September 14, 2012

The Securities and Exchange Commission announced it fined the New York Stock Exchange and its parent company NYSE Euronext $5 million for a compliance error that gave certain customers an improper head start on trading information.

The securities regulator said this is the first time it's levied this sort of penalty at an exchange. Under Regulation NMS (National Market System), exchanges are banned from sending market data to proprietary customers before it's sent to the public through consolidated feeds. The rule is designed to make sure the public has fair access to current market information about the best displayed prices for stocks and trades that have already been executed.

The regulator said it discovered the disparity in data release times ranged from single-digit milliseconds, to multiple seconds. Its investigation also found that 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 which goes out to the public.

"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, the SEC's director of enforcement. "That is why SEC rules mandate that exchanges give the public fair access to basic market data."

NYSE, which agreed to pay the fine, violated this rule for an extended period of time beginning in 2008, the SEC said. The agency said the compliance failure also stemmed from NYSE not monitoring the speed of the data transmission from the two feeds.

The SEC added NYSE's compliance department wasn't involved in key technology decisions, including the design, implementation, and operation of NYSE's market data systems. Because of this, NYSE missed opportunities to avoid compliance failures, the SEC added.

In settling the fine, NYSE is now required to allow an independent consultant to review its market data delivery systems to make sure they're in compliance.

ABOUT THE AUTHOR
As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced ...