A couple of exchanges have settled with U.S. regulators over allegations that their rules didn’t properly disclose how certain orders would be executed; and, that high-frequency traders (HFTs) were given preferential insight into how certain orders worked.
The U.S. Securities and Exchange Commission (SEC) said Mondayy that two exchanges (EDGA Exchange and EDGX Exchange) have agreed to pay a US$14 million penalty to settle the charges. The SEC says that the penalty is the largest it has levied against a national securities exchange. And, it notes that the case is the SEC’s first to focus on stock exchange order types.
The SEC says that the exchanges, which were previously owned by Direct Edge Holdings and are now owned by BATS Global Markets, agreed to pay the $14 million penalty, to cease and desist from committing these violations, and to censured. They also agreed to comply with various undertakings, including a requirement that they develop new policies and procedures relating to the development of, rule filing process for, and communication of information regarding order types.
The exchanges settled without admitting or denying the SEC’s findings. “We entered into a settlement agreement with the SEC, without admitting or denying the allegations, in order to put this matter behind us,” BATS said in a statement. It also notes that the company established a reserve for the settlement as part of the Direct Edge acquisition, and it says that the impact of this settlement is already reflected in its third quarter financial statements.
The SEC says that its investigation found that while operating under rules that described a single “price sliding” process for handling buy or sell orders, the exchanges actually offered three variations of “price sliding” order types. The regulator says that the exchanges’ rules “did not completely and accurately describe the prices at which those orders would be ranked and executable in certain circumstances, and they also failed to describe the execution priority of the three order types relative to each other and other order types.” It also found that the exchanges separately disclosed information about how those order types operated to some but not all of their members.
“These exchanges did not properly describe in their rules how their order types were functioning,” said Andrew Ceresney, director of the SEC’s division of enforcement. “They also gave information about order types only to some members, including certain high-frequency trading firms that provided input about how the orders would operate. Exchanges must ensure that their order types are described accurately in their rules and communications to all members.”
“The SEC does not allege that there was anything inherently inappropriate about the order type functionality. Rather, the SEC alleged that the price sliding functionality was not completely and accurately disclosed in Direct Edge’s rules,” BATS says.
At the same time, BATS also disclosed that a separate investigation into the development of order types at BATS has been concluded with no action taken; “We are pleased to have this matter formally closed,” it says.