September 17, 2012

2012 has been a bad year for exchanges. BATS botched its own IPO, Nasdaq famously botched Facebook’s, and now NYSE has been hit with a fine from the SEC on charges that its trading data gave select clients a split-second start over retail investors.

While the SEC’s $5 million fine against NYSE is paltry compared to the exchange’s revenue, industry experts agree that it is a strong signal that the regulator is watching what exchanges are getting up to. And it’s time for them to get their act together.

“Judging from the fact that it was only a $5m fine, it’s not huge compared to the fines the SEC can give out. It was a slap on the wrist. But it was a sign the SEC is watching this stuff. That’s the message the SEC wants to send to everyone,” says Matt Samelson, principal, Woodbine Associates.

[Read:Will The SEC's Fine Against NYSE Open A Can of Worms? .]

Michael Robinson, a former head of public affairs and communications at the SEC, concurs that the SEC’s fine is a sign that the regulator is highly focused on trade execution and exchanges.

“In 2012, 2013, the speed at which information flows is absolutely front and center for the Commission,” he notes. The SEC’s charges against NYSE showed that the exchange’s compliance department was not involved in important technology decisions, including the design, implementation, and operation of NYSE's market data systems.

Samelson argues that NYSE’s error in providing data to certain clients ahead of others was unintentional. But it shows that exchanges and ATS definitely need to take another look at how their compliance groups are working with technology and operation, and business development groups. “They need to make sure the “I”s are dotted and their “T”s are crossed,” he says.

Former SEC executive Robinson says exchanges need to spend more on technology to avoid the types of glaring errors and infamous technical glitches that we’ve witnessed over the past few months.

“One of the issues here, is, if you’re Nasdaq or any of the other market participants, the decisions you make now about spending in 2013/14 are going to be driven by [the SEC’s action against NYSE,] notes Robinson, who is now Executive VP and acting chair, public affairs practice at Levick. Exchanges need to spend more not just on servers but also on assessing their technology to make sure it’s working properly, he argues.

“Exchanges will have to spend more money on testing systems, as well as regulation and compliance to make sure they’re operating accurately. You can build something in September 2012 that is cutting edge, but will be obsolete in 10 months,” Robinson says.

“It’s not enough to build it, you need to test it and keep your eye on the ball going forward.”

ABOUT THE AUTHOR
Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in ...