The New York Stock Exchange said on Monday it is in talks with U.S. securities regulators to settle allegations the exchange violated rules intended to promote fair competition.
The Securities and Exchange Commission’s investigation centers on a regulation that prohibits an exchange from sending out data on a private feed to certain clients more quickly than on public data feeds.
NYSE Euronext, which operates the NYSE, confirmed the negotiations after Reuters reported on the settlement talks earlier on Monday, citing people familiar with the matter. Those people spoke anonymously because the probe had not been made public.
“NYSE Euronext has been working with the SEC to resolve alleged violations of Rule 603(a) of Regulation NMS, a technical rule governing the timing of delivery of certain exchange market data,” the company confirmed in a statement. “The company does not expect that any settlement of this matter will be material.”
The case stems from an alleged violation of the regulation that governs the dissemination of market information, known as Regulation NMS, or national market system.
It is unclear whether the SEC will ask NYSE to pay a fine to resolve the allegations. The case is likely a few months away from being completed, people familiar with the matter told Reuters.
The settlement talks come during a period of renewed SEC focus on the vulnerability of the markets to super-fast computer-driven trading and fears that some market participants are getting an unfair advantage.
“The SEC is becoming more aware of the effects of different speed and differential speed on market participants, and I think market participants are more aware of the effects of getting information at different times, and probably complaining to the SEC when they think there is a disadvantage,” said Michael Goldstein, a finance professor at Babson College.
The SEC is just beginning to grapple with the fallout from last week’s software glitch that caused a $440 million trading loss for Knight Capital as well as the recent technology debacle at the Nasdaq OMX in handling the initial public offering for social networking giant Facebook.
The series of technological mishaps has only served to weaken investor confidence, which took a big hit in the wake of the financial crisis. Additionally, the Facebook and Knight fiascos have led to questions about whether regulators have the firepower and expertise to keep up with market changes and catch potential problems.
The SEC ramped up its focus on market structure issues like the one at the heart of the NYSE probe in the wake of the May 6, 2010, “flash crash” in which the Dow Jones industrial average plunged about 700 points in several minutes.
According to another person familiar with the matter, the private data feeds at issue in the NYSE probe gave certain only clients an advantage that amounted to milliseconds. The person also said the SEC’s investigation of NYSE did not stem from events in the flash crash.
Critics say, however, that in the world of high-speed trading, milliseconds can be enough to give some investors an unfair edge.
The SEC started exploring policy changes to address technological advances in the markets even before the flash crash, such as whether more rules are needed for high-frequency trading.
But after the event roiled markets, the agency moved fairly quickly to adopt a series of fixes, including single stock circuit breakers and new rules to prevent erroneous trades. Both of those fixes, the SEC says, helped contain the problems with Knight’s error trades.
The SEC has yet to make more sweeping changes, however, such as a fundamental restructuring of REG NMS, and some critics say more needs to be done to protect the markets and restore confidence.
Last week, SEC Chair Mary Schapiro said she has asked her staff in the wake of the Knight incident to expedite the completion of new rules requiring exchanges and other market centers to have programs in place to ensure their capacity and integrity.
The flash crash also spurred the interest of the SEC’s market abuse specialized enforcement unit, which earlier this year disclosed it is conducting roughly 20 different inquiries, ranging from order types to how exchanges police their markets.
Of the various probes, the NYSE is just one of many U.S. exchanges facing regulatory scrutiny.
Several other exchanges this year also disclosed SEC investigations, including Chicago Board Options Exchange, BATS Global Markets, and most recently, NASDAQ, which is being investigated for its handling of the Facebook IPO.
The crackdown on exchanges became evident last year after the SEC sanctioned Direct Edge, saying the fourth-largest exchange had weak internal controls that led to millions of dollars in trading losses and a systems outage.
In that case, the SEC did not fine the exchange.
Courtesy of Reuters
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