The U.S. Securities and Exchange Commission today announced it has settled an enforcement action against Instinet LLC and Inet ATS Inc., two electronic market centers, for repeated violations of rules requiring market centers to publish order execution quality reports.

The reports, commonly referred to as “Dash 5 reports”, are required for each calendar month that provide detailed information about the price and speed at which market centers execute orders.

The SEC’s order found that, 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.

In settling the proceeding, the commission ordered Instinet and Inet to cease and desist from committing or causing any violations, they also agreed to pay a penalty of US$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.

Instinet and Inet consented to the commission’s order without admitting or denying the commission’s findings.

“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,” said Linda Thomsen, director of the SEC’s Division of Enforcement. “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.”

“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,” added associate director Peter Bresnan. “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 [the rule] and the publication of accurate order execution data.”