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NASDAQ PHLX LLCLETTER OF ACCEPTANCE, WAIVER AND CONSENT
NO. 2015048329302
TO:Nasdaq PHLX LLC
c/o Department of Enforcement
Financial Industry Regulatory Authority (“FINRA”)

RE:

Morgan Stanley & Co. LLC, RespondentBroker-Dealer
CRD No. 8209

Pursuant to Rule 9216 of Nasdaq PHLX LLC (“Phlx”) Code of Procedure, Morgan Stanley &Co. LLC (“MSCO” or the “firm”) submits this Letter of Acceptance, Waiver and Consent(“AWC”) for the purpose of proposing a settlement of the alleged rule violations described
below. This AWC is submitted on the condition that, if accepted, Phlx will not bring any future
actions against the Respondent alleging violations based on the same factual findings describedherein.
I.
ACCEPTANCE AND CONSENT
A.

Respondent hereby accepts and consents, without admitting or denying the findings, andsolely for the purposes of this proceeding and any other proceeding brought by or on
behalf of Phlx, or to which Phlx is a party, prior to a hearing and without an adjudicationof any issue of law or fact, to the entry of the following findings by Phlx:
BACKGROUNDMSCO became registered with Phlx on June 3, 1970, and with FINRA on June 5, 1970,
and its registrations remain in effect. The firm provides services to corporate and brokerdealer clients and institutional investors, and has branches in all 50 states, the District ofColumbia, Puerto Rico, and the Virgin Islands. It currently has approximately 3,999
registered representatives. MSCO has no relevant disciplinary history.
SUMMARY
On behalf of the Exchange, the Options Regulation and Trading and Financial
Compliance Examinations sections of FINRA’s Department of Market Regulation (the“staff”) reviewed MSCO’s compliance with Phlx rules in connection with MSCO’s useof Professional Customer origin codes on options orders. These reviews led to findingsthat the firm had failed to correctly mark certain orders with the Professional Customer
origin code from January 1, 2011 through April 27, 2017, in violation of Phlx Rules 707,

STAR No. 20150483293 (AH)        708, 760, 785(c), 1014(g)(i)(A),1 1053 and 1063(e)(i); and Section 17(a) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 17a-3 thereunder.
In addition, in violation of Phlx Rule 748, and subsequently Phlx General Rule 9, Section
20,2 MSCO’s supervisory system and written supervisory procedures (“WSPs”)
applicable to the assignment of accurate origin codes to options orders during the period
between January 1, 2011 and February 19, 2020, were not reasonably designed to achievecompliance with the recordkeeping provisions of the federal securities laws and the rulesof Phlx that govern the accuracy of options order origin codes.
FACTS AND VIOLATIVE CONDUCT
Origin Code Violations
1. Phlx rules, policies, and practices require that when entering an order, a member mustrecord the correct account type or origin code in each order record and as an orderdetail when entering orders into Phlx’s systems to indicate the kind of account for
which the order will be executed and cleared. Each options market has its own origin
codes, but at a minimum, all have codes to indicate that an order is being executed fora customer, a firm, or a market maker. Origin codes are important because they arepart of the audit trail data for every transaction. They also affect the accuracy of afirm’s books and records and Phlx’s audit trail, which may impact the priority oforder execution and Phlx’s surveillance for compliance with Phlx rules and federal
securities laws. Finally, they are important for clearing purposes when trades arereported to the Options Clearing Corporation (“OCC”).
2. Pursuant to Phlx Rule 785, a member must submit certain order information in a form
prescribed by Phlx on an order record for each customer. Among other things, theorigin code determines the order’s priority and is part of the audit trail for everytransaction.
3. Phlx operates a customer priority model in which Phlx Rule 1014(g)(i)(A) establishes
two account categories: a controlled account, which is any account controlled by orunder common control with a broker-dealer, and a customer account, which
comprises all other accounts. Rule 1014(g)(i)(A) requires controlled accounts toyield priority to customer orders when competing at the same price.
4. From January 1, 2011 through April 27, 2017, MSCO submitted an inaccurate origincode of Customer rather than Professional Customer on options orders for four of its
customers. These orders were routed to and executed on thirteen exchanges, resulting
1Phlx Rule 1014(g)(i) was superseded and replaced by Nasdaq Phlx Rule Options 8, Section 25 as of April 16,
2019.
2
As per revisions to the Phlx rulebook, Phlx Rule 748(g) became Phlx Rule 748(h) as of November 23, 2012. Inaddition, Phlx Rule 748(h) was superseded and replaced by Phlx General Rule 9, Section 20(h) as of February 3,
2020. The Firm therefore violated Phlx Rule 748(g) from January 1, 2011 through November 22, 2012, Phlx Rule748(h) from November 23, 2012 through February 2, 2020, and Phlx General Rule 9, Section 20(h) from February
3, 2020 through February 19, 2020.

2        in executions of 53,032 orders with a volume of 1,239,368 contracts, of which 90,914
contracts, or approximately 7.34 percent, traded on Phlx. The majority of the orders
at issue were mismarked due to configuration issues in various of the firm’s ordermanagement systems, while other orders were mismarked due to coding errors related
to the firm’s use of the Financial Information eXchange (“FIX”) messaging protocol.
5. Each instance in which the firm executed an order with an incorrect origin code
potentially had adverse consequences, such as inadvertently impacting the priority oforder execution, creating inaccurate records of purchases and sales, creating an
inaccurate audit trail, reporting trades to OCC with inaccurate trade details, andimpeding Phlx’s ability to surveil for and detect potential violations of its rules andfederal securities laws.
6. By marking orders with incorrect origin codes, MSCO violated the following:a. Section 17(a) of the Exchange Act and Rule 17a-3(a)(6) thereunder, requiring a
broker-dealer to make and keep a memorandum of each purchase and sale for theaccount of the broker-dealer (a record that must be accurate), and Phlx Rule 760,
which requires every member to make and keep records as prescribed by Phlx andby the Exchange Act and rules thereunder;
b. Phlx Rules 785(c) and 1014(g)(i)(A), which require members to submit trade
information in such form as may be prescribed by Phlx so that option orders ofcontrolled accounts yield priority to customer orders when competing at the sameprice;c. Phlx Rule 707, which prohibits a member firm from engaging in conductinconsistent with just and equitable principles of trade;d. Phlx Rule 708, which prohibits a member firm from engaging in acts detrimental
to the interest or welfare of Phlx;
e. Phlx Rule 1053, which requires each member organization to supply trade
information to Phlx in a form prescribed by Phlx covering each Phlx optionstransaction for which the member organization is responsible; andf. Phlx Rule 1063(e)(i), which requires each member organization’s floor broker tocontemporaneously upon receipt of an order and prior to the representation ofsuch an order in the trading crowd record all options orders represented by thefloor broker onto the electronic Options Floor Based Management System certain
specified information, including the origin code, referred to in Rule 1063(e)(i) as
the order type.

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Supervisory Violations
7. Phlx Rule 748, and subsequently Phlx General Rule 9, Section 20, require a member
organization to establish, maintain and enforce WSPs, and a system of supervision forapplying such procedures, that are reasonably designed to supervise the types ofbusinesses and activities in which they and their associated persons engage in order toachieve compliance with, and to prevent and detect violations of, applicable securities
laws and regulations, including the By-Laws and Rules of Phlx.3
8. From January 1, 2011 through February 19, 2020, the firm’s WSPs mandated that theproper origin code be affixed to all options orders at order entry and indicate thecapacity in which such orders are entered. However, the firm’s WSPs and supervisorysystem applicability to the assignment of options origin codes were not reasonably
designed. Specifically:a. the firm’s order management systems had not been properly coded to ensurethat “high-touch”4 Professional Customer orders were tagged with the correct
Professional Customer origin code;b. its supervisory system did not include any post-order entry follow-up or review
of high-touch Professional Customer options orders entered in the Firm’s ordermanagement systems to determine whether such orders were tagged with thecorrect Professional Customer origin code; andc. the firm did not provide its Derivatives Sales Desk personnel with sufficient
tools or guidance to reasonably ensure that high-touch Professional Customer
options orders were marked with the Professional Customer origin code, orsupervise those personnel to determine whether high-touch Professional
Customer options orders were properly marked.
9. From January 1, 2011 through February 19, 2020, the firm’s WSPs and supervisorysystem required daily and quarterly Professional Customer reviews to be conducted by
the firm’s Regulatory Control Group (the “Daily RCG Review” and “Quarterly RCGReview”, respectively) in order to determine whether options orders were marked withthe correct origin code. However, these reviews were not reasonably designed.
Because the Daily RCG Review was established to identify discrepancies between theexecution and clearing capacities of options orders, it could not detect instances inwhich Professional Customer orders were mismarked and executed as Customer orders
and then reported to the OCC in the “Customer” range. Furthermore, although theQuarterly RCG Review identified whether relevant client accounts were properlyclassified as Professional Customer accounts, it did not determine whether options
orders for Professional Customer accounts were ultimately tagged with the correct3

As set forth in Footnote 2, Phlx Rule 748 was superseded and replaced by Phlx General Rule 9, Section 20 as ofFebruary 3, 2020.
4“High-touch” orders are options orders that are manually entered by sales traders on the firm’s Derivatives Sales
Desk on behalf of the firm’s customers.

4        origin code.
10. By failing to establish a supervisory system and WSPs reasonably designed to achievecompliance with Exchange Act and Phlx rules applicable to the assignment of accurate
options order origin codes, MSCO violated Phlx Rule 748(g) from January 1, 2011
through November 22, 2012, Phlx Rule 748(h) from November 23, 2012 throughFebruary 2, 2020, and Phlx General Rule 9, Section 20(h) from February 3, 2020
through February 19, 2020.
B.

Respondent also consents to the imposition of the following sanctions:
1. a censure; and2. a fine of $650,000, of which $48,425 shall be payable to Phlx, and the balance of
which shall be paid to NYSE American LLC, NYSE Arca, Inc., Nasdaq ISE,LLC, Miami International Securities Exchange, LLC, and Cboe Exchange, Inc. 5
Acceptance of this AWC is conditioned upon acceptance of similar settlementagreements in related matters between Respondent and each of these self-regulatoryorganizations.
Respondent agrees to pay the monetary sanction upon notice that this AWC has been
accepted and that such payment is due and payable. Respondent has submitted aPayment Information form showing the method by which it proposes to pay the fine
imposed.
Respondent specifically and voluntarily waives any right to claim that it is unable to pay,
now or at any time hereafter, the monetary sanction imposed in this matter.
The sanctions imposed herein shall be effective on a date set by FINRA staff.
II.
WAIVER OF PROCEDURAL RIGHTS

Respondent specifically and voluntarily waives the following rights granted under Phlx’s Codeof Procedure:A.

To have a Formal Complaint issued specifying the allegations against the firm;B.

To be notified of the Formal Complaint and have the opportunity to answer theallegations in writing;

5Although, as set forth in paragraph 4, the violations occurred on thirteen exchanges, the fine is allocated among sixexchanges.

5        C.

To defend against the allegations in a disciplinary hearing before a hearing panel,to have a written record of the hearing made and to have a written decision issued;
andD.

To appeal any such decision to the Exchange Review Council and then to the U.S.
Securities and Exchange Commission and a U.S. Court of Appeals.

Further, Respondent specifically and voluntarily waives any right to claim bias or prejudgmentof the Chief Regulatory Officer, the Exchange Review Council, or any member of the Exchange
Review Council, in connection with such person’s or body’s participation in discussions
regarding the terms and conditions of this AWC, or other consideration of this AWC, including
acceptance or rejection of this AWC.
Respondent further specifically and voluntarily waives any right to claim that a person violated
the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144,
in connection with such person’s or body’s participation in discussions regarding the terms andconditions of this AWC, or other consideration of this AWC, including its acceptance orrejection.
III.
OTHER MATTERS
Respondent understands that:A.

Submission of this AWC is voluntary and will not resolve this matter unless anduntil it has been reviewed and accepted by FINRA’s Department of Enforcement
and the Exchange Review Council, the Review Subcommittee, or the Office ofDisciplinary Affairs (“ODA”), pursuant to Phlx Rule 9216;

B.

If this AWC is not accepted, its submission will not be used as evidence to prove
any of the allegations against the Respondent; andC.

If accepted:
1.

This AWC will become part of the Respondent’s permanent disciplinary
record and may be considered in any future actions brought by Phlx or any
other regulator against the Respondent;

2.

Phlx may release this AWC or make a public announcement concerning
this agreement and the subject matter thereof in accordance with Phlx
Rule 8310 and IM-8310-3; and3.

Respondent may not take any action or make or permit to be made any
public statement, including in regulatory filings or otherwise, denying,directly or indirectly, any finding in this AWC or create the impression

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that the AWC is without factual basis. Respondent may not take any
position in any proceeding brought by or on behalf of Phlx, or to whichPhlx is a party, that is inconsistent with any part of this AWC. Nothing inthis provision affects the Respondent’s right to take legal or factual
positions in litigation or other legal proceedings in which Phlx is not aparty.
D.

Respondent may attach a Corrective Action Statement to this AWC that is astatement of demonstrable corrective steps taken to prevent future misconduct.
Respondent understands that it may not deny the charges or make any statementthat is inconsistent with the AWC in this Statement. This Statement does notconstitute factual or legal findings by Phlx, nor does it reflect the views of Phlx orits staff.

The undersigned, on behalf of the firm, certifies that a person duly authorized to act on its behalf
has read and understands all of the provisions of this AWC and has been given a full opportunity
to ask questions about it; that the firm has agreed to the AWC’s provisions voluntarily; and that
no offer, threat, inducement, or promise of any kind, other than the terms set forth herein and theprospect of avoiding the issuance of a Complaint, has been made to induce the firm to submit it.

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Accepted by Phlx:_________________
Date__________________________________
Andy Hubbartt
Principal CounselDepartment of Enforcement
Signed on behalf of Phlx, by delegatedauthority from the Director of ODA8        

PAYMENT INFORMATION
The fine amount will be reflected on an upcoming invoice directed to your firm’s chiefcompliance officer. Please DO NOT submit payment at this time. If you need to arrange for analternative method of payment, please contact Nasdaq at (301) 978-8310.

Respectfully submitted,Respondent
Morgan Stanley & Co. LLC
Date:

By:

Name:

Title:STAR No. 20150483293 (AH)