The memorandum follows several instances in which firms sent orders that contained an incorrect quantity of shares or inadvertently re-transmitted orders executed the previous day. The two primary causes of the mistakes were human error or defective software. Although the errors were caught quickly at the NYSE and no customers were harmed, the Exchange emphasized the need for safeguards to prevent errors from being transmitted in the first place.
"While electronic order-entry systems can enhance members' or member organizations' ability to route and execute orders, errors resulting from their use can result in increased market volatility and significant financial risk and exposure to members and member organizations," NYSE Executive Vice President Salvatore Pallante said in the memo.
The memo outlines five regulatory requirements and business practices that must be adhered to when electronic order-entry systems are used:
- Systems must include controls that limit use to authorized persons, check for order accuracy, prevent orders that exceed preset credit- and order-size parameters from being transmitted, and prevent duplication or re-transmission of orders.
- Safeguards must be in place so that system maintenance does not cause inadvertent disabling of systems, or other problems.
- Firms must not test their systems' connectivity to the NYSE by sending orders that are not executable, such as orders at prices far outside a security's current price. Tests must use established procedures and test messages should be clearly denoted.
- Reasonable, written controls and supervisory procedures must be in place before a member or member firm grants correspondents access to its or a vendor's electronic order-routing system, in connection with carrying, clearing or other arrangements.
- Members and member firms must learn the essential facts relative to every customer order, as required by Rule 405, the NYSE's "know your customer" rule. These requirements are imposed on every customer order regardless of how it is received or transmitted, including those routed via electronic trading systems.
About NYSE Regulation: The New York Stock Exchange is the designated examining authority for the major securities firms in the United States, including 250 member firms that deal with the public and account for more than 85 percent of the public customer accounts carried by broker-dealers. These firms service 93 million customer accounts, operate from more than 22,500 branch offices around the world and employ approximately 157,000 registered personnel. The NYSE is committed to strong and effective regulation of its members and member firms to protect investors, the health of the financial system, and the integrity of the capital-formation process. While self regulation in the U.S. securities industry begins with the broker-dealer, the NYSE plays a critical role by maintaining an extensive system for monitoring and regulating the activities of its membership. The Securities and Exchange Commission oversees these activities. NYSE Regulation consists of three divisions: Member Firm Regulation, responsible for the financial, operational and sales-practice regulation of member organizations; Market Surveillance, responsible for surveillance of all trading activities at the Exchange; and Enforcement, which investigates and prosecutes violators of NYSE rules and federal securities laws. There are approximately 560 people in NYSE Regulation, representing approximately one-third of the Exchange's staff.
