A hearing panel of the Investment Industry Regulatory Organization of Canada (IIROC) has approved a settlement agreement, with sanctions, between IIROC staff and Morgan Stanley Canada Limited.
In this agreement, Morgan Stanley Canada admits that it failed to properly review and address the actions of a direct market access client that was engaged in potentially manipulative and deceptive trading activities.
The penalty against Morgan Stanley Canada consists of a $175,000 fine and $15,000 in costs.
Specifically, Morgan Stanley Canada admits that it failed to meet its trading supervision obligations, contrary to Part 7.1 of the Universal Market Integrity Rules (UMIR), by not taking adequate steps to identify and address the trading activity of a client which had executed a significant number of “high closing” trades for a particular security.
An IIROC review found that during a period in 2007, the client entered the high closing price for that security on 81 of 104 trading days, and that during another period in 2008, the client entered the high closing price for that security on 103 of 126 trading days. The firm’s failure to adequately address this potentially manipulative trading was largely the result of an inadequate review of the trading, using an insufficient sample size to test for artificial pricing, and failure to properly document the test results.
Morgan Stanley admitted the allegation that IIROC-regulated firms “must be aware of, and specifically address, the additional risk exposure posed by orders entered by direct market access clients.”
The violations occurred in 2007 and 2008. IIROC began the investigation into Morgan Stanley Canada’s conduct in January 2009. Morgan Stanley Canada is an IIROC-regulated firm.