According to FINRA, Instinet, LLC was censured, fined $3,800,000, and required to retain an independent consultant to conduct a comprehensive review of its Consolidated Audit Trail (CAT) reporting compliance on August 16, 2023.

FINRA found that the firm failed to timely and accurately report data for tens of billions of order events to the CAT Central Repository. The firm hired a third-party vendor to act as its CAT reporting agent, but failed to maintain adequate technical specifications for its order data that would have allowed the data to be converted into a CAT-reportable format. Moreover, the firm's technical specifications were not widely understood by certain individuals at the firm, which significantly hindered the reporting agent's ability to convert the firm's data into a format that could be used for CAT reporting.

The firm notified FINRA in advance that it anticipated CAT reporting issues when required reporting started in June 2020. As a result, the firm failed to timely report over 5.2 billion equities and options order events to the CAT Central Repository, which constituted approximately 17 percent of the firm's CAT reporting obligation during that period. The firm reported 2.7 billion of the late order events by October 2020, but did not report the remaining late order events until five months later.

Subsequently, the firm experienced additional late reporting issues in connection with at least 26 billion events, which constituted approximately eight percent of the firm's CAT reporting obligation for that period. These late reports were caused by various issues, such as the reporting agent's insufficient capacity to process the firm's order event volume.

The problems translating order data and other configuration issues also caused the firm to report inaccurate data for billions of other order events. The firm identified approximately 180 different types of CAT reporting errors, including inaccurate share quantity, handling instructions, department type codes, customer display instruction flags, and event timestamps.

FINRA also found that the firm failed to establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with CAT reporting rules. The firm did not conduct a supervisory review of the accuracy of data it reported to the CAT Central Repository until the third quarter of 2021. Even then, the firm conducted this review only once per quarter, which was not reasonable given the volume of data that it reports, each quarter averaging billions of CAT events.

The firm did not reasonably respond to red flags of significant problems with the accuracy of its CAT reports. While the firm became aware of reporting issues in 2020, it did not reasonably respond to its CAT reporting errors until FINRA raised concerns in 2021.

The Consolidated Audit Trail is a comprehensive database that captures detailed information about orders and trades in the U.S. securities markets. It is a critical regulatory tool that allows FINRA and the SEC to efficiently and accurately track trading activity, detect market manipulation, reconstruct market events, and protect investors. Accurate and timely CAT reporting is essential to maintaining market integrity and enabling effective regulatory oversight.