[ by Howard Haykin ]

Exchange Allegedly Committed Violations Over Extended Period;  Inadequate Compliance Efforts Failed to Detect.
NYSE Agrees to Settle Charges by Paying First-Ever SEC Financial Penalty Against An Exchange

The SEC on Friday its first ever 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 exchange from providing proprietary customers with any market data that is to be disseminated later on as part of the consolidated feed - that goes out to the public with quote data. 

Getting such data ahead of the public broadcast gives recipients a headstart to digests, strategize then act on such information - before the general public is even aware.  Of course, such a scenario would play out if that information was critical enough to influence the price of a security.  This advantage is qiute similar in nature to "insider information."  Preventing early dissemination ensures that the public has fair and timely access to current market information about the best displayed prices for stocks and trades that have occurred.

Improper Distribution of Market Data.   According to the SEC's order, the NYSE violated this rule over an extended period of time - beginning in 2008 - by sending data through 2 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.

What SEC Officials Had to Say.    Three SEC officials offered their thoughts on the charges: 

Robert Khuzami, SEC Enforcement Director:  "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.  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 Hawke, Chief of the SEC Enforcement's Market Abuse Unit:  "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 Cook, SEC Trading and Markets Director:  "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.'"

HIghlighted Details of the Alleged Rule Violations.    The NYSE is alleged to have violated Rule 603(a) of SEC Regulation NMS.

• Two NYSE proprietary data feeds were at issue.

1.  Open Book Ultra sends real-time data about NYSE's entire order book;  
2.  PDP Quotes contains NYSE's quote for each security.

• Several reasons for the transmission disparities.

1.  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.
2.  A software issue in the internal NYSE system that sent data to the consolidated feed.
3.  Data Release Times ranged from single-digit milliseconds to multiple seconds.

The SEC also faults the NYSE Compliance Department and the exchange itself for the following reasons:

• Compliance wasn't involved in important technology decisions, including the design, implementation, and operation of NYSE's market data systems.
• Having failed to involve Compliance 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.
• These computer files related to NYSE's compliance with Rule 603(a).
• Failure to retain the computer files later complicated NYSE's ability to determine when it experienced delays sending data and to calculate the length of delays when they occurred.
• These deficiencies led to apparent violations of Rule 603(a) of Reg. NMS and record retention provisions of Section 17(a)(1) of the Securities Exchange Act and Rule 17a-1.
• NYSE Euronext, which supplied the personnel responsible for these systems and compliance, caused the violations.

Settlement and Sanctions.   NYSE and NYSE Euronext agreed to a $5 million penalty to settle the SEC charges.  In addition, both NYSE and NYSE Euronext must retain an independent consultant to conduct a comprehensive review of their market data delivery systems to ensure that they comply with Rule 603(a).

SEC Staff Credits.   Investigation by members of the Enforcement Division's Market Abuse Unit:  William Max Hathaway, David Herman, Ainsley Kerr, Robert Cohen;  supervised by chief Daniel Hawke and deputy chief Sanjay Wadhwa.

For further details, go to:  [SEC PR 12-189, 9/14/12]   [Chart of Data Feeds]     [SEC Order Against NYSE].