BofA Securities, Inc has agreed to pay a fine of $155,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From at least September 2014 through August 2022, BofAS executed approximately 11,089 off-exchange trade-throughs that it reported to FINRA with an Outbound ISO Exception modifier; however, systemic latency issues prevented the firm from executing the trade-throughs simultaneously.
Instead, they were executed, in limited circumstances, one second or more after ISOs were routed. The intermittent delays were the unintended consequence of the firm’s programming choices for two components of its electronic order management systems that the firm had implemented by September 2014 and May 2016, respectively.
Because these delays were unintentional and not for the purpose of allowing customers to obtain the benefit of better ISO pricing, the Outbound ISO Exception did not apply to these trade-throughs.
Further, from at least January 2015 through July 2023, one of BofAS’s electronic order management systems ingested and processed market data from the national exchanges for the top eight levels of quotations for each NMS stock displayed by each exchange, as part of the firm’s process of taking market snapshots and routing ISOs to protected quotations.
If there was no protected quote among the top eight quotations (because of a prevalence of odd lots in the direct market data feeds), the firm’s electronic order management system did not route an ISO to that exchange. As a result, between June 2022 through August 2022, BofAS executed approximately 42 potential trade-throughs without routing necessary ISOs.
Also, from at least November 2019 through June 2020, a BofAS trading desk manually executed orders outside of the national best bid and offer (NBBO) price for customer facilitations and manually executed certain position transfers outside the NBBO during market hours, resulting in off-exchange trade-throughs of NMS stocks.
In November 2019, BofAS allowed approximately 47 trade-throughs as a result of this manual order execution that did not qualify for a Rule 611(b) exception.
From at least January 2021 through at least April 2021, BofAS routed ISOs with incorrect FIX tag information from the customer regarding an associated clearing firm, which resulted in exchanges rejecting 3,475 ISOs. This resulted in BofAS executing 23 trade-throughs without routing necessary ISOs.
Additionally, BofAS did not conduct regular surveillance of its Rule 611 compliance program to detect the above-referenced issues.
Therefore, from at least September 2014 through at least July 2023, BofAS violated Exchange Act Rule 611(a)(1), (a)(2) and (c), and FINRA Rules 6380A(a)(5)(I) and (J), and 2010.
From at least September 2014 through at least July 2023, BofAS’ supervisory system was not reasonably designed to achieve compliance with Exchange Act Rule 611 because the firm’s supervision process did not include a system or written procedures designed to detect and review potential trade-throughs reported with an Outbound ISO Exception modifier without simultaneously-routed ISOs.
Further, the firm’s WSPs did not include specific guidance for supervisors regarding how to review the validity of Exchange Act Rule 611 exception modifiers applied to trade-throughs.
From at least January 2015 through July 2023, BofAS’s supervisory system and WSPs were not reasonably designed to detect and review trade-throughs that resulted from the firm’s electronic order management system only ingesting and processing market data from the national exchanges for the top eight price levels of quotations for NMS stocks.
From at least November 2019 through June 2020, BofAS’s supervisory system and WSPs were not reasonably designed to detect and review manually-executed trade-throughs by the firm’s trading personnel on one of its trading desks.
From at least January 2021 through at least August 2022, BofAS’s supervisory system and WSPs were not reasonably designed to review ISO rejection messages that national exchanges sent after BofAS routed ISOs and potential resulting trade-throughs that may have occurred as a result of those rejections.
Therefore, from at least September 2014 through at least July 2023, BofAS violated FINRA Rules 3110(a), 3110(b) and 2010, and NASD Rule 3010.
On top of the $155,000 fine, the firm has agreed to a censure.
