“It’s a significant event whenever the SEC fines an exchange,” said Neal Wolkoff, former CEO of the American Stock Exchange, in an interview. “This is intended to allay concerns the investing public may have that exchanges aren’t separating their SRO functions from their commercial interests.”
The CBOE penalty and accompanying details of the investigation provided an opportunity to “thoroughly educate” the exchanges about what is expected from them, said Huey-Burns.
That’s highlighted by a passage in which the SEC notes that exchange staffers tried to assist OptionsXpress by helping it write a so-called Wells submission, a formal reply to regulatory concerns raised by the agency. The edited document contained inaccurate and misleading information, the SEC wrote.
“There’s no question in my mind that by putting that in the complaint the SEC is sending a message to the exchanges that, you may have to accommodate your members, but we want your focus to be on your regulatory role,” said Huey-Burns, a partner at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland.
Judith Burns, an SEC spokesperson, said commission staff members don’t comment on cases beyond published statements. The SEC noted in its order that the CBOE has acted to address the issues, including changing its regulatory, compliance and corporate governance structure.
The spread of equity trading across dozens of private venues and advances in technology have spurred the SEC to a broader role in exchange oversight. In April, the agency passed a rule, Regulation Systems Compliance and Integrity, directing exchanges to strengthen their technology and instructing member firms to participate in tests to show they can sustain operations after a large disruption.
Daniel Hawke, head of the SEC’s market-abuse unit, said in a speech on Feb. 25, 2012, that the agency had begun a broad examination of practices that gained dominance in the past decade amid the shift to automation. The SEC is looking into techniques such as co-location, in which exchanges let traders place computers close to the market’s systems to shave time off executions, rebates venues pay users, direct market access where brokers let investors send orders to venues themselves, and whether the types of orders that exchanges offer are being misused.
The levying of fines against exchanges reflects an increased level accountability, said Bruce Weber, dean of the Alfred Lerner College of Business and Economics at the University of Delaware.
“Exchanges really need to think through their compliance enforcement and make their SRO duties something that’s taken very seriously,” said Weber by telephone. “In recent years, new product development, marketing, customer relations, investor relations and new listings have been getting high priority. If anything, their SRO duties have slipped backwards in terms of management priority.”
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