J.P. Morgan Securities Fine - $200m - Data Completeness - CFTC - May 2024

Quick facts

• J.P. Morgan Securities Fine Amount: $200m

• Date: 23 May 2024

• Violation Period: 2014 - 2023

• Primary Violation: Data Completeness

J.P. Morgan Fine Overview

The CFTC has issued an order against J.P. Morgan Securities for data completeness  surveillance failures over a 9 year period from 2014 to 2023.

They failed to properly configure its surveillance systems, resulting in billions of order messages not being surveilled on multiple trading venues.

Details of the J.P. Morgan Fine

Timeline and Discovery

• Issues date back to at least 2014.

• They were discovered during a new exchange onboarding process in June 2021.

• Full remediation was completed by 2023.
  
  

Scope

• The issues affected at least 30 global trading venues, primarily affecting sponsored access trading from three major algorithmic trading firms.

• Several venues were under CFTC jurisdiction.

• A U.S. designated contract market (not disclosed in the enforcement order, referred to as "DCM-1") was the most impacted venue. 
  
  

Scale

• Billions of order messages were not surveilled.

• Over 99% of order messages on DCM-1 were not captured.
  
  

System and Process Failures

• J.P. Morgan failed to properly configure data feeds into its surveillance tools and did not test direct-from-exchange data feeds.

• The firm erroneously assumed exchange data was a "golden source."

• J.P. Morgan failed to apply exchange data feeds to its quarterly reconciliation process.
  
  

Context

• In 2020, J.P. Morgan settled previous charges related to spoofing and manipulation.

• During that settlement, J.P. Morgan had represented it was "revising its trade surveillance programs."

• The firm claimed systems surveilled trades on "over 40 futures and options exchanges".

• The surveillance gaps were not known or disclosed during the 2020 settlement.

Root Causes

• The configuration issues prevented the ingestion of direct-from-exchange order and trade data.

• This started when J.P. Morgan began using a third-party surveillance system (Nasdaq SMARTS) in 2014.

• J.P. Morgan failed to implement proper testing and verification procedures.

• This resulted in inadequate controls for maintaining complete surveillance coverage.

Select Quotes

• On the scope of the surveillance failure: "J.P. Morgan failed to ingest into its surveillance systems—and thus failed to surveil—billions of order messages from 2014 through 2021. Accordingly, J.P. Morgan failed to surveil more than 99% of order messages on DCM-1 during that time period".

• On the system configuration issue: "The surveillance gaps that occurred with respect to J.P. Morgan and its clients' trading on the trading venues, including DCM-1, stemmed from a failure to ingest data into J.P. Morgan's surveillance systems. These surveillance gaps resulted from J.P. Morgan's failure to configure certain data feeds to ensure that complete trade and order data were being ingested by J.P. Morgan's surveillance tools."

• On the reconciliation process failure: "While J.P. Morgan had in place a quarterly reconciliation process designed to ensure the completeness of some order and trade data ingested into certain surveillance systems, J.P. Morgan did not subject direct-from-exchange data feeds to that reconciliation process, based on an erroneous assumption that data directly from an exchange was from a 'golden source' and thus did not need to be tested."

J.P. Morgan Fines and Penalties

• Civil Monetary Penalty: $200 million, with a potential $100 million offset from related settlements:

  • Up to $50 million offset from OCC settlement (March 14, 2024).

  • Up to $50 million offset from Federal Reserve settlement (March 8, 2024).

Sources

• CFTC - Order

• CFTC - Press Release