As described in the SEC’s order, from June 2001 through May 2004 Instinet and Inet repeatedly published monthly execution reports containing inaccurate order execution quality information. The errors in the reports included the misclassification of shares, miscounting of cancelled shares, improper exclusion of orders, improper calculations based on erroneous times, improper categorizing of orders, inaccurate order execution information, incorrect calculation of spreads and other incorrect calculations.
The order finds that Instinet and Inet relied heavily on automated systems, yet did not adequately test their systems and did not respond effectively after NASD staff, SEC staff and third parties detected repeated errors in the execution reports. The order notes that Instinet and Inet’s Dash 5 reports served a particularly important function to all market participants due to the high percentage of Nasdaq volume handled by Instinet and Inet.
Linda Thomsen, the Director of the SEC’s Division of Enforcement stated, “The rule requiring monthly publication of order execution reports is an important means of promoting transparency and competition between market centers and helps brokers obtain the best trades for their customers. By failing to publish accurate order execution quality reports, Instinet and Inet affected the ability of brokers to identify which market centers provided the best execution of trades for investors.”
Associate Director Peter Bresnan added, “This is the first SEC action against any market center for erroneous Dash 5 reports and should serve as a reminder to all market centers of the importance of accurate Dash 5 reports. Inet and Instinet simply did not take their Dash 5 reporting responsibilities seriously enough. The penalties and undertakings in today's settled action are designed to ensure Insinet and Inet's future compliance with Rule 11Ac1-5 and the publication of accurate order execution data."
In settling the proceeding, the Commission ordered Instinet and Inet to cease and desist from committing or causing any violations and any future violations of Section 11A of the Exchange Act and Rule 11Ac1-5 thereunder. Instinet and Inet also agreed to pay a penalty of $350,000 each, and agreed to adopt a number of remedial undertakings, including retention of an independent third party to confirm the accuracy of their Dash 5 reports and retention of a third party regulatory auditor to conduct a comprehensive regulatory audit of their compliance programs relating to Rule 11Ac1-5.
Instinet and Inet consented to the entry of the Commission’s order without admitting or denying the Commission’s findings. In determining to accept the Offers, the Commission considered remedial acts promptly undertaken by Instinet and Inet, cooperation afforded the Commission staff and the undertakings.
The Commission acknowledges the assistance of the NASD. The Commission’s Order was filed concurrently with a NASD Acceptance Waiver and Consent (“AWC”) that closely parallels the Commission’s Order and includes a violation of the NASD’s Rule 3010. The AWC also includes a $700,000 penalty to be paid directly to the NASD relating to 11Ac1-5. Instinet and Inet also settled numerous other charges based on violations of NASD rules and paid NASD an additional penalty of $775,000.
