Compliance February 7, 2007
A Billion Here, A Billion There…
The New York Stock Exchange has fined Morgan Stanley $300,000 for its failure to stop a trader from entering an order to buy $10.8 billion in stocks – rather than the $10.8 million intended.
Reported by Nevin E. Adams
The NYSE said Morgan Stanley did not have appropriate blocks within its trading systems to prevent an erroneous order from being routed to the NYSE floor and failed to properly supervise and train traders.
In all, 692 NYSE-listed stocks, some 12.7 million shares, were traded on the NYSE Floor. For at least 15 minutes, the error caused significant market disruption until the accuracy of the orders could be verified, according to Reuters.
Hedged Exposure
The NYSE’s February report on disciplinary actions, a customer contacted Morgan Stanley on September 1, 2004, to unwind part of a swap, according to the report. 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.
About 9:32 a.m. the trader entered an order on behalf of the firm to buy 100,000 units of the basket to cover a portion of the short position – but, according to the NYSE, the system used to create the basket built in a multiplier of 1,000, so the trader erroneously created a basket with a value of $10.8 billion instead of $10.8 million. As a result, the NYSE said erroneous orders for about 677.4 million shares were transmitted, and about 81.5 million shares worth some $875.3 million were traded before the firm canceled the order.
Morgan Stanley consented to the fine and censure without admitting or denying guilt. The NYSE hearing officer, according to the report, noted that Morgan Stanley has since established preset trade limitations for each trader on its swap desk and has added safeguards.