TRADER LOSES $120,000 but TD Ameritrade refuses to honor their policy of making customers whole ….

Direct Edge Exchanges Hit With SEC Sanctions for System Glitches


 

The article below is from http://www.foxbusiness.com/industries/2011/10/13/direct-edge-exchanges-hit-with-sec-sanctions/

–Regulators say Direct Edge exchanges broke rules, made errors

–Millions of dollars in trading losses blamed on violations, says SEC

–Direct Edge says it is responding, takes exchange obligations seriously

(Updates throughout with additional detail on exchange incidents, background.)

The U.S. Securities and Exchange Commission on Thursday sanctioned electronic stock exchange operator Direct Edge for violations and mistakes that drove millions of dollars worth of trading losses, according to regulators.

Regulators charged that in November 2010 the company helped exchange members fix erroneous trades driven by its “untested computer code,” breaking transaction rules and Direct Edge’s own guidelines as an exchange, according to regulators.

In a separate incident last April, an employee error disrupted Direct Edge’s trading systems, which the company failed to remedy before millions in losses mounted for customers, regulators said in a statement Thursday.

The two stock exchanges run by Direct Edge, as well as its order-routing unit, were censured and agreed to take “remedial measures,” according to a notice from the SEC.

“Direct Edge was required to police not only its members’ conduct, but its own conduct as well,” said Robert Khuzami, director of the SEC’s division of enforcement, in a statement.

Direct Edge said it had formed a plan to respond to the issues, including “significant” investments in technology and staff.

“Our entire organization stands committed to these efforts and conducting ourselves as a model exchange operator,” representatives of the company said in a separate statement.

Based in Jersey City, N.J., Direct Edge runs the newest of the 13 full-fledged stock exchanges operating in the U.S., having converted its electronic platforms to exchange status in July 2010. Its EDGA and EDGX platforms account for approximately 9.9% of daily trading in domestic shares this month, according to data from BATS Global Markets.

The company is about one-third owned by the International Securities Exchange, the U.S. options unit of Deutsche Boerse AG (DBOEF, DB1.XE). Trading firms Knight Capital Group (KCG) and Citadel LLC also own stakes, along with Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM).

The Nov. 8, 2010 mishap arose from a software update that included a bug. If a member firm of the exchange happened to include a decimal point in the field for the quantity of shares intended to be bought or sold at Direct Edge, the number of shares transacted wound up far higher than the intended amount.

Three firms fell victim to the error. While one submitted a loss claim for $105,000, which Direct Edge honored, the other two refused to accept the positions–about 27 million shares’ worth of 1,000 different stocks–and turned them over to the exchange operator, where officials opted to trade out of the position over a period of days using the company’s internal broker unit, used to route trades to other markets.

That trading violated Direct Edge’s exchange rules, and initial uncertainty over the total size of the position resulted in some transactions being incorrectly marked, breaking some regulations around short-selling. Direct Edge lost about $2.1 million on the trading, according to regulators’ findings.

On April 13 of this year, an employee updating Direct Edge’s databases made an error that took down the company’s EDGX platform beginning at about 3:19 p.m. ET and lasting until the end of the session. For 24 minutes, the exchange continued to broadcast quotes to public data feeds, violating federal rules, and several members filed loss claims for more than $668,000, regulators said.

The firm cooperated with the SEC probe and agreed to settle cease-and-desist and administrative proceedings without admitting or denying fault in the matter, according to regulators. Direct Edge has boosted risk management and technology controls in response.

Other exchanges have fallen prey to similar mishaps over the past year. In September 2010 futures exchange company CME Group Inc. (CME) briefly submitted about 30,000 “test orders” into the live market, and CME paid about $4.7 million to compensate customers.

Nasdaq OMX Group Inc. (NDAQ) paid out roughly $3 million after a software glitch in April fed incorrect prices to trading firms and halted business in more than 80 securities.

Copyright © 2011 Dow Jones Newswires

Read more: http://www.foxbusiness.com/industries/2011/10/13/direct-edge-exchanges-hit-with-sec-sanctions/#ixzz1bdQ6ezvM

The article below is from  http://www.fiercefinanceit.com/story/sec-sanctions-direct-edge-faulty-systems-controls/2011-10-15

The SEC has taken Direct Edge to task for two snafus that revealed weaknesses in order processes and compliance, resulting in million of losses by trading clients.  The exchange has agreed to a battery of remedial measures, without admitting or denying guilt. The two incidents:

  • On Nov. 8, 2010, untested computer code changes resulted in EDGA and EDGX overfilling orders submitted by three members. The unwanted trades involved an estimated 27 million shares in about 1,000 stocks, totaling roughly $773 million. At the exchanges’ instruction, one member traded out of the overfilled shares and submitted a claim of $105,000 of losses. “When the other members refused to do likewise, the exchanges assumed and traded out of the overfilled shares through the routing broker’s error account, in violation of their own rules.” The SEC also found that in resolving the overfilled trades, which cost the exchanges about $2.1 million, DE Route “failed to mark the orders as short or mismarked them as long, and failed in its Regulation SHO obligation to ascertain if shares were available to borrow.
  • On April 13, 2011, an EDGX database administrator inadvertently disabled database connections, disrupting the exchange’s ability to process incoming orders, modifications, and cancellations. Several EDGX members to file claims for more than $668,000 in losses. “EDGX received internal alerts immediately and got external notifications soon after,” including from members seeking to cancel unfilled trades and from numerous trading centers that were bypassing EDGX. EDGX waited 24 minutes after the outage to remove its quotations from public market data, and violated the Regulation NMS “by failing to immediately identify its quotations as manual quotations.”

The agreed-upon remedy involves basic GRC practices. The firm has among other things agreed to implement an ERM framework and an information security program. It will hire an information security director, a corporate training director, and a chief compliance officer. In addition, it will enhance their systems to prevent recurrences.
See Case Document on SEC’s Site  http://www.sec.gov/litigation/admin/2011/34-65556.pdf

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