Morgan Stanley Settles with FINRA, Agrees to $1 Million Fine for Trading Oversights

Morgan Stanley agreed to pay FINRA a $1 million fine for failing to maintain adequate risk management controls in its market access business.

Morgan Stanley & Co. LLC has settled with the Financial Industry Regulatory Authority (FINRA), agreeing to pay a $1 million fine for failing to establish adequate risk management controls and supervisory procedures within its market access business from August 2019 through June 2023.

According to FINRA, Morgan Stanley’s deficiencies included a failure to implement proper controls designed to prevent erroneous order entries, which violated multiple regulations under the Securities Exchange Act, including Section 15(c)(3), Exchange Act Rules 15c3-5(b) and 15c3-5(c)(1)(ii), as well as FINRA Rules 3110(a), (b), and 2010. The examination of the firm’s onboarding procedures for new customers placing low-touch orders revealed its shortcomings, as it grouped clients without a straightforward documentation process or rationale for how it assigned customers to these groups. The oversight extended to establishing thresholds for high-value orders and controls for orders priced significantly away from reference prices. Morgan Stanley did not adequately document the rationale for the thresholds applied to different client categories, leading to inconsistent and unverified trading limits.

Morgan Stanley Settles with FINRA, Agrees to $1 Million Fine for Trading Oversights

For high-touch clients, the firm adopted a system where traders were categorized based on their experience, influencing the order thresholds under which they were allowed to operate. However, the procedures did not sufficiently document why the team considered these limits reasonable or necessary.

Additionally, the firm’s trading desk applied a uniform single-order notional value threshold without a clear justification, allowing traders to submit orders up to the limit regardless of their performance ratings. This lack of documented reasoning extended to various controls, including a standardized market impact limit control, which failed to consider the unique trading patterns of several hundred customers.

Morgan Stanley’s soft block controls, which placed hold limits on transactions breaching risk thresholds, also came under scrutiny. While these hold limits paused orders for review, the firm did not require documentation of the rationale behind decisions to release orders back into the market. Moreover, staff could release orders that had been amended after manual reviews without further oversight, raising concerns about the potential for erroneous orders. Between August 2019 and June 2023, Morgan Stanley reportedly did not conduct adequate reviews of its market access controls and supervisory procedures, contributing to the regulatory breach.

In addition to the $1 million fine, Morgan Stanley has agreed to accept a censure from FINRA. This settlement highlights the critical need for robust risk management systems in the financial services industry, mainly as firms engage in high-speed trading and market access activities.

As regulatory bodies scrutinize firms’ compliance with risk management protocols, this case’s implications underscore the importance of maintaining transparent and effective supervisory practices within trading operations.

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