Chicago Stock Exchange Inc. agreed to pay $300,000 to settle U.S. regulatory claims that it failed to comply with rules designed to ensure all investors get the best prices.
Some brokers were able to abuse a component of the exchange’s order-matching system to obtain better prices at the expense of other investors, according to an order from the Securities and Exchange Commission made public today. One broker manipulated the system to advantage hedge-fund clients at the expense of other traders, the order said.
The exchange, which has averaged 0.4 percent of daily U.S. equity volume in 2013, didn’t implement policies designed to detect and prevent such misconduct from 2006 to 2010, the SEC said. The exchange also didn’t implement surveillance procedures to monitor brokers’ use of its system from 2006 to 2008, the SEC said.
“The validated cross system permitted institutional brokers to execute transactions at stale prices within previously captured NBBO,” or national best bid and offer, the SEC said in the order. “The system was thus not reasonably designed to prevent validated cross trades from trading through the NBBO prevailing at the time of execution.”
David A. Herron, the exchange’s chief executive officer, said the firm cooperated with the SEC’s investigation. “We are happy to put this issue to bed,” Herron said in a phone interview. The Chicago Stock Exchange is partly owned by Bank of America Corp., JPMorgan Chase & Co., Goldman Sachs Group Inc., and E*Trade Financial Corp., according to its latest annual report.