Broker-Dealer Settles Cboe BZX Charges Over Market Access Control Failures
A broker-dealer settled Cboe BZX Exchange charges for failing to maintain reasonably designed market access risk management controls to prevent the entry of erroneous orders.
According to a letter of consent from the firm, its Order Routing Hub paused a buy-side 100,000-warrant market order on March 7, 2025, under an average daily volume soft block and flagged it to firm personnel for review. Personnel released the order to the market. Once released, the order went to LOD, an internal firm application, which broke it into smaller child orders and priced each one off the National Best Bid and Offer at the moment that child order was created. LOD sent the child orders to other markets through the firm's smart order router. The firm's system was designed so that an order released from a soft-block pause faced no further market access controls in the smart order router. The firm's check on aggressive pricing applied only to securities with Limit Up-Limit Down bands and, since warrants have none, it never engaged. Personnel could have set a completion price by hand, which would have capped how aggressively the system priced child orders and stopped it from sending more, but the tool was not mandatory as of March 7, 2025, and no one used it.
The warrant was quoted at a $0.028 bid and a $0.041 offer when the order arrived. As each child order was entered, the national best offer kept rising, and the following child orders were priced higher still. Executions ran past $4,500 per warrant across the consolidated market, up to roughly an 11,179,412 percent increase, and the firm's Cboe BZX fills reached $4,583.56. At about 16:08, the firm asked the Exchange Trade Desk to break the trades, arguing that everything at or above $0.10 in the 15 seconds starting at 15:48 was clearly erroneous. A street-wide ruling went further and busted all trades at or above $0.04 between 15:47 and 15:51.
Cboe BZX found that the firm's controls were not reasonably designed to prevent the entry of erroneous orders by rejecting orders exceeding appropriate price or size parameters, in violation of Cboe BZX Rule 3.2 ("Violations Prohibited") and Exchange Act Rules 15c3-5(b) and 15c3-5(c)(1)(ii) ("Risk management controls for brokers or dealers with market access").
The firm consented to a censure and a $15,000 fine, in a matter Cboe BZX said relates to a separate matter that was resolved on behalf of Cboe EDGX Exchange for another $15,000. Cboe BZX also noted the firm's November 2021 settlement of $120,000 in fines with the exchange, as well as Cboe BYX Exchange and Cboe EDGX, for similar risk control deficiencies.