All things considered, the New York Stock Exchange's $5 million
settlement with the Securities and Exchange Commission could
have been a lot worse for the NYSE. The SEC order issued Friday
concluded that beginning in June 2008, the NYSE's proprietary
feed delivered real-time data to the exchange's customers before
information was sent to the processor that put out a
consolidated public feed. The SEC said the exchange's compliance
failures "gave certain customers an improper head start on
trading information," and Enforcement Director Robert Khuzami
said in the commission's statement on the settlement that any
early access for one set of investors "can in today's markets be
a real and substantial advantage that disproportionately
disadvantages retail and long-term investors."
But the order didn't find that the NYSE's information
systems were responsible for the "flash crash" on May 10, 2010.
You probably remember: One trader's single $4.1 billion sale
sparked computer-generated, high-frequency trading that sent the
Dow Jones Industrial Average down 700 points in a matter of
minutes. The crash led to an investigation of how the stock
exchange puts out information, which, in turn, led to Friday's
settlement. In the order, however, the SEC specifically noted
that the data delays didn't cause the crash, reiterating its previous findings. Friday's settlement also didn't allege that
the time gap between the disclosure of proprietary and public
information caused any investors to lose money nor that the NYSE
deliberately intended to give proprietary customers early access
to data. The NYSE, which was represented by Covington & Burling,
emphasized those points in its statement on the settlement,
which also noted that the exchange has modified its systems to
fix the network issues that created the timing lag.
As I read the settlement order, though, I kept thinking
about exactly how much time we're talking about. The time lag
between delivery of data to the propriety feed and to the public
consolidator ranged from a millisecond or two to as much as five
seconds in extremely heavy trading volume. Five seconds! How
many of us ordinary investors could process information, make a
trading decision and act on it in five seconds, let alone in the
millisecond information gap during ordinary trading?
I'm not saying that there shouldn't be a level playing field
for all investors. There certainly should. I'm saying that
high-frequency traders whose computer algorithms can react in
milliseconds to the data they receive simply aren't playing on
the same field as us. That's a bigger problem for the NYSE (and
other exchanges) and the SEC than the time gap Friday's
settlement addresses. How can ordinary investors have confidence
in markets in which information is processed at such ultrahuman
speed that milliseconds matter?
SEC Commissioner Mary Schapirosaid in January that because
of high-frequency trading, the exchanges need to be more
vigilant and the SEC needs to exercise rigorous oversight of the
markets. Reuters reported on the steps the SEC took after the
flash crash, urging exchanges to cooperate with one another and
implement rules to prevent a recurrence of the
computer-generated plunge. Those were a good beginning, as was
the careful investigation of the NYSE's computer systems. But
here's hoping that Friday's settlement doesn't mark the end of
the SEC's vigilance.
(Reporting by Alison Frankel)
Follow us on Twitter @AlisonFrankel, @ReutersLegal | Like us on Facebook