US investment bank Morgan Stanley has been fined $300,000 by the New York Stock Exchange after its order routing system failed to prevent an erroneous transaction to buy $10.8 billion of stocks instead of $10.8 million as intended, causing significant market disruption.
Nyse says Morgan Stanley failed to implement blocks and inhibitors within the electronic trading system to prevent mistaken orders from being routed to the Nyse floor. The bank was also adjudged to have inadequate procedures for training, supervision and control of traders.
According to a statement released by Nyse, a customer contacted Morgan Stanley on 1 September 2004, to unwind part of a swap. 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.
At just after 9:30 am on the day the trader entered an agency order on behalf of the firm to buy 100,000 units of the basket to cover a portion of the short position. But the system used to create the basket built in a multiplier of 1000, so the trader erroneously created a basket with a value of $10.8 billion instead of $10.8 million.
As a result erroneous orders for about 677.4 million shares were transmitted for execution. Around 81.5 million shares with a market value of $875.3 million were traded before the firm cancelled the order.
Altogether 692 Nyse-listed stocks, or 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 erroneous orders could be verified, says Nyse.
Morgan Stanley did not have adequate features in place to validate order accuracy and establish limits or prohibitors to prevent orders exceeding preset parameters, says Nyse.
The US bank consented to the $300,000 fine without admitting or denying guilt.
Nyse says Morgan Stanley has subsequently established pre-set trade limitations for each of its traders and now requires each trader to make a manual computer entry to verify and acknowledge that a trade will exceed a pre-set limit when a red warning "pop-up" appears on the trader's screen.
Last year the Tokyo Stock Exchange (TSE) admitted that a problem with its own dealing system prevented a Mizuho Securities trader from cancelling an erroneous share-sale order that could cost the brokerage more than $225m.
In October a trader at Mizuho mistakenly tried to sell 610,000 shares at one yen apiece in recruiting company J-Com, which had just completed an IPO on the market for smaller companies. The broker had actually intended to sell one share at Y610,000.