FINRA fines Instinet $3.8M for reporting deficiencies
Instinet, LLC has agreed to pay a fine of $3,800,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From the start of its Consolidated Audit Trail (CAT) reporting obligation on June 22, 2020, through the present, Instinet failed to timely and accurately report data for tens of billions of order events to the CAT Central Repository.
As a large industry member, Instinet was required to begin reporting its order event data to the CAT Central Repository on June 22, 2020. After evaluating various internal and vendor CAT reporting solutions, Instinet hired a third-party vendor to act as the firm’s CAT reporting agent.
Instinet, however, failed to maintain adequate technical specifications for its order data that would have allowed the finn’s data to be conve1ied to a CAT-reportable format. Moreover, the firm’s technical specifications were not widely understood by certain individuals at the firm. This significantly hindered the reporting agent’s ability to convert Instinet’s data into a format that it could use for CA T reporting.
In early June 2020, Instinet notified FINRA that it anticipated it would experience CAT reporting issues starting on June 22, 2020.
As it expected, Instinet experienced significant CAT reporting problems from the very beginning of its reporting obligations. The firm determined that it was not timely reporting all CAT-reportable events because its reporting agent could not fully translate the firm’s data to a CAT-reportable format. As a result, from June 22, 2020, through November 6, 2020, alone, Instinet failed to timely report to the CAT Central Repository over 5.2 billion equities and options order events, which constituted approximately 17% of the firm’s CA T reporting obligation for this period.
By late October 2020, the firm had reported 2.7 billion of the late order events but did not report the remaining 2.5 billion until March 2021, which was up to nine months after these order events occurred. On October 26, 2020, Instinet completed the rollout of a new code that addressed some of the causes of the reporting errors.
Unrelated to the data conversion issue, Instinet experienced late reporting issues in connection with at least 26 billion events from November 2020 through December 2022, which constituted approximately 8% of the firm’s CAT reporting obligation for this period. These late reports were caused by a variety of issues, such as the reporting agent’s insufficient capacity to process Instinet’s order event volume.
The problems translating order data and other configuration issues also caused the firm to report inaccurate data for billions of other order events. By January 2023, Instinet identified approximately 180 different types of CAT reporting errors, including inaccurate share quantity, handling instructions, department type codes, customer display instruction flags, and event timestamps.
Therefore, Instinet violated FINRA Rules 6830, 6893, and 2010.
From June 22, 2020 through the present, Instinet’s supervisory system, including written procedures, was not reasonably designed to achieve compliance with FINRA Rules concerning CAT reporting. Instinet did not conduct a supervisory review of the accuracy of data it reported to the CAT Central Repository until the third quarter of 2021.
Even then, Instinet conducted this review only once per quarter. This frequency was not reasonable given the volume of data that lnstinet reports to the CAT Central Repository.
Further, Instinet did not reasonably respond to red flags of significant problems with the accuracy of its CAT reports. While Instinet became aware of reporting issues in 2020, it did not reasonably respond to its CAT reporting errors until FINRA raised concerns to the firm in 2021. In late 2021 and early 2022, Instinet began to expedite its remediation program, but the remediation of known issues is still not complete.
Therefore, by failing to establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with CAT repo1ting rules, Instinet violated FINRA Rules 3110 and 2010.