SEC Raps New York Stock Exchange Over Improper Distribution of Market Data

Jack Humphrey, Regulatory journalist
September 17, 2012 /

The Securities and Exchange Commission has filed over the weekend first-of-its-kind charges against the New York Stock Exchange for compliance failures that gave certain customers an improper head start on trading information.

SEC Regulation NMS (National Market System) prohibits the practice of improperly sending market data to proprietary customers before sending that data to be included in what are known as consolidated feeds, which broadly distribute trade and quote data to the public. This ensures the public has fair access to current market information about the best displayed prices for stocks and trades that have occurred.

According to the SEC’s order against NYSE, the exchange violated this rule over an extended period of time beginning in 2008 by sending data through two of its proprietary feeds before sending data to the consolidated feeds. NYSE’s inadequate compliance efforts failed to monitor the speed of its proprietary feeds compared to its data transmission to the consolidated feeds.

NYSE and its parent company NYSE Euronext agreed to a $5 million penalty and significant undertakings to settle the SEC’s charges. It marks the first-ever SEC financial penalty against 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,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “That is why SEC rules mandate that exchanges give the public fair access to basic market data. Compliance with these rules is especially important given exchanges’ for-profit business interests”

Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, added, “The violations at NYSE may have been technological, but they were not technical. Robust technology governance is just as important to preventing investor harm as any other compliance or supervisory function.”

Robert W. Cook, Director of the SEC’s Division of Trading and Markets, said, “Market data is the lifeblood of the national market system. Our rules require exchanges to distribute information on quotes and trades to the consolidated data processors on terms that are ‘fair and reasonable’ and ‘not unreasonably discriminatory.’”

The SEC’s allegations focused primarily on differentials in the speed of NYSE’s delivery of market data from 2008 through mid-2010. The SEC alleged that, at certain times during that period, NYSE delivered market data through two proprietary data feeds slightly faster than it delivered market data to the consolidated tape. The alleged timing differentials, which were generally at the level of milliseconds, were the result of technology issues that have been resolved.

The transmission disparities had several causes. An internal NYSE system architecture gave one of the data feeds a faster path to customers than the path used to send data to the consolidated feed. Also there was a software issue in the internal NYSE system that sent data to the consolidated feed. The disparities in data release times ranged from single-digit milliseconds to multiple seconds.

NYSE said it has completed systems modifications in 2010 and 2011 that eliminated the technology issues that were the subject of the investigation. NYSE also now preserves the computer files that were the subject of the records-retention charge.

The SEC’s order finds that NYSE’s compliance department was not involved in important technology decisions, including the design, implementation, and operation of NYSE’s market data systems. By not involving the compliance department at critical junctures, NYSE missed opportunities to avoid compliance failures.

NYSE also failed to retain computer files that contained information about its transmission of market data, including the times that NYSE sent data to be included in the consolidated feed. Such failure complicated NYSE’s ability to determine when it experienced delays sending data and calculate the length of delays when they occurred.

NYSE Euronext Chief Executive Officer Duncan L. Niederauer said, “NYSE Euronext is committed to the highest standards of integrity and accountability. The timing differentials stemmed from technology issues, not from intentional wrongdoing by the exchange or any of its personnel.

“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. We will continue to take every responsible measure to ensure that our market operates with the utmost fairness and transparency.”

 

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