The Scratch Pad, the Cross and the Backdated Ticket
At 9:42 a.m. a client telephones: 'Buy 50,000 ABC at 12.50, good for the day.' The salesman writes it on a scratch pad, is interrupted, and at 9:58 enters a sell order for 5,000 ABC at market. It fills immediately at 12.35. He does not call the client. At 10:05 he arranges a cross with another client's buy order at 12.50 to 'reverse' the sale, manually keying both sides without a cross ticket. At 4:30 p.m. the client calls; the market closed at 12.80. The salesman says the order 'didn't get filled.' He then asks a back-office clerk to change the order-entry time on the ticket to 9:40 and to hold the client's confirmations at the office 'until this is sorted out.' The clerk is unsure and asks you, the desk supervisor.
1. Identify each breach and the rule or principle engaged, distinguishing the order-entry error from the later conduct.
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The error itself. A sell of 5,000 at market instead of a buy of 50,000 at 12.50. The firm may execute only as instructed, so the sale was unauthorised. Errors happen; how they are handled determines the regulatory outcome.
The later conduct.
- Failure to notify. The client and the desk should have been told immediately. Concealment turns an operational error into a conduct matter.
- The cross at 12.50. Crossing client orders requires documented instructions or consent, a cross ticket and a fair price. Here it was used to reverse an error and shift the loss-a breach of fair dealing and best execution, and potentially a prohibited wash or cross.
- Backdating the time stamp. Falsification of records, a serious books-and-records and SRC violation.
- Holding confirmations. Confirmations must be delivered promptly; withholding them conceals the error.
- The 4:30 statement. Saying the order 'didn't get filled' was false; the client lost the chance to buy at 12.50 when the stock closed at 12.80.
2. Describe the correct handling from 9:58 onward, including error-trade procedures, the cross and client remediation.
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Immediately. The salesman should have called the client and the supervisor, disclosed the erroneous sale, and sought instructions. No further trades, and no cross, without authorisation.
Error trade. The erroneous sale should be handled through the firm's error account and the exchange's erroneous-trade procedure if a cancellation is available within the prescribed window. Otherwise the firm bears the loss, not the client. The firm must not quietly transfer the loss to another client through the cross.
The buy order. It remained good for the day; the client was entitled to have it worked at P12.50 or better. Since the stock closed at P12.80, her measurable loss is 50,000 × P0.30 = P15,000, plus the cost of covering the unauthorised short sale. Remediation: make the client whole-deliver 50,000 shares at P12.50 or pay the difference.
The other client. Unwind the cross unless that client independently consented and the price was demonstrably fair. Document the basis.
Root causes. No immediate order entry, no scratch-pad control, and no four-eyes check on large orders.
3. What should happen to the records and to the individuals involved, and what must be reported?
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Records. Preserve the scratch pad, order tickets, cross records, call recording and confirmations. Do not alter timestamps; the clerk must refuse and report the request. Place a litigation hold covering all related emails and chats.
Individuals. Remove the salesman from client contact pending investigation. Discipline him for the error, the concealment, the attempted record alteration and the unauthorised cross. Commend the clerk for escalating. Review the supervisor who allowed manual crossings and late order entry.
Reporting. Assess whether the matter is reportable to the PSE and the SEC; the falsification attempt and the client complaint should be escalated to compliance and legal. Notify insurers. Remediate the client and the other side of the cross.
Procedures. Immediate order entry, recorded lines, four-eyes review above a threshold, a documented cross policy, and an absolute prohibition on using client orders to correct errors. Report the outcome to the board or audit committee.