According to FINRA, Electronic Transaction Clearing, Inc. was censured and fined $70,000 for failing to establish and maintain supervisory systems to comply with Regulation SHO's order marking requirements.
Rule 200(g) of Regulation SHO requires firms to properly mark sell orders as "long," "short," or "short exempt." These markings are critical for regulatory oversight of short selling activity and help prevent abusive trading practices. However, Electronic Transaction Clearing had no supervisory system designed to verify it was correctly marking sell orders, and its written procedures didn't describe any process for reviewing or testing orders for compliance.
The firm later implemented a sampling system and updated its procedures with detailed review steps, but only after FINRA identified the deficiency. This reactive approach to compliance is problematic because it means violations may have occurred before the issue was discovered.
Additionally, the firm failed to reasonably monitor orders from customers using more than one Market Participant Identifier (MPID). When a customer trades through multiple MPIDs, their positions must be aggregated to determine the correct order marking. Without proper monitoring, orders could be incorrectly marked as "long" when the customer's aggregate position was actually short, potentially allowing improper trading activity.
Regulation SHO serves important market integrity functions, helping prevent naked short selling and other manipulative practices. When firms fail to maintain systems ensuring compliance with these rules, it can undermine market fairness and efficiency.
For investors, this case demonstrates that even operational and compliance matters that seem technical can have real implications for market integrity. While individual investors may not directly see the impact of order marking violations, these failures can contribute to market manipulation and unfair trading advantages. Investors should be aware that regulatory compliance extends beyond obvious customer-facing issues to include critical back-office and operational systems.
