WASHINGTON – Two securities exchanges have agreed to pay a total $14 million to settle federal charges of giving inaccurate information to trading firms about the buy and sell orders they used.
The Securities and Exchange Commission announced the settlement Monday in the civil case with the EDGA and EDGX exchanges. The SEC said it was the largest penalty it had imposed on a U.S. stock exchange and the first case involving types of trading orders used.
The exchanges gave full information about their ranking of orders by price and other data to some of their trading firm members — including some high-frequency firms — but not to all, the SEC said. That created a risk that not all investors could understand how the orders worked, the agency said.
High-frequency trading firms, which use computer algorithms to buy and sell stocks in milliseconds, now account for a majority of stock trading volume. They look to get a jump on competitors by using computers to rapidly analyze market data and exploit minuscule price differences.
Retail investors, through the trading firms, could have been disadvantaged by the alleged conduct of the two exchanges. The SEC didn’t specify what kinds of investors were affected. But Enforcement Director Andrew Ceresney said the damage from the conduct “is really to all market participants.”
“Generally there’s harm to the market,” he said in a conference call with reporters.
The exchanges neither admitted nor denied wrongdoing but agreed to refrain from such violations in the future. They also were censured, bringing the possibility of a stiffer sanction if the alleged violation is repeated.
BATS Global Markets, which took over the two exchanges as part of its acquisition early last year of trading platform Direct Edge, wasn’t targeted in the SEC action. The alleged violations by EDGA and EDGX — two of the four stock exchanges operated by BATS — occurred from 2010 through 2014.
The merger with Direct Edge made BATS, based in Kansas City, Missouri, the second-largest U.S. stock exchange supplanting the Nasdaq Stock Market.
The SEC made two separate investigations into order types of BATS and Direct Edge.
In a statement Monday, BATS said SEC had closed the inquiry on its operations without taking any enforcement action, “and we are pleased to have this matter formally closed.”
Until now, the biggest penalty against a stock exchange levied by the SEC was a $10 million fine against Nasdaq for technical problems that disrupted Facebook’s public stock offering in May 2012 and kept many investors from buying or selling shares.