Spencer Platt/Getty ImagesTraders on the floor of the New York Stock Exchange on Thursday.
The New York Stock Exchange on Friday settled accusations that its trading data gave select clients a split second advantage over retail investors, the latest federal action against a major exchange.
In a civil enforcement action, the Securities and Exchange accused the Big Board of “compliance failures” that allowed certain customers to receive stock data before the broader public. The improper actions, which began in 2008, ran afoul of safeguards set up to promote fairness in a system known for favoring elite investors.
The S.E.C. forced the Big Board to adopt a battery of internal controls and pay a $5 million penalty. While the fine is a token sum for the country’s biggest and most prominent trading platform, the action represents the agency’s first ever fine of an exchange.
“Improper early access to market data, even measured in milliseconds, can in today’s markets be a real and substantial advantage that disproportionately disadvantages retail and long-term investors,” Robert Khuzami, the agency’s enforcement director, said in a statement. “That is why S.E.C. rules mandate that exchanges give the public fair access to basic market data.”
In a statement, the N.Y.S.E. played down the significance of the action. The S.E.C., the exchange noted, did not unearth intentional wrongdoing or evidence that the problems harmed individual investors. Instead, the exchange blamed “technology issues” for the lapses, problems that N.Y.S.E. says it has since fixed.
“NYSE Euronext is pleased to have this matter resolved, and believes that the settlement is in the best interest of its shareowners, clients and employees,” Duncan L. Niederauer, the company’s chief executive, said in the statement. “We will continue to take every responsible measure to ensure that our market operates with the utmost fairness and transparency.”
The action against the Big Board is part of a wider federal crackdown on the nation’s biggest exchanges. The S.E.C., which has penalized the Direct Edge exchange for having “weak internal controls,” is also pursuing the Chicago Board Options Exchange for not properly policing the markets.
The sprawling investigation has grown in the wake of the so-called flash crash on May 6, 2010, when the Dow Jones industrial average plummeted more than 700 points in minutes before quickly recovering. Federal authorities and Congressional committees have centered their scrutiny on technology breakdowns and the ever-changing world of high-speed trading.
“Today’s action by the S.E.C. affirms what many have believed for years: that our U.S. capital markets are threatened by those with the resources and access to get split second advantages over the rest of us,” Senator Carl Levin, a Michigan Democrat whose Permanent Subcommittee on Investigations has examined high-speed trading, said in a statement.
In its most prominent case, the S.E.C. is investigating Nasdaq for Facebook’s botched public offering in May. BATS Global Markets has also acknowledged receiving a request from the agency, which is examining whether any collaboration between BATS and high-frequency trading firms could hinder competition. The agency is also examining BATS’ own aborted public offering this year.
The companies often blame their woes on technological glitches. But in the N.Y.S.E. case, regulators paint a more pervasive problem, tracing the improper acts to multiple technology mishaps and compliance woes.
In highlighting disparities in the distribution of stock data, the S.E.C. pointed to an “internal N.Y.S.E. system” and a “software issue.” The problems, according to regulators, caused the exchange to send stock pricing and other data to certain customers milliseconds – or even multiple seconds – before it released information more widely. The breakdown, which first came to light in the aftermath of the flash crash, ranged from 2008 to 2010.
Despite the scope of the issues, the S.E.C. suggested they were preventable.
The exchange, regulators say, failed to keep computer files that detailed the timing of data feeds. N.Y.S.E.’s compliance department also steered clear of the exchange’s major technology decisions, according to the S.E.C. The compliance staff, for example, did not help design or implement the exchange’s market data systems. Under the terms of the settlement, N.Y.S.E. must hire an independent consultant to study the exchange’s “market data delivery systems.”
“The violations at N.Y.S.E. may have been technological, but they were not technical,” said Daniel M. Hawke, the head of the agency’s Market Abuse Unit, which is leading the investigations into various exchanges. “Robust technology governance is just as important to preventing investor harm as any other compliance or supervisory function.”
Article source: http://dealbook.nytimes.com/2012/09/14/n-y-s-e-settles-regulatory-action-on-trading-data/?partner=rss&emc=rss