SEC Fines NYSE - The Industry Spread

Michael Volpe

After spending a decade in finance, Michael Volpe has been a freelance investigative journalist since 2009. His work has been published locally in the Chicago Reader, Chicago Crusader, Chicago Heights Patch, and New City. Nationally, Volpe's work has appeared in a wide variety of publications including the Washington Examiner, the Daily Caller, Crime Magazine, the Southern Christian Leadership Conference Newsletter, and Counter Punch. Volpe has been recognized by whistleblowers as leading the charge in getting their stories out. His first book Prosecutors Gone Wild was published in October 2012, his second book The Definitive Dossier of PTSD in Whistleblowers was published in February 2013 and his third book Bullied to Death was published in August 2015.

SEC Fines NYSE

March 7, 2018

SECThe Securities and Exchange Commission has sanctioned the NYSE for several violations.

The SEC made the announcement in a press release.

“The Securities and Exchange Commission today announced that it charged the New York Stock Exchange and two affiliated exchanges with regulatory failures in connection with multiple episodes, including several disruptive market events.  The charges arose from five separate investigations and include the first-ever charged violation of Regulation SCI.  The Commission adopted Reg SCI to strengthen the technology infrastructure and integrity of the U.S. securities markets, and today charged two NYSE exchanges with violating Reg SCI’s business continuity and disaster recovery requirement.  In settlement, the exchanges agreed to pay a $14 million penalty.

“According to the SEC’s order, the violations include erroneously implementing a market-wide regulatory halt, negligently misrepresenting stock prices as ‘automated’ despite extensive system issues ahead of a total shutdown of two of the exchanges, and applying price collars during unusual market volatility on Aug. 24, 2015, without a rule in effect to permit them – a move that resulted in order imbalances being resolved more slowly.”

The order described the five episodes this way.

  • NYSE and American’s July 8, 2015 Trading Halt: On July 8, 2015, two of the NYSE Exchanges suspended intra-day trading for approximately three and one-half hours (the “Shutdown”). During the 47 minutes before the Shutdown, NYSE and American experienced escalating connectivity problems between their trading units and the communications “gateways” used by customers, which eventually prevented many customers from being able to consistently access quotations in a majority of the symbols traded on these exchanges (“Impaired Symbols”). As a result, quotations in the Impaired Symbols were no longer automated. Nonetheless, during this time period, NYSE and American continued to disseminate quotations for the Impaired Symbols marked as “automated.” The quotations that were inaccurately identified as automated after these exchanges had reason to believe otherwise constituted negligent misrepresentations of material facts to market participants in violation of Section 17(a)(2) of the Securities Act.
  • Arca’s Use of Price Collars During the August 24, 2015 ETF Market Volatility: U.S. equity and equity-related futures markets experienced unusual volatility on August 24, 2015. The volatility led to a total of 1,278 Limit-Up/Limit-Down (“LULD”) trading pauses on five exchanges. Arca, which was the primary listing exchange for more than 85% of these exchange traded products (“ETPs”), including exchange traded funds (“ETFs”), had 999 (or 78%) of the LULD pauses, of which 697 were repeat pauses in securities that were reopened after their first pause of the day. Many of these repeat halts were caused, at least in part, because Arca applied price collars to reopening auctions that followed LULD pauses. By applying these price collars, Arca’s order imbalances on reopening auctions resolved more slowly than they would have with wider or no reopening collars and potentially limited the extent to which the prices of reopened issues could adjust to changing conditions without triggering additional LULD halts. Arca violated Section 19(b)(1) of the Exchange Act because its rules described price collars for opening and closing auctions, but not for reopening auctions. Arca also violated Section 19(g)(1) because it did not comply with its rules regarding reopening auctions.
  • Arca’s Erroneous March 31, 2015 Trading Halt: On the morning of March 31, 2015, Arca erroneously implemented a market-wide regulatory halt that stopped all trading 3 of 4Arca-listed securities on all exchanges. Arca lifted the market-wide halt after approximately 20 minutes and resumed its own trading approximately two hours later, but could not publish closing auction order imbalance information. As a result, Arca violated Rule 608(c) of Regulation NMS by imposing a market-wide halt in violation of a national market system plan, and Section 19(g)(1) of the Exchange Act by violating its own rule that required Arca to publish closing order imbalance information.
  • NYSE and American’s Failure to Comply with Reg SCI’s Business Continuity and Disaster Recovery Requirements: Regulation Systems Compliance and Integrity (“Reg SCI”) requires national securities exchanges and other SCI entities to have business continuity and disaster recovery (“BC/DR”) plans that provide for certain “reasonably designed” backup and recovery capabilities. For approximately one year following Reg SCI’s November 3, 2015 effective date, NYSE and American, in a wide-scale disruption, would have relied on the backup systems of Arca for trading in NYSE- and American- listed symbols. NYSE and American accordingly lacked the required policies and procedures for “reasonably designed” backup and recovery capabilities and therefore violated Reg SCI Rules 1001(a)(1) and 1001(a)(2)(v).
  • NYSE and American’s Failure to State Material Aspect of Operation of Exchange Order Types: From 2008 to 2015, the interaction between two order-types on NYSE and American—pegging orders and non-displayed reserve orders—created the possibility that floor brokers’ pegging orders could in certain circumstances detect the presence (but not the quantity) of non-displayed depth liquidity on the exchanges’ order books. This potential behavior was a material aspect of the operation of the exchanges, but it was not described in any effective rules of NYSE or American during this period, despite a customer complaint that brought the potential behavior to the exchanges’ attention. As a result, NYSE and American violated Section 19(b)(1) of the Exchange Act.

“Exchanges play an important role in protecting investors,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.  “For retail investors to have confidence in our markets, exchanges must provide accurate information and comply with legal requirements, including being equipped for unexpected market disruptions.

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