BATS exchange group to pay record $14 million SEC fine

(Reuters) - Exchange operator BATS Global Markets said on Monday it agreed to pay a record $14 million penalty to settle charges that two exchanges formerly owned by Direct Edge Holdings gave advantages to certain high-frequency trading firms.

The U.S. Securities and Exchange Commission said Direct Edge, prior to its merger with BATS a year ago, selectively disclosed information about how firms can advantageously place certain orders on its markets.

BATS did not accept or deny any wrongdoing. The No. 2 U.S. stock market operator said the SEC had also concluded a separate investigation into the development of order types on the legacy BATS exchanges without taking any action.

Exchanges are required under federal securities laws to obtain SEC approval for rules governing how buy and sell orders are matched and to comply with those rules.

Direct Edge did not properly describe in its rules how certain order types were functioning, said Andrew Ceresney, Director of the SEC’s Division of Enforcement.

“They also gave information about order types only to some members, including certain high-frequency trading firms, that provided input about how the orders would operate,” he said.

While the SEC found nothing wrong with the order types themselves, the regulator said they presented “significant risk” to firms that did not understand how to use them.

Haim Bodek, a former trader who said his firm was hurt by the lack of disclosure by Direct Edge and who filed to collect an award from the SEC as a whistleblower in 2011, said the SEC fine was “quite vindicating for me.”

Bodek’s lawyer, Shayne Stevenson of Hagens Berman in Seattle, said it could take months for his client to learn if and how much he might collect as the SEC must post a notice to allow anyone who claims a right to the award to step forward.

Previously, the largest penalty ever levied against a stock exchange was $10 million on Nasdaq OMX Group Inc in May 2013 to settle civil charges stemming from mistakes made during Facebook Inc’s initial public offering in 2012.

BATS runs four U.S. stock exchanges, an options exchange and the biggest pan-European stock market.

Reporting by John McCrank in New York; Additional reporting by Herbert Lash; Editing by David Gregorio and Andre Grenon