← Broker database 2022-09-30
Lightspeed Financial Services Fined $25,000 for Options Order Coding Errors
According to FINRA, Lightspeed Financial Services Group LLC was fined $25,000 for submitting options orders with inaccurate origin codes and for failing to maintain adequate supervisory systems to ensure origin code accuracy.
The findings revealed that because the firm was not a member of options exchanges, it contracted with and routed customer options orders to third-party broker-dealers that would then route those orders to options exchanges for execution. For each options order routed to third-party broker-dealers, the firm used an origin code indicating, among other things, whether the order originated from a Customer or a Professional Customer. A Professional Customer origin code is required for all option orders submitted by customers who are not broker-dealers and who placed an average of more than 390 options orders per day during any month in a quarter.
Options exchanges use origin codes to prioritize and match orders, and to calculate fees. The firm submitted options orders for two customer accounts with incorrect origin codes to one of the third-party broker-dealers. The options orders incorrectly stated that the orders originated from Customers, even though the customers were in fact Professional Customers at the time of the orders. The inaccurate origin codes were caused by a computer coding error in the firm's order routing system. The firm subsequently fixed the error after FINRA contacted it about the issue.
The firm's supervisory system was inadequate to detect such errors. Although the firm maintained written procedures requiring quarterly reviews to determine whether it was using accurate origin codes on its options orders, these reviews were limited to determining whether customers who qualified as Professional Customers were properly categorized in the firm's systems. Critically, the firm's origin code reviews did not encompass its order routing system or include a review of executed trades to ensure that orders submitted to other broker-dealers for execution contained accurate origin codes. After FINRA contacted the firm about the matter, it revised its relevant supervisory procedures.
While this violation stemmed from a computer coding error rather than intentional misconduct, it highlights the importance of firms having comprehensive testing and review procedures for their automated trading systems. Origin codes serve important functions in the options markets, affecting order handling priority and fee calculations. When orders are incorrectly coded, it can result in improper order handling and incorrect fee assessments, potentially disadvantaging other market participants.
This case also illustrates the importance of firms designing supervisory reviews that address all aspects of their operations, including their technology systems. The firm's quarterly reviews checked whether customers were properly categorized in its systems but failed to verify that this information was correctly transmitted through the order routing system. Effective supervision requires firms to review not just inputs but also outputs to ensure that systems are functioning as intended throughout the entire order lifecycle.