On January 12, 2015, the Securities and Exchange Commission announced that it had obtained a $14 million settlement against two exchanges formerly owned by Direct Edge Holdings, EDGA and EDGX (the “Respondent Exchanges”) for their failure to file Exchange Rules that accurately described the order types they offered, and for providing preferential disclosure to certain high frequency traders.  This recovery constitutes the largest penalty ever levied by the SEC against a national securities exchange and appears to be the first action focusing primarily on exchange order type issues.

According to the SEC’s Order, the official Rules filed by both Exchanges only described a single price sliding order type, while each Exchange actually offered three variations to their members: Hide Not Slide, Price Adjust, and Single Re-Price.  The SEC claims that the Rules failed to describe each order’s functionality and their priorities relative to each other and other order types.  Moreover, although this information was not available to all members, the Exchanges provided it to a select few customers, including several high frequency trading firms.  The SEC also claims that that two of these order types were developed in response to requests from high frequency trading customers and that both Exchanges would rotate which order type was used by default without filing the necessary Rule Amendment or providing notice to anyone except these “preferred” members.