FINRA fines HSBC for violating Regulation NMS
HSBC Securities (USA) Inc has agreed to pay a small fine as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
Between July 2017 and September 2020, HSBC failed to take reasonable steps to ensure that intermarket sweep orders it routed to certain market centers met the requirements set forth in Rules 600(b)(30) and 600(b)(31)2 of Regulation National Market System (NMS) of the Securities Exchange Act of 1934, in violation of Rule 611(c) of Regulation NMS and FINRA Rule 2010. During this same period, HSBC failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with Rule 611(c), in violation of FINRA Rules 3110 and 2010.
Specifically, when HSBC routed orders to various exchanges that it marked as ISOs during this period, three technical issues with its vendor’s smart order router resulted in the firm not recognizing, and then routing additional ISOs necessary to execute against, protected quotes displayed by certain market centers. As a result, HSBC sent a total of 10,265 ISO orders that were priced through other market centers’ protected liquidity because the firm did not route the additional ISOs necessary to execute against those protected quotes.
HSBC did not identify these issues and did not conduct a review designed to verify that it routed all necessary ISOs to execute against protected quotations. Accordingly, HSBC failed to take reasonable steps to establish that the ISOs it routed met the requirements set forth in Rules 600(b)(30) and 600(b)(31). The firm’s vendor resolved the technical issues in its smart order router system in September 2020.
Prior to July 2017, HSBC routed ISOs only to executing brokers. When HSBC began routing ISOs directly to exchanges, the firm did not update its supervisory systems to include a review of ISOs for compliance with Rule 611. Between July 2017 and September 2020, HSBC’s supervisory system, including written procedures, was not reasonably designed to achieve compliance with Rule 611(c).
In particular, HSBC had no reviews or procedures to establish that ISOs it routed to comply with Rules 600(b)(30) and 600(b)(31) by executing against protected quotations were sent and received by all necessary venues, on a timely basis, for the correct size and price, in compliance with Rule 611(c). Because of these supervisory deficiencies, HSBC failed to detect and timely remediate the three technical issues with its vendor’s smart order router that caused the firm to route ISOs that were priced through market centers’ protected quotations. HSBC has since remediated these deficiencies.
On top of a $19,197 fine, HSBC has agreed to a censure.