The Securities and Exchange Commisssion charged the New York Stock Exchange Friday with giving an ‘improper head start’ to high-speed trading firms, giving them market data milliseconds or, in some cases, full seconds before retail and long-term investors got it.
The case involves two of the exchange’s proprietary data feeds, Open Book Ultra and PDP Quotes, which sent data to high-frequency traders, trading desks of large banks, statistical arbitrageurs and other subscribers before the information on the full depth of orders in its market reached the public.
The nation’s oldest stock exchange, as a result, became the first to ever pay a financial penalty to the Securities and Exchange Commission. Without admitting or denying the SEC’s findings, the exchange agreed to pay $5 million and to hire a consultant to review its market data systems.
“NYSE Euronext is committed to the highest standards of integrity and accountability,” the exchange’s chief executive, Duncan Niederauer, said in a formal statement. “The timing differentials stemmed from technology issues, not from intentional wrongdoing by the exchange or any of its personnel.”
The “differentials” first came to the attention of the Securities and Exchange Commission on May 6, 2010. That is the day that a “Flash Crash” occurred, sending stock prices plunging more than 600 points in a matter of minutes and rebounding nearly as quickly.
During two five-minute periods that afternoon, NYSE servers were swamped, processing more than 4.8 million quotes. The average delay in sending quotes to the public record, known as the consolidated tape, was between 3.7 and 5.3 seconds.
In comparison, the average processing times for the two proprietary feeds were under 2 milliseconds and under 16 milliseconds, respectively.
Later on, the delay to the public tape exceeded 10 seconds.
A millisecond is a thousandth of a second.
Ironically, the New York Stock Exchange was already in the midst of fixing the cause of the delays, when the Flash Crash hit.
By that day, the SEC noted in its administrative proceeding against the exchange, the NYSE had fixed a software issue that was slowing down the distribution of data, in approximately half of the relevant computer servers. But half remained to be fixed.
The data delays subsequently came to the attention of the SEC when it began to investigate the causes of the crash. But, the SEC said, the NYSE’s market data problems ” did not cause the extreme volatility that day.”
Nonetheless, “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. “That is why SEC rules mandate that exchanges give the public fair access to basic market data.”
A market data aggregator, Nanex.net of Winnetka, Ill., first noted speed differences between the quotes coming from the consolidated, public feed and Openbook, the NYSE’s proprietary data feed, on August 23, 2010, in its own analysis of that day’s events. The firm called Friday’s settlement a “watershed event” that vindicated its analysis.
“I feel like I woke up on the other side of the Looking Glass,” said Nanex software developer Eric Hunsader. “It’s a good first step.”
The technical problems gave an advantage to customers that the NYSE relies on for the great majority of its business. Four-fifths of the NYSE’s trading volume is attributable to subscribers to a package of NYSE proprietary market data products that includes the Open Book Ultra feed, the SEC said.
In the Open Book Ultra case, the path for sending data to subscribers involved fewer steps, than the path for sending it to a network processor that fed the public tape.
In the case of PDP Quotes, the path got configured in January 2008 in such a way that it wnet directly to subscribers, instead of passing through the NYSE’s Market Data Distribution system.
And, in early to mid-2010, the Market Data Distribution system began experiencing delays in periods of high market activity. But subscribers to the PDP Quotes service did not experience those delays.
In late February of that year, the exchange began preparing a fix to the problem. That software was released in late April – and the rollout was finished May 14, 2010.
The consultant that the NYSE hires will report both to the exchange and to the SEC. The consultant cannot have any other business with the NYSE, for two years after the engagement, according to the administrative proceeding.
No consultant has yet been chosen.
The Nasdaq Stock Market has picked IBM to review its systems, after the disruption in May of the Facebook initial offering of shares to the public, involving its IPO Cross system.
Knight Capital also retained IBM, after its August 1 debacle which sent a flood of erroneous orders onto NYSE exchanges and caused the market maker to lose $440 million.