US Watchdog SEC Issues $14 Million Monetary Fine to Direct Edge

The SEC has issued a financial penalty against two US exchanges that were operated by Direct Edge. The venues were

rp_sec-logo-securities-and-exchange-commission-300x300.pngTwo US trading venues have been issued one of the largest fines by the SEC for failing to accurately describe the order types being used on the exchanges. The SEC reported that it issued a monetary penalty of $14 million to EDGA Exchange and EDGX Exchange, formerly operated by Direct Edge. The move highlights the regulator’s focus on ensuring stability and confidence in financial markets.

The violations were uncovered during a probe by the country’s main equities regulator. The SEC’s investigation found that the two exchanges had been inaccurately operating price rules. Details state that while operating under rules that described a single “price sliding” process for handling buy or sell orders, the EDGA Exchange and EDGX Exchange actually offered three variations of “price sliding” order types.

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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.

The former ECNs, that were converted to stocks exchanges, were also found to have been disclosing information about how those order types operated to some, but not all of their members.

Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, commented in a statement: “These exchanges did not properly describe in their rules how their order types were functioning.

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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.”

Regulators have come down heavy on exchanges that fail to adhere to federal securities laws. The SEC’s order finds that the EDGA and EDGX exchanges violated Sections 19(b) and 19(g) of the Securities Exchange Act of 1934. Without admitting or denying the SEC’s findings, EDGA and EDGX agreed to accept a censure, pay the $14 million penalty, and cease and desist from committing these violations.

BATS Global Markets, the current owner of the two exchanges that have been charged for violations, is the most liquid market operator for US equities across its four exchanges. BATS cooperated with the watchdog and established a reserve for the penalties; the venue issued a statement on the matter: “We have cooperated with the SEC staff throughout both investigations, and thank the staff for their thoughtful consideration and discussion of the relevant facts and policy issues. BATS established a reserve for the SEC settlement as part of the Direct Edge acquisition and the impact is already reflected in its third quarter financial statements.”

Additional details issued by the SEC state that according to its order instituting a settled administrative proceeding, exchanges and other self-regulatory organizations are required under federal securities laws to obtain Commission approval for rules governing order types and operate in compliance with their own set of rules as approved by the SEC.  An important category of an exchange’s rules is the operation of its order types, so that its members and all other participants in trading on an exchange can understand the terms and conditions under which trading is conducted.

From the time they began operating as registered exchanges in 2010 until late 2014, up until when they finally updated their rules and obtained Commission approval for the changes, the EDGA Exchange and EDGX Exchange were supposed to be processing orders using a single “displayed price sliding process” according to their rules.  However, the exchanges actually offered three price sliding order types: Hide Not Slide, Price Adjust, and Single Re-Price. These were not completely and accurately described in their rules.

In 2013 the SEC issued two fines to CBOE and NYSE Euronext for violations.

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