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Screenshot of a breaking news alert e-mail from Q2 2017
The Hong Kong Securities and Futures Commission (SFC) has announced that it has reprimanded and fined Instinet Pacific Limited (IPL) $17.3 million after resolving concerns over IPL’s breaches of the Code of Conduct in relation to its electronic and algorithmic trading systems and alternative liquidity pool (ALP).
In November 2016, the SFC and IPL jointly engaged independent reviewers to review IPL’s electronic and algorithmic trading systems and ALP. The review findings revealed that IPL failed to ensure:
- reasonable controls were in place to prevent its algorithmic trading system from generating and passing erroneous and disorderly orders to the market on three occasions between December 2014 and January 2016;
- non-proprietary orders received execution priority over proprietary orders in its ALP before May 2016;
- compliance with documentary requirements of the Code of Conduct, including:
the incident reports concerning its electronic trading system did not contain the minimum details as required;
- the access log for its ALP was not adequately maintained;
- the guidelines for its ALP was not sufficiently comprehensive, accurate and up-to-date; and
- the documentation on the design, development, risk management controls, order cancellation function, pre-trade risk controls as well as smart order router controls of its electronic and algorithmic trading systems and ALP was not sufficiently comprehensive.
In reaching the resolution, the SFC took into account all relevant circumstances, including that IPL:
- involved their senior management in the liaison with the SFC about the regulatory concerns;
- took the initiative to bring this matter to a conclusion by cooperating with the SFC to address the regulatory concerns in the disciplinary action; and
- engaged independent reviewers to conduct a review of the SFC’s regulatory concerns and identify the deficiencies in its internal controls.
The SFC also took into consideration an undertaking by IPL’s board of directors that reasonable steps will be implemented to ensure the failures set out above will be rectified within 12 months; otherwise, similar failures would have resulted in a substantially higher level of fine.