SEC Brings Settled Administrative Proceedings Against NYSE Relating to Informational Advantages, Electronic Trading and Other Matters

June 05, 2014

The Securities and Exchange Commission (SEC or Commission) on May 1, 2014 announced a settlement (Settlement) with the New York Stock Exchange LLC and certain of its affiliates (collectively, the NYSE), addressing a variety of practices – including informational disparities and the current hot-button topic of co-location. In this latest settlement concerning electronic trading and the dissemination of market data, the NYSE agreed, without admitting or denying the SEC’s findings, to settle charges relating to a wide variety of historic conduct that largely took place between 2005 and 2011. As part of the Settlement, the NYSE consented to a $4.5 million civil monetary penalty and the retention of a compliance consultant.

The Settlement marks the first enforcement action by the SEC implicating practices employed by electronic and high-frequency trading (HFT) firms since the publication of Michael Lewis’ book, “Flash Boys” – in which Mr. Lewis argues that HFT unfairly exploits informational disparities. The Settlement also follows criticism by the New York Attorney General (NYAG) of co-location arrangements at securities exchanges, as well as calls by the NYAG for the SEC and other regulators to focus their attention on HFT issues.

This OnPoint discusses the three charges in the Commission’s order that specifically address informational disparities, namely: (1) the provision of co-location services to certain customers prior to September 2010, pursuant to terms that were individually negotiated with private firms and not submitted for SEC approval; (2) the lack of procedures to prevent the misuse of non-displayed liquidity in order books for exchange error account trading; and (3) the early distribution of order imbalance information to floor brokers – a practice that was not fully disclosed to the public. The OnPoint also explores how the Settlement is consistent with prior statements and practices by the SEC staff concerning market structure issues.

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This article was reprinted by Law360.