The CFTC got an acknowledgment from JPMorgan of fault in the London Whale case, while the SEC won one high-profile case and lost another, even as it brought Knight Capital to book in its first case under the market access rule and shut down a pyramid scheme that targeted Asian-Americans.
Knight Capital Charged, Fined $12M in Market Access Debacle
Although it’s paying a $12 million fine and taking other actions to settle SEC charges, Knight Capital Americas is not one of the firms admitting to wrongdoing in its own case. The firm was charged with violating the agency’s market access rule in connection with the firm’s Aug. 1, 2012, trading incident that disrupted the markets.
Because of a 2005 action it took with regard to computer code, Knight Capital rendered a function of an automated equity router defective. Even though that function was not intended for use, the firm did not remove it from the router. That meant that in July 2012, when Knight was getting ready to participate in the NYSE’s new Retail Liquidity Program and incorrectly deployed new code in the same router, the problem was compounded.
As a result, certain orders eligible for the NYSE’s program triggered the defective function in Knight Capital’s router, which was then unable to recognize when orders had been filled. During the 45 minutes after the market opened on Aug. 1, Knight Capital’s router rapidly sent more than 4 million orders into the market when attempting to fill just 212 customer orders. The firm traded more than 397 million shares, acquired several billion dollars in unwanted positions, and eventually suffered a loss of more than $460 million.
To add insult to injury, an internal company system generated 97 automated emails to a group of personnel on August 1 that actually identified the problem and the router. While the messages weren’t designated as system alerts, they were triggered by the code deployment failure. Had the employees acted in time, they could have fixed the problem before the opening of the market that day.
Knight Capital was charged with numerous violations of the market access rule, as well as violations of Regulation SHO regarding the proper marking of short sale orders and locating of shares to borrow for short sales.
While the firm neither admitted nor denied the charges, it did agree to the fine, and to retaining an independent consultant to conduct a comprehensive review of the firm’s controls and procedures to ensure compliance with the market access rule.
This was the first enforcement action for the SEC under the market access rule. The rule was adopted in 2010 as Rule 15c3-5.
JPMorgan Admits Wrongdoing in $100 Million CFTC Settlement
The Commodities Futures Trading Commission has wrung an admission from JPMorgan that its employees behaved “recklessly” with derivatives in the London Whale case, even as it collected $100 million from the firm that has constantly been in the headlines of late.
According to David Meister, the CFTC’s head of enforcement, JPMorgan’s traders tried to shore up their position after trades went sour “by dumping a gargantuan, record-setting volume of swaps virtually all at once, recklessly ignoring the obvious dangers to legitimate pricing forces.”
The CTFC had launched a 17-month investigation into whether market manipulation was the result of the Whale’s trades, and pressed for JPMorgan to admit fault. The agency did have to threaten JPMorgan with a lawsuit, but the concession came at last — if not, perhaps, as complete as the CFTC might like.
Joe Evangelisti, a JPMorgan spokesman, said that the bank neither admitted nor denied the legal decision from the CFTC that the bank had violated laws, but instead was admitting to “certain facts set out in the order.”