High-Speed Enforcement: SEC Goes After New York Stock Exchange

The Friday morning release from the Securities and Exchange Commission caused a double-take as reporters saw our inbox message fields: “SEC CHARGES NEW YORK STOCK EXCHANGE.”

In a historic first, the Big Board was hit with a $5 million fine and charged with giving out trading data to paying clients before the general public. No one leaked information; rather, the speed of the feed to the insiders was faster than the speed of the feed to the rest of us.

How much faster? It doesn’t matter.  What’s happening here is that the SEC is going after the built-in unfairness of ultra-high-speed trading, which accounts for a vast number of trades.

“Improper early access to market data, even measured in milliseconds, can in today’s markets be a real and substantial advantage that disproportionately disadvantages retail and long-term investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

As market abuse unit chief Daniel Hawke put it, “The violations at NYSE may have been technological, but they were not technical.”

The findings stemmed from the SEC inquiry into the “flash crash” temporary meltdown of May, 2010, Bloomberg BusinessWeek reported.

NYSE was ordered to halt the practice, which apparently started in 2008, and must hire a consultant to make sure it doesn’t happen in the future.

In a written statement, NYSE Euronext CEO Duncan L. Niederauer said the company is committed to the highest level of integrity, that the exchange was not accused of intentional wrongdoing and — echoing virtually all accused companies — that the practice has ended and the problems fixed.

“The timing differentials stemmed from technology issues, not from intentional wrongdoing by the exchange or any of its personnel,” he said.

The problem, SEC said, is that NYSE’s compliance department was not involved in the design of the system to begin with. Most any NYSE-traded company could have told the exchange that’s a problem, after Enron and Sarbanes-Oxley.

Instead, NYSE gets slapped with its first-ever SEC fine in shenanigans that started exactly as this stuff was supposedly being cleaned up.