The New York Stock Exchange and several affiliates will pay a $4.5 million penalty to settle civil charges over what U.S. regulators say were repeated failures to comply with exchange rules and federal laws.
The Securities and Exchange Commission said that NYSE engaged in a series of different business practices that either violated rules or were conducted without having a rule in place to permit such activity. At least one pertains specifically to high-frequency trading, the subject of Michael Lewis' controversial book "Flash Boys."
The infractions occurred between 2008 and 2012.
"The SEC regulates exchanges, in part, by reviewing rules proposed by the exchanges that govern exchange activities and allow market participants to decide how and where to place orders," Andrew J. Ceresney, director of the SEC's Division of Enforcement, said in a statement. "We will hold exchanges accountable if they fail to have rules governing their operations or fail to follow them."
At a time when the market is under intense scrutiny over the pervasiveness of high-frequency trading and as volume shrinks and polls show confidence in market integrity is low, the announcement shows that conditions remain unsettled.
The fine itself was seen by market experts as minor, but it could help send an important message.
"Four million is not going to break ICE," Peter Costa, a governor at the NYSE and head of Empire Executions, said of Intercontinental Exchange, the NYSE's parent. "It just doesn't look good in light of everything else going on."
The SEC focused on a series of violations in which the exchange either should have allowed or prohibited certain activities but failed to enforce the rules.
One of the charges that got the most attention from traders involved the NYSE distributing "closing order imbalance" information, or the difference between pending buy and sell orders, to floor traders earlier than regulations allowed.
"The closing order imbalance information was disseminated starting at 2 o'clock and not 3:40 as per exchange rules," said Sal Arnuk, co-founder of Themis Trading and an ardent supporter of trading reform. "Whoever had access to this information had an hour-and-40-minute head start if they wanted to get ahead or perform the quote-unquote closing imbalance trade, which is a giant front-run."
Another of the charges struck at the heart of the high-speed trading debate. The SEC said the NYSE allowed trading firms to locate their trading engines on site but at "disparate contractual terms," despite a rule that mandates such arrangements be made on "a fair and equitable basis."
The SEC also said the NYSE allowed Archipelago Securities to trade out of an error account without rules in place that allowed it. Error accounts set aside money to compensate trades that are executed incorrectly.
While there were no actual fraud allegations, the missteps the exchange took highlight problems self-regulatory organizations like the NYSE are facing in keeping with technological challenges.
"It's just the latest example of self-regulation not working in the securities industry," said Andrew Stoltmann, a Chicago-based securities lawyer who has sued multiple Wall Street firms in insurance fraud cases. "It's a pretty significant black eye for the NYSE, and it's just the latest in the long parade of horribles engaged in by these SROs."
Stoltmann called the fine a "slap on the wrist," while Costa said one result could be that technological changes actually could take longer to implement in the future.
"Going forward, anything new that they present is going to take a lot longer to implement," Costa said. "They're going to be more concerned about whether it's in violation of NYSE rules. ... It will slow innovation."
The exchange operator and an affiliated routing broker are settling the charges without admitting or denying the allegations.
One of the biggest critics of high-frequency traders, Nanex's Eric Hunsader, quickly latched onto the news about the NYSE's co-location problems by tweeting it.