by Howard Haykin

WHAT WENT WRONG – ORDER ENTRY.    Examiners from FINRA Options Regulation determined that OptionsHouse (or OMSL) had incorrectly calculated the average number of daily orders each month for each account - dividing the number of monthly orders per account by calendar days, rather than by business days. This effectively diluted the counts by including holidays and weekends with zero trades.

As a result, 2 customer accounts under common ownership that together met the ‘Professional Customer’ threshold were misclassified as ‘Customer’. And it was the orders from these accounts - 136,579 contracts – that had an inaccurate origin code of Customer, instead of Professional Customer.

WHAT WENT WRONG – SUPERVISION.    As we know, each violation that FINRA detects must be attributed to inadequate supervision. And in this case, ... while OMSL had in place WSPs that addressed Professional Customer reviews …

• the WSPs failed to explain to the reviewer the proper method of counting orders to determine Professional Customer threshold. Although OMSL had reviewed monthly reports of customer account activity, those reports were not limited to options orders, and thus were not a reasonable tool to count the total number of options orders each month to enable OMSL to assess Professional Customer status for options orders.

• OMSL lacked documentary evidence that it had conducted quarterly Professional Customer reviews prior to 2016.

• prior to 2Q-2016, OMSL failed to verify the accuracy of FIX messages sent to one of its executing brokers to ensure that proper configurations were in place when it routed Professional Customer orders for execution to that executing broker.

This case was reported in FINRA Disciplinary Actions for February 2019.

For further details, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016049700801.