NYSE Euronext (NYX), the biggest U.S. exchange operator, will pay $5 million to resolve regulatory claims that the New York Stock Exchange violated rules by giving certain customers a head start on trading information.
The NYSE sent data through two proprietary feeds to paying customers before relaying the information to the so-called consolidated feed, which distributes trade and quote data to the public, the Securities and Exchange Commission said in an administrative order filed Sept. 14. Investigators are conducting similar reviews of other exchanges, according to two people with knowledge of the probes, which aren't public.
The SEC penalty, the first of its kind against an exchange, comes as lawmakers and regulators question whether retail investors are being harmed in an increasingly fragmented marketplace of high-speed, computer-driven trading. NYSE's practice was discovered in the SEC's investigation of the so- called flash crash of May 2010, in which $862 billion was erased from equity prices in 20 minutes before recovering.
The practice violated Regulation NMS, which obliges exchanges to give the public fair access to market information, the SEC said. The NYSE violated SEC rules "over an extended period of time" starting in 2008 by failing to monitor the speed of its proprietary feeds compared to the consolidated feed, the agency said in its order.
The violations stemmed from technology issues in NYSE's Open Book Ultra and PDP Quotes proprietary data feeds, according to the SEC.
"The timing differentials stemmed from technology issues, not from intentional wrongdoing by the exchange or any of its personnel," NYSE Euronext Chief Executive Officer Duncan Niederauer said in a statement. The company, which operates exchanges in the U.S. and Europe, will "ensure that our market operates with the utmost fairness and transparency," he said.
While the SEC has previously faulted exchanges for misconduct by employees, the Sept. 14 action marks the first time the agency has fined an exchange for having faulty systems that violated securities rules.
The SEC action follows the Nasdaq Stock Market's flubbed initial public offering of Facebook Inc. (FB) in May and Bats Global Markets Inc.'s withdrawal of its IPO after a technology glitch in March, both of which undercut investor confidence that exchanges are in command of their technology systems. The agency is considering a new rule to mandate that exchanges and possibly brokers employ adequate automated systems to operate their markets and related platforms, according to Dave Shillman, an executive in the SEC's trading and markets division.
The SEC penalty, the first of its kind against an exchange, comes as lawmakers and regulators question whether retail investors are being harmed in an increasingly fragmented marketplace of high-speed, computer-driven trading. The NYSE's practice was discovered in the SEC's investigation of the so- called flash crash of May 2010, in which $862 billion was erased from equity prices in 20 minutes before recovering.