In the Matter of New York Stock Exchange LLC, and NYSE Euronext: SEC Sanctions NYSE for Discriminatory Data Distribution

In the administrative proceeding In the Matter of New York Stock Exchange LLC, and NYSE Euronext, the respondents, the New York Stock Exchange LLC and NYSE Euronext, (collectively, “NYSE”) consented to an Order Instituting Administrative and Cease-and-Desist Proceedings (the “Order”) issued by the Securities and Exchange Commission (“SEC”) for violations of Rule 603(a) of Regulation NMS (“Rule 603(a)”), the record retention provisions of Section 17(a)(1) of the Securities Exchange Act (“Section 17(a)(1)”) and Rule 17a-1.  Securities Exchange Act Release No. 67857 (Admin. Proc. 3-15023, Sept. 14, 2012).  The Order required the NYSE to pay a $5 million civil penalty and hire a consultant to provide recommendations on how to avoid future violations. 

Stock exchanges subject to SEC regulation, such as the NYSE, are required to send computerized quotes and trade reports (“market data”) to be included in publicly available consolidated data feeds.  Stock exchanges are permitted to distribute customized market data directly to customers via proprietary feeds, but Rule 603(a) requires exchanges to distribute market data on terms that are “fair and reasonable” and “not unreasonably discriminatory.” 

According to the Order, from June 2008 to July 2011, the NYSE consistently released market data to its subscribing customers before it sent the same market data for inclusion in the public consolidated feed, creating time disparities between the two feeds.  The time disparities “ranged from single-digit milliseconds to, on occasion, multiple seconds.”  There were several reasons given for the time disparities.  First, the data path for one NYSE proprietary feed involved fewer steps and was thus faster than the data path to the consolidated feed.  Second, another NYSE proprietary feed bypassed the system that processed market data into the required format for the consolidated feed.  As a result, intermittent delays in the data processing system affected the data being sent to the consolidated feed, but not the proprietary feed.  Third, a software problem caused delays in the release of market data to the consolidated feed during periods of high trading volume.

The SEC, citing its own adopting release for Rule 603(a), explained that under the standards of “fair and reasonable” and “not unreasonably discriminatory,” the rule prohibited the release of market data via proprietary feeds “any sooner” than the data had been sent for inclusion in the consolidated feeds.  Therefore, the SEC found that NYSE had violated Rule 603(a). 

The SEC also found that NYSE had violated Section 17(a)(1) of the Exchange Act and Rule 17a-1 thereunder.  Section 17(a)(1) required every exchange to “make and keep for prescribed periods such records as the [SEC] may require by rule.”  Rule 17a-1 specified that exchanges had to keep “all records as shall be made or received by it in the course of its business.”  NYSE regularly retained trade-related timestamps and processing speed data for three days before deletion to make room for more recent data.  The SEC found that the deleted timestamps and processing speed data “fell within the scope of [Section 17(a)(1)] because they related to NYSE’s compliance with Rule 603(a).”  

NYSE reached a settlement with the SEC, consenting to a $5 million civil penalty, a cease and desist order, and a censure.  NYSE also consented to a series of undertakings, including hiring an independent consultant to analyze NYSE’s market data distribution systems and make recommendations of how to prevent and detect future violations of Rule 603(a). 

The primary materials for this case may be found on the DU Corporate Governance website.


Michael Burleigh