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Morgan Stanley and the Great $10 Bil. Trade Debacle

NYSE Regulation fined Morgan Stanley $300,000 for a failure to provide sufficient inhibitors and blocks within its trading system that led to a massive botched trade. According to the regulator, on the morning of September 1, 2004 a Morgan Stanley trader received instructions from a customer to unwind a portion of an existing swap, with an affiliate of the

NYSE Regulation fined Morgan Stanley $300,000 for a failure to provide sufficient inhibitors and blocks within its trading system that led to a massive botched trade.

According to the regulator, on the morning of September 1, 2004 a Morgan Stanley trader received instructions from a customer to unwind a portion of an existing swap, with an affiliate of the firm acting as the counterparty. To hedge its position, the affiliate took a short position in the shares of common stock underlying the basket. The mistake came about when the trader entered an order to buy 100,000 units of the basket to cover a portion of the affiliate's short position, not realizing that the tool used to create the basket had a built in multiplier of 1,000. The result was a basket with a value of $10.8 billion instead of $10.8 million.Over 81 million shares with a market value of $875 million were executed before the firm cancelled the order. NYSE claims that the order cause significant market disruption as the accuracy of the erroneous orders was verified.

NYSE charged Morgan Stanley with fault for the error claiming that the order entry system used by the trader had the capability to set trading limits, which would have prevented, or at least limited the impact of the error. The firm neither utilized the functionality nor told the traders that it existed.

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