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- Sarah ten Siethoff is New Associate Director of SEC Investment Management Rulemaking Office
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- Julie Erhardt is SEC's New Acting Chief Risk Officer
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NEWSLETTERS & ALERTS
NYSE to Pay Record $14Mn Penalty for Multiple Violations
In what is said to be the largest SEC fine against a U.S. exchange, the NYSE and 2 affiliated exchanges agreed to pay $14 million to settle SEC charges that they committed a series of infractions, including missteps in dealing with a 3-1/2 hour trading halt in July 2015 and a wild trading session that roiled ETFs funds a month later.
All told, the charges stem from 5 separate investigations and include the first-ever charged violation of Regulation SCI, which was adopted to strengthen the technology infrastructure and integrity of the U.S. securities markets.
Regulation Systems Compliance and Integrity, or Reg SCI, was adopted in November 2014. It applies to “SCI Entities,” a term which includes SROs - including stock and options exchanges, registered clearing agencies, FINRA and the MSRB, ATSs, that trade NMS and non-NMS stocks exceeding specified volume thresholds, disseminators of consolidated market data ("plan processors"), and certain exempt clearing agencies.
Regulation SCI applies primarily to the systems of SCI entities that directly support any one of 6 key securities market functions - trading, clearance and settlement, order routing, market data, market regulation, and market surveillance ("SCI systems").
SEC FINDINGS. The NYSE Exchanges engaged in certain business practices: (i) without having in place required and effective rules; (ii) operated in a manner that did not comply with the exchange rules then in effect; and/or, (iii) operated in a manner that did not comply with the federal securities laws. Specifically:
1. NYSE and American’s 7/8/15 Trading Halt: On this date, these NYSE Exchanges suspended intra-day trading for approximately 3-1/2 hours. During the 47 minutes before the shutdown, NYSE and American experienced escalating connectivity problems between their trading units and the communications “gateways” used by customers, which eventually prevented many customers from being able to consistently access quotations in a majority of the symbols traded on these exchanges. As a result, disseminated quotations were inaccurately marked as “automated,” which constituted negligent misrepresentations of material facts to market participants.
2. Arca’s Use of Price Collars During the 8/24/15 ETF Market Volatility: On this date, U.S. equity and equity-related futures markets experienced unusual volatility, which led to a total of 1,278 Limit-Up/Limit-Down (“LULD”) trading pauses on 5 exchanges – Arca being the primary listing exchange for more than 85% of these exchange traded products (“ETPs”). Many of these repeat halts were caused, at least in part, because Arca applied price collars to reopening auctions that followed LULD pauses and the resultant order imbalances on reopening auctions resolved more slowly than they would have with wider or no reopening collars.
3. Arca’s Erroneous 3/31/15 Trading Halt: That morning, Arca erroneously implemented a market-wide regulatory halt that stopped all trading of 134 Arca-listed securities on all exchanges. Arca lifted the market-wide halt after approximately 20 minutes and resumed its own trading approximately two hours later, but could not publish closing auction order imbalance information.
4. NYSE and American’s Failure to Comply with Reg SCI’s Business Continuity and Disaster Recovery Requirements: For approximately one year after Reg SCI went effective, NYSE and American, lacked the required pols and procedures for “reasonably designed” backup and recovery capabilities.
5. NYSE and American’s Failure to State Material Aspect of Operation of Exchange Order Types: From 2008 to 2015, the interaction between 2 order-types on NYSE and American - pegging orders and non-displayed reserve orders - created the possibility that floor brokers’ pegging orders could in certain circumstances detect the presence (but not the quantity) of non-displayed depth liquidity on the exchanges’ order books. This potential behavior was a material aspect of the operation of the exchanges, but it was not described in any effective rules of NYSE or American during this period, despite a customer complaint that brought the potential behavior to the exchanges’ attention.
[Click here for further details: SEC Order]