SEC Awaits NYSE Snafu Report, Weighs Regulation, Possible Fine

The Securities and Exchange Commission (SEC) is waiting for a full report from the New York Stock Exchange and parent company InterContinental Exchange (NYSE:ICE) to learn exactly what shutdown trading for over 3 hours on Wednesday. The report may shape future market regulation and may determine if the NYSE will be hit with a financial penalty, has learned.

Sources familiar with the situation said that while NYSE President Tom Farley and ICE CEO Jeffrey Sprecher were in contact with SEC officials and Chair Mary Jo White throughout the outage, a full post-mortem will provide a clearer picture. The SEC is not only looking at the cause of the snafu but also how decisions by exchange executives were made. These details may be used by regulators to determine if the current regulatory structure of U.S. markets is adequate or if improvements need to be made.  Although sources added it is too soon in the process to speculate on a financial penalty, the SEC has a consistent track record for fining exchanges for disruptions.

SEC Scorecard:

January 2015 - BATS Global Markets/Direct Edge: $14 million against two exchanges formerly owned by Direct Edge, which were acquired by BATS Global Markets. The fine settled charges over failure to accurately describe the order types being used on the exchanges. Full disclosure, I was employed by BATS during 2012-2014.

May 2013 Nasdaq OMX: $10 million for failures during the Facebook IPO.

October 2013 Knight Capital: $12 million to settle charges that it violated the agency’s market access rule in connection with the firm’s August 1, 2012 trading incident that disrupted the markets.

September 2012 NYSE Euronext: $5 million for compliance failures that gave certain customers an improper head start on trading information, first of its kind charges by the SEC.

The SEC declined to comment for this story but late Thursday, an SEC spokesperson confirmed via email that Chair Mary Jo White dispatched Director of Trading and Markets Steve Luparello to “meet with senior NYSE officials in New York today to review yesterday’s events and NYSE’s plans going forward. The Chair and senior Commission staff are continuing their discussions with exchange officials and other market participants.”

NYSE declined to comment to on its current discussions with the SEC but did publicly release a statement Thursday providing more detail on the technical issue which blamed a configuration problem connected to the release of new software.

While the shutdown grabbed headlines, it did not disrupt stock trading. Larry Tabb, founder of the TABB Group, notes order flow went to other venues and that the takeaway of the shutdown is that exchanges are fully electronic and can handle a tremendous amount of volume.

Wednesday U.S. trading volume across all exchanges was 7.3B shares, slightly above the 5-Day average.  Tabb said it was too soon to determine if the NYSE is liable for a financial penalty.