NYSE Settles Charges Its Safeguards Fell ShortBy Jean Eaglesham and Scott Patterson 2 May 2014 The Wall Street Journal

The New York Stock Exchange agreed to settle allegations it broke rules designed to protect investors, the second such pact in less than two years as the top U.S. securities regulator tries to ratchet up the policing of stock markets.

The Big Board, along with affiliated exchanges and a broker, agreed to pay $4.5 million to settle civil charges by the Securities and Exchange Commission that they "repeatedly" broke their own rules or failed to submit rules governing certain activities to the regulator.

The NYSE firms, bought for more than $8 billion last year by the IntercontinentalExchange Group Inc., didn't admit or deny wrongdoing in the pact. An ICE spokesman declined to comment.

The NYSE's alleged failings between 2008 and 2012 included the lack of a rule to ensure fair treatment of investors who paid to get faster trading by connecting directly to an exchange's computers, the SEC said.

The regulator also highlighted a previously undisclosed incident more than four years ago, in January 2010, when a 15-minute glitch in a test of NYSE's trading system caused the exchange to rack up erroneous trades with a total value of more than $4 billion, resulting in an eventual loss of $1.2 million.

The case is the latest in a series against exchanges as the SEC, facing concerns from lawmakers and others that U.S. markets unfairly disadvantage small investors in favor of high-speed traders, ramps up its scrutiny of trading firms and the exchanges that police much of their own activities.

Stock exchanges "play a pivotal role in our national market system and that role comes with significant responsibilities," Andrew Ceresney, the SEC enforcement chief, told reporters on a conference call Thursday.

"This was an overriding failure by the exchange to have appropriate policies and procedures," he added.

Still, Mr. Ceresney said he agreed with the agency's chairman, Mary Jo White, that "the markets aren't rigged."

Regulators have brought several enforcement actions against exchanges in recent years, amid headline-grabbing glitches such as the fumbling of the Facebook Inc. initial public offering in May 2012. Nasdaq OMX Group Inc. last year agreed to pay $10 million to settle SEC allegations related to the botched Facebook offering, without admitting or denying liability.

The first fine imposed on an exchange by the SEC came in 2012, when NYSE paid $5 million to settle allegations it delivered valuable trading data to some customers ahead of others. Under that pact, the exchange didn't admit or deny wrongdoing.

The SEC didn't say whether or how investors were hurt by the alleged NYSE misconduct. Officials declined to discuss this aspect of the case, beyond saying the exchange broke -- or failed to have -- rules designed to "stop investor harm."

One of those rules related to an affiliated brokerage firm, called Archipelago Securities LLC, or ArcaSec, which was responsible for routing orders between NYSE exchanges and to other trading venues. In 2005, the firm -- without seeking the required SEC approval -- set up an "error account" that could hold bad trades as the result of computer errors or other mishaps, the administrative order said.

NYSE told the SEC about the multibillion-dollar glitch and error-account trading on January 13, 2010, two days after the error occurred, according to the administrative order. NYSE waited to alert the SEC until after its employees had traded out of the positions in the error account, sustaining a net loss of $1.2 million, the order added.

The error, involving more than 18,000 buy and sell orders that resulted in trades of more than 28 million shares, led to another rules breach: ArcaSec incurred a net capital shortfall of about $99 million over two days during the incident, the enforcement action said.

NYSE employees trading for the error account had access to a computer program that provided a look at all orders sitting at the exchange, including hidden orders, which was information other trading firms couldn't access. Such information could have allowed the employees to "anticipate possible shifts in a security's price," the SEC said.

The allegations involving NYSE's so-called co-location services, in which customers pay to get faster trading by linking directly to the exchange's computers, relate to 2006 through September 2010, the SEC said.

NYSE offered co-location through its data centers in Brooklyn and Manhattan without getting a rule for this approved by the SEC, according to the administrative order. The charges for the co-location services weren't publicly disclosed and not all customers paid the same amounts, the order said. NYSE began to standardize fees in mid-2009, it added.

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