The Financial Conduct Authority (FCA) has also imposed a financial penalty of £27,766,200 on CGML following an FCA investigation into related matters. The two regulators’ investigations, conducted in parallel, have resulted in a combined total financial penalty of £61,600,000.
The Firm agreed to resolve this matter, and therefore qualified for a 30% reduction in the amount of the financial penalty. Without this reduction, the amount of the financial penalty imposed by the PRA would have been £48,400,000.
Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, said:
“Firms involved in trading must have effective controls in place in order to manage the risks involved. CGML failed to meet the standards we expect in this area, resulting in today’s fine.”
Throughout the relevant period, CGML received repeated supervisory communication from the PRA on the need to strengthen its trading controls. Notwithstanding this engagement and the remediation work CGML undertook during the relevant period, weaknesses in trading controls persisted.
The PRA expects firms to remediate identified issues promptly and completely. In this case, certain of the issues crystallised into trading incidents, the most significant of these occurring on 2 May 2022. In this instance, an experienced trader incorrectly inputted an order, resulting in US$1.4bn inadvertently being executed on European exchanges. Deficiencies in CGML’s trading controls contributed to this incident, in particular the absence of certain preventative hard blocks and the inappropriate calibration of other controls.
Following the trading incident on 2 May 2022, the PRA has required CGML to strengthen its trading controls. CGML has undertaken remediation work, taking steps to improve and strengthen its trading controls.
Rule breaches
The PRA found that CGML breached the following during the relevant period:
- PRA Fundamental Rule 2 (a firm must conduct its business with due skill, care and diligence);
- PRA Fundamental Rule 5 (a firm must have effective risk strategies and risk management systems);
- PRA Fundamental Rule 6 (a firm must organise and control its affairs responsibly and effectively);
- Rule 2.1(2) Algorithmic Trading of the PRA Rulebook (a firm must have in place effective systems and risk controls, suitable to the business it operates, to ensure that its trading systems are subject to appropriate trading thresholds and limits);
- Rule 2.1(3) Algorithmic Trading of the PRA Rulebook (a firm must have in place effective systems and risk controls, suitable to the business it operates, to prevent the sending of erroneous orders, or the systems otherwise functioning in a way that may create or contribute to a disorderly market);
- Rule 2.2(2) Algorithmic Trading of the PRA Rulebook (a firm must ensure that its systems are fully tested and properly monitored to ensure they meet the requirements of Rule 2.1 Algorithmic Trading of the PRA Rulebook).
Source: PRA
Failures in the firm’s systems and controls led to US$1.4bn of equities being sold in European markets when they should not have been.
On 2 May 2022, a CGML trader had intended to sell a basket of equities to the value of US$58m. The trader made an inputting error while entering the basket in an order management system. This resulted in a basket to the value of US$444bn being created.
CGML controls blocked US$255bn of the basket progressing, but not the remaining US$189bn which was sent to a trading algorithm. The algorithm selected was designed to place portions of this total order to be sold in the market over the rest of the day.
In total US$1.4bn of equities were sold across European exchanges, before the trader cancelled the order. This coincided with a material short-term drop in some European indices which lasted a few minutes.
While parts of CGML’s trading control framework operated as CGML expected, some primary controls were absent or deficient. In particular, there was no hard block that would have rejected this large erroneous basket of equities in its entirety and prevented any of it reaching the market.
Due to poor design, the trader was also able to manually override a pop-up alert, without being required to scroll down and read all the alerts within it. The firm’s real-time monitoring was ineffective, which meant that it was too slow to escalate internal alerts about the erroneous trades.
Steve Smart, joint executive director of enforcement and market oversight at the FCA, said: ‘The FCA expects firms engaged in trading activities, including those using algorithmic trading, to have effective systems and controls in place to stop errors like this occurring.
‘These failings led to over a billion pounds of erroneous orders being executed and risked creating a disorderly market. We expect firms to look at their own controls and ensure that they are appropriate given the speed and complexity of financial markets.’
CGML did not dispute the FCA’s findings and agreed to settle, which means it has qualified for a 30% discount. Without this discount, the amount of financial penalty imposed by the FCA would have been £39,666,000.
On 22 May 2024, the Prudential Regulation Authority (PRA) also imposed a financial penalty of £33,880,000 on CGML following its own investigation into related matters.
Source: FCA
