New York Stock Exchange rules governing everything from how traders connect their computers to when prices are disseminated to floor brokers were either inadequate or ignored by the exchange operator over five years ending in 2012, regulators said today.

NYSE, which was bought by IntercontinentalExchange Group Inc. last year, agreed to pay $4.5 million to settle the complaint, according to a SEC statement today. Among other infractions, regulators said NYSE and its subsidiaries failed to establish guidelines for an account they use to trade in and out of securities when computer errors occur.

The sweeping complaint is the SEC’s first regulatory broadside against a major U.S. exchange since the publication of Michael Lewis’s “Flash Boys” a month ago, which sparked a debate about how fairly the American equity markets are structured. While the sum is small compared with NYSE’s earnings, until recently fines were never levied against U.S. equity exchanges, which are shielded from legal scrutiny.

“The order highlights instances where the exchanges conducted business without a rule in place due to weak or inadequate policies and procedures,” the SEC said. “In other instances, the exchanges did not operate in compliance with their effective rules. Both failures reflect a troubling lack of compliance with the requirements and obligations imposed on securities exchanges.”

Eric Ryan, a spokesman for Atlanta-based ICE, declined to comment. Shares of IntercontinentalExchange rose 0.5 percent to $205.40 as of 1:41 p.m. in New York.

Self Regulation

Like other stock venues, the NYSE is a self-regulatory organization, meaning it formulates its own rules and submits them to the SEC before they are enacted. In today’s complaint, the SEC alleged NYSE failed to write strong enough rules in some cases and broke existing ones in others.

Listed in the SEC release were violations related to the day-to-day operations at NYSE, among them the practice of colocation, in which brokers are allowed to place computers close to exchange machines to reduce the time it takes to transmit orders. The citations were procedural, alleging NYSE rules lacked specificity or were ignored, and the SEC stopped short of indicating the practices themselves are illegal.

Colocation Services

For instance, when NYSE provided colocation services to customers, it did so “without an exchange rule in effect that permitted and governed the provision of such services on a fair and equitable basis,” according to the SEC statement. Regarding a feed that published data on trading imbalances to floor brokers, the process “did not function in accordance with the rules submitted by the NYSE and approved by the SEC,” it said.

In another example cited by the SEC, the NYSE exchanges used an error account maintained at Archipelago to trade out of securities positions without having appropriate rules. The exchanges, without admitting or denying the findings, agreed to settle the claims by retaining an independent consultant and paying the penalty along with Archipelago, the SEC said.

Archipelago Securities maintains the error account to trade securities that it acquires when computer malfunctions require it to buy or sell stock to maintain an orderly market.

Today’s settlement is the second time in less than two years that the NYSE has been assessed a cash penalty by the SEC. In September 2012, the company paid $5 million over rule violations for giving certain customers trading data before the public. Before that, the commission had never imposed a monetary punishment on an exchange.

CBOE Settlement

The SEC exacted a $6 million settlement from CBOE Holdings Inc. in June 2013 after it was found to have interfered with a three-year SEC investigation of short selling at a member firm.

SEC Chairman Mary Jo White faced questions from lawmakers at a congressional hearing on April 29 about criticism of the SEC’s oversight of stock markets and automated trading strategies. While Republicans praised White for conducting a comprehensive review of market rules and activity, they questioned her proposal for a larger budget.

“We could not be doing a more intensive review of all of the issues,” White said, adding that she couldn’t disclose when the SEC would issue recommendations for new rules.

In March the New York attorney general began a broad investigation into the U.S. stock market, while the Federal Bureau of Investigation is examining some strategies.

Other NYSE violations cited today by the SEC were the operation of a block trading facility that broke exchange rules and the failure to execute certain types of orders when markets lock, or when bid and ask prices are the same. Archipelago Securities failed to put in place policies to prevent the misuse of nonpublic information in connection with the error account, the SEC said.

Source: Bloomberg (by Nick Baker)