The New York Stock Exchange has settled accusations from the SEC that its trading data gave certain clients a head start on stock data over retail investors. It was the first time the SEC slapped a fine on an exchange.
The SEC, which fined the exchange $5 million, claimed the improper actions at NYSE began in 2008, when it began sending data through two of its proprietary feeds before sending market data to the consolidated feeds.
The regulator charged that NYSE failed to monitor the speed of its proprietary feeds compared to its data transmission to the consolidated tape, which is received by retail investors.
Importantly, given the microsecond speed of today’s electronic market, the SEC noted that “the disparities in data release times ranged from single-digit milliseconds to multiple seconds.”
The two NYSE proprietary data feeds at issue were Open Book Ultra — which sends real-time data about NYSE's entire order book — and PDP Quotes, which contains NYSE's quote for each security.
NYSE denied any deliberate wrongdoing. Instead, the exchange stated that “the alleged timing differentials, which were generally at the level of milliseconds, were the result of technology issues that have been resolved.”
Technology error or not, the SEC put the blame squarely on NYSE for several serious failures.
“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,” the regulator said.
“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. […] NYSE's failure to retain them complicated its ability to determine when it experienced delays sending data and calculate the length of delays when they occurred,” the SEC noted in a statement.
Regardless of whether NYSE’s ‘error’ was deliberate or not, it is a big deal, notes Joe Saluzzi, partner at Themis Trading. “This is one of the murky areas of market structure when it comes to what’s inside data feeds,” he said.
NYSE claims the mismatch in the timing of delivery of market data was the “result of technology issues that have been resolved.”
Saluzzi says NYSE’s choice of the word ‘technology’ is important. “This was no technical glitch,” he says. “The technology was established. No one had an issue with it. No one was looking.”
Whether the error was intentional or not, the point is that NYSE was giving information first to a subset of people, Saluzzi notes. “It doesn’t matter if it was intentional or not. It happened for a long time.”
So could the SEC's charge against NYSE open a whole can of worms?
According to Saluzzi, that is a strong possibility. “We don’t know what has been going on at the other 12 exchanges – two of which are owned by NYSE” , Saluzzi notes.
The potential benefits for an exchange that is delivering market data to some clients faster than others are clear: “If an exchange gives certain clients a head start it can increase that exchange’s market share since by getting information to people faster it’s encouraging them to trade more. And the end user can make a lot of money,” Saluzzi says.
He adds: “These feeds are for sale. NYSE’s data feed would be better than others. If you look at annual reports, the biggest growth area is in data sales.”
