Morgan Stanley Fined $4M by the SEC for Market Access Rule Violation

The Securities and Exchange Commission is ordering Morgan Stanley (MS) to pay $4 million for violating the market access rule. The rule mandates that brokerage firms implement adequate risk controls before giving customers market access. An SEC probe, however, found that Morgan Stanley, which gives institutional customers direct market access via an electronic trading desk, did not have the necessary controls in place to stop a rogue trader from putting in orders that went over pre-set trading thresholds.

David Miller, who was an institutional sales trader, than purportedly exploited access to the market. Without Morgan Stanley’s knowledge he committed financial fraud that would later result in the closure of Rochdale Securities, which was the financial firm where he worked. Miller, who has since partially settled the SEC’s case, pleaded guilty to parallel criminal charges. He was sentenced to 30 months behind bars.

Miller misrepresented to Rochdale Securities that a customer had given authorization to buy Apple stock. While the customer order was for the purchase of 1,625 Apple shares, Miller instead put in numerous orders, buying 1.625 million shares. He intended to share in the profit if the stock made money but if it didn’t he planned to say he made a mistake about the order’s size.

However, the stock went down on the day of the purchases and Rochdale went under its net capital net requirements to trade securities. The firm forced to shut its operations to cover the $5.3 million losses.

In its order to settle the administrative proceedings, the SEC said that the Apple stock orders that Miller routed through Morgan Stanley’s trading desk on October 25, 2012 eventually totaled approximately $525 million. This went way beyond Rochdale’s $200 million pre-set aggregate daily trading limit.

To execute the orders Morgan Stanley’s electronic desk at first upped Rochdale’s limit to $500 million and then $750 million. However, Morgan Stanley staff did not perform the necessary due diligence to make sure the credit raises were warranted. One reason for this, says the regulator, is that Morgan Stanley’s written supervisory procedures did not give reasonable guidance for personnel who were responsible for deciding whether to raise customer trading thresholds.

The SEC said that Morgan Stanley violated the Securities Exchange Act of 1934.’s Rule 15c3. The firm settled the case without denying or admitting to the findings In addition to paying the $4 million, the broker-dealer agreed to cease and desist from causing or committing market access rule violations in the future.

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Read the SEC Order (PDF)

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