Morgan Stanley has agreed to pay nearly $7.9 million to settle claims that it failed to provide investors the best prices on stock trades because its automated trading system delayed the execution of orders and altered transaction prices - to the bank’s financial benefit.
In a statement the US Securities and Exchange Commission (SEC) says Morgan Stanley has agreed to settled fraud charges brought against the bank for its failure to provide best execution to retail investors on 1.2 million over-the-counter (OTC) securities over a three year period from 24th October 2001 through to 8th December 2004.
The SEC says Morgan Stanley embedded undisclosed mark-ups and mark-downs on certain retail OTC orders processed by its automated market-making system and delayed the execution of other retail OTC orders.
Morgan Stanley earned more than $5.9 million in revenue through the undisclosed changes, says the SEC, all of which will be distributed back to 'injured investors' through a distribution plan.
Linda Chatman Thomsen, director of the SEC's division of enforcement, says the duty to provide best execution is a fundamental duty of a broker-dealer: "By recklessly programming its order execution system to receive amounts that should have gone to retail customers, Morgan Stanley violated its duty of best execution and defrauded its customers."
Morgan Stanley did not admit or deny the SEC's findings but will retain an independent compliance consultant to conduct a review and provide a report on its automated retail order handling practices.
In February Morgan Stanley was fined $300,000 by the New York Stock Exchange (Nyse) after its order routing system failed to prevent an erroneous transaction to buy $10.8 billion of stocks instead of $10.8 million as intended, causing considerable market disruption.