Two Direct Edge exchanges now owned by BATS Global Markets will pay $14 million to settle charges of improperly describing stock orders, the SEC announced Monday.
It is the first SEC case focused mainly on stock exchange order types, and the largest penalty against a national securities exchange, Securities and Exchange Commission officials said in a statement announcing the charges and settlement. The company did not admit or deny the allegations, and noted in a statement that a similar investigation of BATS was closed without further action.
The SEC investigation, which began before Direct Edge merged with BATS Global Markets in 2013, found that Direct Edge rules did not accurately describe how its order types functioned, describing a single “price sliding” process, instead of three variations of “price sliding” order types offered by EDGA Exchange and EDGX Exchange.
The SEC also found problems with some of the prices and execution priorities of the three order types relative to each other and other order types, and criticized the exchanges for telling some members, including high-frequency trading firms, but not others, how those order types operated.
Since beginning as registered exchanges in 2010 until late 2014 — when they updated their rules and received SEC approval for the changes — the two exchanges were only supposed to be processing orders using a single “displayed price sliding” process, but also offered “hide not slide,” “price adjust” and “single reprice” without proper disclosure in their rules, according to the SEC.
In a statement, BATS said the SEC was not alleging improprieties in order type functionality, but only “that the price sliding functionality was not completely and accurately disclosed in Direct Edge's rules.” BATS created a reserve for the SEC settlement when it acquired the exchanges, and reflected that in third-quarter statements.
“It is critically important that an exchange completely and accurately describes its procedures and rules,” said SEC Enforcement Division Director Andrew Ceresney during a conference call explaining why the SEC imposed its highest penalty to date against a national exchange. The previous record fine against an exchange was $10 million against Nasdaq.
“I think that reflects our view of the egregiousness of the conduct here. If we find violations regarding order types, we are going to bring an enforcement action,” he said.
