SEC Charges Electronic Market Centers Instinet, LLC and Inet ATS,
Inc. with Violating Rule 11Ac1-5
FOR IMMEDIATE RELEASE
2005-151
Instinet and Inet Agree to Pay the SEC and the NASD Civil
Penalties Totaling $1.4 Million
Washington, D.C., Oct. 18, 2005 — The Securities and
Exchange Commission today announced a settled enforcement action
against Instinet, LLC and Inet ATS, Inc., two electronic market
centers, for repeated violations of Rule 11Ac1-5 of the Exchange
Act. Rule 11Ac1-5 requires market centers to publish order execution
quality reports (commonly referred to as “Dash 5 reports”) for each
calendar month that provide detailed information about the price and
speed at which market centers execute orders.
As described in the SEC’s order, from June 2001 through May 2004
Instinet and Inet repeatedly published monthly execution reports
containing inaccurate order execution quality information. The
errors in the reports included the misclassification of shares,
miscounting of cancelled shares, improper exclusion of orders,
improper calculations based on erroneous times, improper
categorizing of orders, inaccurate order execution information,
incorrect calculation of spreads and other incorrect calculations.
The order finds that Instinet and Inet relied heavily on
automated systems, yet did not adequately test their systems and did
not respond effectively after NASD staff, SEC staff and third
parties detected repeated errors in the execution reports. The order
notes that Instinet and Inet’s Dash 5 reports served a particularly
important function to all market participants due to the high
percentage of Nasdaq volume handled by Instinet and Inet.
Linda Thomsen, the Director of the SEC’s Division of Enforcement
stated, “The rule requiring monthly publication of order execution
reports is an important means of promoting transparency and
competition between market centers and helps brokers obtain the best
trades for their customers. By failing to publish accurate order
execution quality reports, Instinet and Inet affected the ability of
brokers to identify which market centers provided the best execution
of trades for investors.”
Associate Director Peter Bresnan added, “This is the first SEC
action against any market center for erroneous Dash 5 reports and
should serve as a reminder to all market centers of the importance
of accurate Dash 5 reports. Inet and Instinet simply did not take
their Dash 5 reporting responsibilities seriously enough. The
penalties and undertakings in today's settled action are designed to
ensure Insinet and Inet's future compliance with Rule 11Ac1-5 and
the publication of accurate order execution data."
In settling the proceeding, the Commission ordered Instinet and
Inet to cease and desist from committing or causing any violations
and any future violations of Section 11A of the Exchange Act and
Rule 11Ac1-5 thereunder. Instinet and Inet also agreed to pay a
penalty of $350,000 each, and agreed to adopt a number of remedial
undertakings, including retention of an independent third party to
confirm the accuracy of their Dash 5 reports and retention of a
third party regulatory auditor to conduct a comprehensive regulatory
audit of their compliance programs relating to Rule 11Ac1-5.
Instinet and Inet consented to the entry of the Commission’s
order without admitting or denying the Commission’s findings. In
determining to accept the Offers, the Commission considered remedial
acts promptly undertaken by Instinet and Inet, cooperation afforded
the Commission staff and the undertakings.
The Commission acknowledges the assistance of the NASD. The
Commission’s Order was filed concurrently with a NASD Acceptance
Waiver and Consent (“AWC”) that closely parallels the Commission’s
Order and includes a violation of the NASD’s Rule 3010. The AWC also
includes a $700,000 penalty to be paid directly to the NASD relating
to 11Ac1-5. Instinet and Inet also settled numerous other charges
based on violations of NASD rules and paid NASD an additional
penalty of $775,000.
For more information, contact
Peter H. Bresnan
Associate Director
Division of Enforcement
(202) 551-4597
John Reed Stark
Chief, SEC Office of Internet Enforcement &
Counselor to the Director
(202) 551-4892
Additional materials:
Administrative Proceeding, Release No. 34-52623
