Electronic traders know that milliseconds of latency can cost them a lot. Now, NYSE Euronext know that too.
Without admitting or denying allegations by the US Securities and Exchange Commission (SEC) Exchange, NYSE Euronext officials announced on Sept. 14th that the exchange agreed to pay a $5 million penalty to settle latency discrepancies between two of its proprietary market data feeds and the data it delivers to the Consolidated Quote System (CQS).
According to SEC officials, NYSE Euronext violated Rule 603(a) of Regulation NMS, which prohibits exchanges to deliver quote and trade data to its proprietary feed clients before it sends the same data to the consolidated quote feed, as well as the record-retention section of 17(a)(1) of the Securities Exchange Act.
The regulator inspected several high-volume trading days from early 2010 and found various 15-second intervals where NYSE Euronext’s market data distribution system (MDDS) experienced average delays exceeding 25, 50 or 100 milliseconds, often near the market close, say officials. A number of these periods also had more than 10 percent of their quotes delayed more than a second, including one day in February 2010 where a “substantial” percentage of quotes were delayed by more than five seconds during the last 30 seconds of trading, the officials add.
This would not have been an issue if NYSE Euronext’s Open Book Ultra and PDP Quote, also known as NYSE BBO, feeds also reflected the same delays. However, NYSE Euronext staff designed the exchange’s proprietary feeds to run in parallel with its MDDS. So when the MDDS experienced its delays, the proprietary feeds did not.
NYSE Euronext officials attribute the timing differences to technology issues that they have resolved.
“The violations at the NYSE may have been technological, but they are not technical,” said Daniel Hawke, chief of the SEC’s Division of Enforcement in a prepared statement. “Robust technology governance is just as important to preventing investor harm as any other compliance or supervisory function.”
As part of the settlement, NYSE Euronext will hire an outside consultant, at its own expense, to compile a report on the exchange operator’s current Rule 603(a) compliance of its NYSE, NYSE Arca and NYSE MKT MDDS platforms as well as the related internal policies and procedures. The consultant will then have a chance to recommend changes to improve policies, procedures and platforms, which NYSE Euronext will need to implement.
This action by the SEC is a clear signal to the other regulated exchange operators to have their own proprietary market data feeds up to snuff in regards to Rule 603(a). Although $5 million might be a rounding error to many investment banks, it is not for exchanges. What’s worse is the potential remediation costs they face if they are in breach of the rule.
The SEC probably would have taken an exchange out to the woodshed earlier on this matter if it was not for all of the time and it has spent in rolling out Dodd-Frank regulations with the US Commodity Futures Trading Commission (CFTC) over the past couple of years. But now it sounds like mommy is definitely home.
