On Friday, the U.S. Securities and Exchange Commission (SEC) announced that it had administratively fined the New York Stock Exchange (NYSE) $5 million (pdf) for allowing its private customers access to stock market information ahead of when it was available to the general public. This occurred from June 2008 to about mid-May 2010. The fine amounts to about a morning’s worth of revenue for the exchange.
The SEC stated in its settlement accord that the NYSE had violated SEC Rule 603(a) related to the regulation of national market systems (pdf), which “requires that exchanges distribute market data on terms that are ‘fair and reasonable’ and ‘not unreasonably discriminatory.’ This rule prohibits an exchange from releasing data relating to quotes and trades to its customers through proprietary feeds before it sends its quotes and trade reports for inclusion in the consolidated feeds.”
However, during the period in question, the NYSE allowed customers of its proprietary feeds to receive information from milliseconds to sometimes several seconds ahead of the general public. An article in the LA Times quoted a trader as saying that allowing this to happen was akin to letting those NYSE customer to see “who won a horse race and being able to bet before everyone else.”
Why did this happen? The SEC said that the NYSE’s internal system’s architecture (pdf) was designed in such a way that allowed its proprietary customers a faster path to the real-time market data than the public. Making matters worse, the SEC said, was a “software issue” in the early to mid-2010 period that slowed down information getting to the public when trading volume was very high.
The SEC also stated that the NYSE did not “systematically monitor its data feeds to ensure they complied with Rule 603(a)” even though the exchange was aware that there could be a 603(a) rule violation as early as in 2009. It wasn’t until early 2010 that the exchange decided that it had better fix its compliance issues, which finally were in 2011.
The NYSE, which didn't admit or deny the SEC's allegations, put the blame on the popular corporate excuse of late: “technology issues." In a statement, NYSE CEO Duncan Niederauer said that, “NYSE Euronext is committed to the highest standards of integrity and accountability. The timing differentials stemmed from technology issues, not from intentional wrongdoing by the exchange or any of its personnel.”
Maybe not intentional wrong doing, but it looks suspiciously like callous indifference to the public investor at the very least.
The NYSE statement also notes that the SEC hasn’t claimed that the “NYSE data delays caused any investor harm,” but that’s most likely because it is impossible to figure out what the exact harm was and to whom, rather than an indication of no harm being felt by some public investors using the NYSE information.
A former SEC litigator is quoted in the Wall Street Journal saying that although the fine wasn’t large, it was “meant to send a message” to all the exchanges that they need to be fair and non-discriminatory in their business practices.
If that was the intent, it’s likely to have the same effect as telling a teenager to clean up his or her room.
Robert N. Charette is a Contributing Editor to IEEE Spectrum and an acknowledged international authority on information technology and systems risk management. A self-described “risk ecologist,” he is interested in the intersections of business, political, technological, and societal risks. Charette is an award-winning author of multiple books and numerous articles on the subjects of risk management, project and program management, innovation, and entrepreneurship. A Life Senior Member of the IEEE, Charette was a recipient of the IEEE Computer Society’s Golden Core Award in 2008.