Two exchanges formerly owned by Direct Edge, EDGA and EDGX, agreed this week to pay $14 million to settle charges with the SEC that the exchanges’ rules “failed to accurately describe the order types being used on the exchanges.” The order types in question were “price sliding” which allowed the exchange to modify instead of cancelling a non-routable order when the order would cause a locked or crossed market. For a period of over four years, the exchanges’ rules described only one price sliding process, when in fact there were three price sliding order types which each modified the orders in question a slightly different way. The SEC found that the exchanges did not provide complete and public information regarding the operation of the order types and further did not submit rules changes to the Commission that would have accurately described the operation of the order types.
According to the investigation, Direct Edge implemented one of the order types at the behest of a single high-frequency trading firm which indicated that the development of such an order type would cause the firm to increase order flow to the exchange from 4-5 million to 12-15 million orders per day. While Direct Edge published technical specifications regarding the new order type, it did not update the specifications in response to subsequent modifications to the order type and did not amend its proposed exchange rules with the Commission to reflect the order type. Further, the exchanges provided full details of the order types to selected firms (specifically several high-frequency traders), but did not make the information available publicly.
The SEC’s announcement of the settlement can be found here.