Chicago Stock Exchange to pay fine to settle SEC charges


The Chicago Stock Exchange will pay $300,000 to settle civil charges accusing the exchange operator of violating market rules designed to protect investors from having their trades executed at inferior prices, U.S. regulators said.

The Securities and Exchange Commission's August 15 order against the exchange marks the latest in a series of enforcement actions by the regulator targeting exchanges in a broader crackdown that started several years ago.

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The exchange agreed to settle the charges without admitting or denying any wrongdoing.

"We're very happy to come to a resolution and put it behind us," said David Herron, CEO of the Chicago Stock Exchange, a small exchange that only accounts for about 0.4 percent of U.S. equities trading volume.

According to the SEC, from 2006 through 2010, the exchange failed to implement proper policies designed to prevent violations of Rule 611 of Regulation NMS, which is meant to protect investors from having orders executed at non-competitive prices.

The SEC said the problems first began when the exchange transitioned from a physical trading floor to an automated, all-electronic platform in 2006.

Part of the exchange's new platform contained a feature known as a "validated cross system" that allowed institutional brokerages to trade privately with one another. Flaws in that system, however, led some trades to be executed at stale prices.

In April 2008, the exchange learned that certain hedge funds were manipulating the system by using it to start a trade, and then sitting back and watching to see whether the market was moving in their favor. If it moved against them, they canceled their trades.

"Notwithstanding these red flags, the Chicago Stock Exchange failed to implement effective surveillance procedures reasonably designed to prevent abuses of the validated cross system," the SEC said in its order.

The exchange decommissioned the program in December 2010, which Herron told Reuters was well before the SEC starting investigating the matter.

"This was one small part of our functionality and has long been disabled and is no longer an offering of the CHX," Herron said.

The SEC has been taking a series of actions against exchanges.

Since late 2011, it has filed civil charges against Direct Edge, NYSE Euronext, Nasdaq OMX and the Chicago Board Options Exchange for a variety of problems.

Earlier this month, the SEC decided not to formally charge Deutsche Boerse, operator of the Eurex exchange, for violations related to sales to U.S. investors. But the SEC did issue a detailed investigative report outlining the findings of its investigation into Eurex and urging other foreign exchanges not to make the same mistakes.

(Reporting by Sarah N. Lynch in Washington; additional reporting by Tom Polansek in Chicago; Editing by Leslie Adler)