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SEC fines NYSE $5 million in compliance settlement

The New York Stock Exchange has agreed to a $5 million compliance settlement in response to SEC charges of improper distribution of market data.

The Securities and Exchange Commission has reached a $5 million agreement with the New York Stock Exchange and its parent company, NYSE Euronext, to settle compliance violation charges.

The timing differentials stemmed from technology issues, not from intentional wrongdoing by the exchange or any of its personnel.

Duncan L. Niederauer,
CEO, NYSE Euronext

The compliance settlement resulted from Securities and Exchange Commission (SEC) charges that the New York Stock Exchange (NYSE) improperly gave certain customers a "head start on trading information." It marks the first time an SEC fine and financial penalty has been levied against an exchange, according to the SEC.

"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," said SEC Division of Enforcement Director Robert Khuzami in a statement. "Compliance with these rules is especially important given exchanges' for-profit business interests."

SEC regulations prohibit sending market data to proprietary customers before sending that data in "consolidated feeds" that distribute trade and quote data to the public. The regulation is designed to ensure the public has fair access to current market information on pricing for stocks and trades.

The NYSE violated this rule over an extended period of time beginning in 2008 by sending data through two of its proprietary feeds before sending data to the consolidated feeds, according to the SEC. The SEC stated that the NYSE's "inadequate compliance efforts" did not monitor the speed of its proprietary feeds compared to its data transmission to the consolidated feeds.

The SEC's order found that the NYSE's compliance department was "not involved in important technology decisions," including the design, implementation and operation of market data systems. By not involving the compliance department, the NYSE missed opportunities to avoid compliance failures, according to the SEC.

The NYSE also failed to retain computer files that contained information about its transmission of market data, including the times the NYSE sent data to be included in the consolidated feed, according to the SEC.

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"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,'" SEC Division of Trading and Markets Director Robert W. Cook said in a statement.

In addition to the $5 million SEC fine, the compliance settlement requires the NYSE and NYSE Euronext to implement "significant undertakings" to ensure the violations do not occur again, according to the SEC. NYSE Euronext is also required to retain an independent consultant to conduct a comprehensive review of their market data delivery systems to ensure the organization complies with SEC rules.

NYSE Euronext agreed to the compliance settlement and SEC fine without admitting to or denying the charges. The NYSE completed system modifications in 2010 and 2011 that eliminated the technology shortcomings that led to the compliance investigation, according to the exchange. The exchange also now preserves the computer files that were the subject of the SEC's records retention charge, according to NYSE Euronext.

"The timing differentials stemmed from technology issues, not from intentional wrongdoing by the exchange or any of its personnel," NYSE Euronext Chief Executive Officer Duncan L. Niederauer said in a statement. "We will continue to take every responsible measure to ensure that our market operates with the utmost fairness and transparency."

Let us know what you think about the story; email Ben Cole, Associate Editor. For IT compliance news and updates throughout the week, follow us on Twitter @ITCompliance.

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