New York Stock Exchange to pay $4.5 million to settle SEC charges

WASHINGTON (Reuters) - The New York Stock Exchange agreed on Thursday to pay $4.5 million to settle charges brought by U.S. securities regulators that the exchange flouted its own rules, marking the latest crackdown on violations of market structure rules.

A flag flutters in the wind outside the New York Stock Exchange November 5, 2012. REUTERS/Chip East

The Securities and Exchange Commission said the NYSE, two of its exchanges and one affiliated brokerage “repeatedly engaged in business practices that either violated exchange rules or required a rule when the exchanges had none in effect.”

Among the more serious problems flagged by the SEC was NYSE’s failure to obtain approval to offer co-location services and its disparate pricing, which permitted some trading firms to pay less money than others to place their computer servers inside the exchanges’ data centers.

Co-location provides advantages to traders because it lets them get access to data faster. The SEC did not allege specifically that any investors were harmed by NYSE’s violations.

NYSE, NYSE Arca, NYSE MKT and its affiliated routing broker Archipelago Securities agreed to settle without admitting or denying the charges. A spokesman for NYSE, which is owned by IntercontinentalExchange Group Inc, declined to comment.

The charges against NYSE mark the second case the SEC has brought against the exchange operator since 2012. Previously, NYSE paid $5 million to settle charges it had given certain customers “an improper head start” on trading data.

It is also the latest in a series of cases filed by the SEC since 2011 against exchanges, dark pools and other trading firms on a variety of market structure-related matters.

Part of the SEC’s focus has been on the relationships between high-speed trading firms and exchanges, including services the exchanges provide such as co-location and access to direct data feeds.

The FBI, U.S. Attorney General and the New York Attorney General have all said they are probing high-speed trading, among other areas.

The SEC has been broadly investigating market structure issues for several years, prompted in part by the May 2010 “flash crash.” It previously filed charges against Nasdaq OMX, Direct Edge, now a part of BATS Global Markets, the Chicago Board Options Exchange and the Chicago Stock Exchange.

Several of the cases have focused on instances where an exchange’s duty as a self-regulated organization (SRO) has clashed with its business practices. Under federal securities laws, exchanges have specific duties as SROs to police their own marketplace and provide transparency about their activities.

One such duty requires exchanges to disclose material changes to their businesses by submitting proposed rule changes to the SEC for approval and public comment.

Thursday’s case comes after Andrew Ceresney, the head of the SEC’s enforcement division, told Reuters in an interview on Wednesday that more cases against exchanges over violations of their rules would be coming.

In addition to the problems with rules governing co-location, the SEC said NYSE failed to get rules in place before letting its routing broker trade out of an “error account,” which is used to liquidate positions resulting from malfunctions, unmatched orders or routing errors.

The SEC also said a trading incident left the brokerage with a net capital deficiency of $99 million that was not properly reported.

Thursday’s $4.5 million penalty is small relative to many other SEC settlements and to IntercontinentalExchange’s annual revenue of $1.67 billion last year. That’s likely because none of the charges rise to the level of fraud.

The case is still significant because actions against exchanges are not common, and because it serves to send a message that the SEC will pursue all kinds of market structure violations.

Reporting by Sarah N. Lynch; Additional reporting by John McCrank in New York; Editing by Bill Trott, Doina Chiacu and Lisa Shumaker