SEC Sanctions NYSE, American and Arca Exchanges

The Commission brought its first action based on Regulation SCI regarding business continuity as part of a proceeding naming the New York Stock Exchange, NYSE American and NYSE Arca, Inc. as Respondents. The proceeding is the result of five separate investigations that cover violations that occurred primarily in 2013, although one traces to 2008, that resulted in a $14 million penalty being imposed on the exchanges. In the Matter of New York Stock Exchange LLC, Adm. Proc. File No. 3-18388 (March 6, 2018).

The proceedings center on five separate violations:

Trading Halt: On July 8, 2015 the NYSE and American suspended intra-day trading for about three and one half hours. Beginning in mid-morning on July 8, 2015 each exchange experienced escalating connectivity issues between trading units and customer gateways. Internal monitoring systems reflected the issues. Each exchange received multiple external notifications in addition to the internal warnings over a period of about 47 minutes prior to an 11:32 shutdown.

During that period the exchanges had “reason to believe” within the meaning of Regulation NMS Rule 600 that they did not meet the definition of an “automated trading center.” Neither exchange immediately identified the quotations as manual. To the contrary, both exchanges continued to transmit quotations that were labeled as automated without suspending trading in the impaired symbols. The exchanges were negligent in not disclosing that the quotations were not automated and not entitled to trade through protection.

ETF Market Volatility: During market volatility Arca imposed collars following the resumption of trading after halts which was inappropriate. On August 24, 2015 U.S. equity and equity-related futures markets experienced unusual price volatility. The night before the Shanghai Composite stock index experienced a decline of over 8%. Prices were particularly volatile for equities and ETPs around the opening at 9:30 a.m. The extreme volatility resulted in 1,278 limit-up, limit-down trading pauses on five exchange including Arca. To reopen auctions after a limit-up limit-down halt Arca applied price collars that were calculated based on the last trade prior to the auction. The collars limited the volume of shares available for execution in the reopening auctions.

The application of the price collars constituted a material operation of the exchange that should have been the subject of an effective exchange rule. At the time exchange did not have such a rule.

Failure to provide closing order imbalance information: On the morning of March 31, 2013 the trade process on one of Arca’s trading units entered a software loop while processing an order. While in the loop the trade process sent 212 million extraneous messages. Eventually Arca halted trading in the 134 securities involved on all exchanges. This was caused by inadvertently instituting a “halt procedure.” The applicable provisions of the national market system plan only provides for a trading halt in certain instances not applicable here.

Arca rules in effect at the time required the exchange to publish certain information regarding each security prior to the daily closing auction. Because the proprietary feed was unavailable, Arca decided to run the closing auction without first disseminating the required information. Subsequently, the exchange took remedial actions.

Failing to comply with Reg SCI: Reg SCI, adopted in December 2014, requires that key market participants have policies and procedures to ensure the robustness and resiliency of their technology systems. Under the applicable Regulation SCI rules one required element is a business continuity and disaster recovery plan. The NYSE and American failed to comply with this requirement from November 3, 2015 to November 23 2016. During that period in the event of a wide-scale disruption during which the two exchanges would be unable to operate neither had the required plan. Rather, each exchange relied on the Arca backup system in Chicago. This was contrary to the dictates of the Regulation.

Pegging interest orders and the detection of prices on non-displayed depth liquidity: The interaction between two order-types on the NYSE and American created the possibility that floor brokers’ pegging orders could, in certain circumstances, detect the presence of non-displayed depth liquidity on the exchanges’ order books over a seven year period beginning in 2008. This was a material aspect of exchange operations but was not described in any effective rules. There were customer complaint that brought the issue to the attention of the exchange.

The Order alleges violations of Exchange Act Sections 19(b)(1) and 19(g)(1), Securities Act Section 17(a)(2), and certain rules under Regulations SCI and NMS.

In resolving the proceeding, Respondents will implement certain undertakings over the next three years. Those undertakings center on proving written evidence of compliance with the obligations of each exchange as described here.

In resolving the proceedings Respondents consented to the entry of a cease and desist order based on Exchange Act Section 19(b)(1) and to censures. In addition, Respondents NYSE and American consented to the entry of a cease and desist orders based on Securities Act Section 17(a)(2) and rules 1001(a) and 1001(a)(2)(v) under Regulation SCI. Respondent Arca consented to the entry of a cease and desist order based on Exchange Act Section 19(g)(1) and rule 608(c) of Regulation NMS. Respondents will also pay a penalty of $14 million.

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