In its first ever direct action against an exchange, the SEC has penalized the New York Stock Exchange $5 million for giving certain market data users an informational advantage.
The Commission asserts NYSE violated Regulation NMS, which was adopted in 2007 to ensure fair access to markets and market data. Specifically, the SEC says proprietary trading customers were given access to two NYSE data feeds ahead of other public customers.
The pattern of jumping ahead of the exchange’s consolidated feed had been in play since 2008, says an SEC order, and NYSE’s compliance efforts were inadequate to catch the error.
“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,” says SEC enforcement director Robert Khuzami. “Compliance with these rules is especially important given exchanges’ for-profit business interests.”
Perception of unfair advantage is particularly troublesome now as markets and wirehouses work to renew public interest in IPOs. If investors feel insiders will be able to move ahead of their orders, they may stay away.
The data feeds in question were Open Book Ultra, which sends real-time data about the exchange’s entire order book; and PDP Quotes, which contains NYSE’s quote for each security. Transmission disparities were caused by an internal system-architecture issue, which gave the feeds a faster path to data users.
Further, an internal software issue affected the rate at which data was sent to the consolidated feed. Time disparities ranged from single-digit milliseconds to multiple seconds.
The SEC’s order notes NYSE’s compliance department had no involvement with key technology decisions, including design and operation of the market data systems. It adds information about transmission times was not retained by NYSE, further complicating the exchange’s ability to determine when delays occurred.
In addition to a $5-million penalty, the SEC’s order requires NYSE to engage in remedial activities, including the hiring of consultants to determine where failings exist in its data feeds and reporting to the Commission on progress to correct those problems.