SEC puts exchanges in sights charging CBOE regulatory lapses

Exchange executives, long shielded from legal scrutiny in the U.S., have been put on notice that may be changing after federal regulators fined CBOE Holdings Inc. $6 million for unprecedented lapses in supervision.

The levy, disclosed yesterday in a settlement with the biggest American options venue, marks the third time in nine months the Securities and Exchange Commission has announced financial sanctions against a market operator. Before collecting $5 million from NYSE Euronext in September for data dissemination violations, the commission had never imposed a monetary penalty on an exchange.

More than a decade of evolution in the way stocks, options, futures and derivatives trade in the U.S. has raised scrutiny of exchanges, which compete against each other for profits while supervising members as self-regulatory organizations. The role, dating from a period when markets were owned by the firms that used them, has been questioned following lapses in technology and oversight.

“This is something that’s been percolating at the SEC for a number of years,” said Paul Huey-Burns, a lawyer who worked at the agency from 1986 to 1998, in a phone interview yesterday. “There’s a perception at the agency that while the exchanges, as SROs, are an important part of the regulatory framework, that particular leg has not been holding up its side of the stool.”

CBOE added 0.5% to $42.02 as of 10:37 a.m. in New York.


Legislation that created the SEC in 1934 also deemed the main venues self-regulatory organizations, or SROs. The status gives them immunity for most actions taken as part of their supervisory duties, protecting them from lawsuits related to the exercise of those powers and preventing losses that could jeopardize institutions seen as vital to the U.S. economy.

Those shields were publicly challenged last year in the aftermath of Nasdaq OMX Group Inc.’s mishandling of Facebook Inc.’s initial public offering. Brokerages such as Citigroup Inc., which claim to have lost tens of millions of dollars when Nasdaq’s computers malfunctioned, said exchanges should be forbidden from hiding behind SRO rules when their mistakes reflected attempts to maximize profits.

The SEC didn’t cite New York-based Nasdaq for errors of regulation, charging the company instead with securities laws violations in a complaint settled last month. Nasdaq’s $10 million payment marked the second time the SEC had secured cash compensation from a market operator.

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