On September 14, 2012, Securities and Exchange Commission ("SEC") announced that it had brought charges against the New York Stock Exchange and its parent company NYSE Euronext ("NYSE") for compliance failures that improperly gave certain customers a "head start" on trading information. A graphic analysis of the NYSE's improper practices is attached. The NYSE agreed to a $5 million penalty and significant undertakings to settle the SEC's charges. This case marks the first time that the SEC has brought charges against a national securities exchange that resulted in the payment of monetary damages.
Pursuant to Regulation NMS, the SEC prohibits the practice of improperly sending market data to proprietary customers before sending that data to be included in consolidated feeds, which broadly distribute trade and quote data to the public. The purpose of these provisions are to ensure that the public has fair access to current market information about stock prices and trades at the same time.
The SEC Order alleges that the NYSE's practices violated Rule 603(a) of Regulation NMS which "requires that exchanges distribute market data on terms that are 'fair and reasonable' and 'not unreasonably discriminatory.'" The SEC alleges that "[o]ver an extended period [beginning in June 2008], NYSE violated Rule 603(a) in connection with the release of certain data through two proprietary feeds. The primary reason for the disparity in the release of the information appears to be due to an internal architecture issue where the proprietary feed to customers was faster than the path used to send quotes to the network processors.
The SEC Order noted that the "NYSE did not take adequate steps to comply with Rule 603. Although the business units that designed NYSE’s market data systems attempted to ensure that the systems complied with Rule 603, NYSE’s compliance department played no role in the design, implementation, or operation of the systems. NYSE also did not systematically monitor its data feeds to ensure they complied with Rule 603, and had no written policies and procedures concerning the rule."