BATS’ Fine in Direct Edge Settlement Could Be a Record

The Securities and Exchange Commission is about to levy what could be the largest fine ever against a market operator.

The U.S. equity market regulator is said to be near a settlement upwards of $13 million over how Direct Edge, which has been purchased by BATS Trading, handled investors’ orders, according to a report in the Wall Street Journal.

The three-year investigation by market regulators into allegedly unfair treatment of investors by stock exchanges could result in the largest fine ever levied against a stock exchange, according to people familiar with the matter.

The settlement in the Direct Edge investigation , the Journal reported, would hand the SEC a win in its examination of the opaque ties between stock exchanges and high-speed traders. Exchanges, in response to the heightened scrutiny, have published hundreds of pages detailing how their order types operate.
However, the WSJ reports that a deal isn’t assured, the board of BATS, which merged with Direct Edge last year, has signed off on the settlement, which is in the final stages of negotiations and could be announced within weeks, people familiar with the matter said.

The SEC investigation concerns actions taken by Direct Edge before the merger, these people said. The combined trading handled by BATS and Direct Edge exchanges accounts for about one-fifth of all U.S. stock-market volume.

An SEC spokesman declined to comment for the story.

The current record fine for an exchange came in May 2013, when Nasdaq OMX Group Inc. agreed to pay $10 million to settle securities-law violations tied to its handling of the chaotic Facebook Inc. public offering a year earlier.

The investigation into Direct Edge focused on the exchange’s usage of specific order types, instructions that exchanges provide to determine how customers’ buy and sell orders are handled. That includes instructions such as whether or when an order should be executed. Order types, which have proliferated in recent years, have come under increased scrutiny amid concerns that certain market players are gaining an advantage by getting more information than other traders about how order types work.

The WSJ wrote the SEC, which is investigating order types at the major exchanges, has been probing whether Direct Edge’s description of its order types didn’t match how its computer trading system actually worked, according to people familiar with the settlement talks. The investigation also has focused on whether certain clients had more information about how the order types operated then others, these people said.

As a result of the investigation, BATS forced out William O’Brien, Direct Edge’s president, earlier this year. He was replaced by Chris Concannon, formerly an executive at high-frequency trading firm Virtu Financial.

The investigation is one of several that regulators, law-enforcement officials and lawmakers have opened into exchanges and other trading venues, with a focus on whether high-speed traders have been given advantages over other investors.