According to FINRA, Virtu Americas LLC was fined a total of $675,000, with $84,375 payable to FINRA, for failing to reasonably document risk management controls designed to prevent entry of erroneous orders and failing to establish a system to regularly review the effectiveness of those controls.
The firm's documentation failures were comprehensive and concerning. Virtu failed to reasonably document its system of risk management controls to demonstrate that certain controls were reasonably designed. Neither the firm's supervisory procedures nor other documentation adequately described the firm's process for determining thresholds for certain controls or explained the rationale for chosen thresholds. The firm largely did not maintain records of its rationales for such thresholds, making it impossible to verify whether the controls were appropriately calibrated.
A particularly problematic aspect involved the firm's "soft blocks"—controls that paused orders until the firm reviewed the block. Virtu did not have written procedures concerning how reviewers should evaluate soft block alerts or under what circumstances a soft block should be overridden or confirmed. The firm's procedures also did not require reviewers to contemporaneously document their reviews or their rationale for overriding soft blocks and releasing orders into the market. Without such documentation requirements, the risk management controls to which these soft blocks applied were not reasonably designed to prevent erroneous orders.
Additionally, Virtu failed to establish, document, and maintain a system reasonably designed to regularly review the effectiveness of its risk management controls and supervisory procedures. While the firm maintained written procedures to review control thresholds and assess overall operations, these procedures did not reasonably describe what the firm was required to review or how reviews should be conducted. The firm's failure to reasonably document how thresholds were determined or why they were reasonable resulted in an inadequate annual evaluation of individual risk controls and the overall risk management system.
Risk management controls are critical in today's high-speed electronic trading environment. Erroneous orders can cause significant market disruptions, harm investors, and damage market integrity. Proper documentation of these controls and regular effectiveness reviews ensure that controls remain appropriate as market conditions and trading strategies evolve.
Following these findings, Virtu decommissioned the two platforms that housed the problematic controls and remediated the identified issues.
