evade certain regulatory thresholds or requirements, such as capital or margin requirements....
The US Committee on Financial Services called this continuous waiving a "...moral hazard that undermines the deterrent value of the Excess Capital Premium charge."
TLDRS:
- From the start of its Consolidated Audit Trail (CAT) reporting obligation on June 22, 2020, through the present, Instinet failed to timely and accurately report data for tens of billions of order events to the CAT.
- Instinet ignored warning signs of its CAT reporting issues.
- They knew about the problems in 2020 but only acted after FINRA expressed concerns in 2021.
- Even then, their attempts to rectify the issues were delayed and incomplete.
- Penalty? Censure & $3.8 million fine while not admitting wrong doing.
