FINRA fines UBS Securities for inaccurate statistics regarding order execution
UBS Securities LLC has agreed to pay a fine of $475,000 fine as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From September 2015 through January 2019, UBS Securities (UBS-S) operated an alternative trading system called UBS ATS (UBSA) that received covered orders reportable under Rule 605. During this time, the firm published 41 monthly Rule 605 reports that contained inaccurate order and execution quality statistics for covered orders.
Due to a coding error, UBSA’s Rule 605 execution quality statistics were derived from the “parent” orders originated at UBS-S’s broker-dealer, instead of the resulting “child” orders that UBSA received.
In addition, when the UBS-S broker-dealer originated non-covered parent orders and then routed resulting covered child orders to UBSA, UBSA’s Rule 605 reports improperly excluded execution quality statistics for the covered child orders.
As a result, from September 2015 through January 2019, the firm’s monthly UBSA Rule 605 reports significantly underreported the number of covered orders and related shares it received, executed, and cancelled. For example, each of the firm’s published UBSA Rule 605 Reports for May, August, and December 2018 failed to include millions of covered orders and executed shares and more than a billion order shares and cancel shares related to the covered orders.
The underreported amounts for the three months ranged from less than 2% to approximately 14% of UBSA’s reported total number of covered orders, and the order shares, canceled shares, and executed shares related to those orders.
Also, a separate coding error caused the UBSA monthly Rule 605 reports to double-count the number of cancel shares for certain covered orders between September 2015 and January 2018. This resulted in UBS-S overreporting a portion of all covered cancel shares in the UBSA Rule 605 reports from September 2015 through January 2018.
Therefore, UBS-S violated Rule 605 and FINRA Rule 2010.
From at least September 2015 through November 2019, UBS-S’s supervisory reviews for compliance with Rule 605 consisted of manual retrieval and analysis by firm personnel of a sample of covered orders in the firm’s Rule 605 reports. However, the firm’s sample for supervisory reviews was unreasonably small.
In addition, due to system limitations, cancelled covered orders were excluded from UBS-S’s supervisory reviews. Therefore, UBS-S did not review canceled covered order statistics to determine whether the UBSA Rule 605 reports were accurate. As a result, UBS-S failed to detect that it was overreporting share quantities for certain cancelled covered orders in the UBSA Rule 605 reports for nearly two years.
UBS-S also failed to reasonably investigate and act upon evidence of Rule 605 reporting deficiencies. UBS-S discovered the coding error relating to parent and child orders in September 2017 but did not correct the error until February 2019, 17 months after UBS-S became aware of this coding error.
Therefore, UBS-S violated FINRA Rules 3110 and 2010.
On top of the fine, the firm has agreed to a censure.