NYSE Euronext (NYSE:NYX) has reached an agreement with the Securities and Exchange Commission (SEC) to pay a $5 million fine relating to a violation of regulations governing the timing of delivery of market data by the exchange.  The SEC had identified a discrepancy between the time that data was relayed via two of its propriety feeds, Open Book Ultra and PDP Quotes, and the time that data was sent to the public consolidated feed.
Our $27 valuation of NYSE Euronext’s stock is in-line with the current market price.
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The disparity in data delivery timings was discovered during the SEC’s investigation of the flash crash of May 2010, during which the Dow Jones Industrial Average by 9% before recovering.  The software problem that caused the delay in the delivery of market data to the consolidated feed was identified by the company in February 2010, but it was only able to fix about half of the relevant servers by the day of the crash, May 6th, 2010. High trading volume on the day led to processing delays of about 10 seconds on servers which were not fixed, leading to the crash. The SEC also blamed NYSE for failing to maintain certain computer records required by the regulatory agency.
Although NYSE has denied any intentional wrongdoing on its part, blaming technology issues for the timing differential, retail investors will feel let down by the exchange. The public’s faith in the technology used by exchanges suffered a massive blow after glitches in Nasdaq’s (NASDAQ:NDAQ) software during the Facebook (NASDAQ:FB) initial public offering, earlier this year, cost investors more than $100 million in losses. (See Facebook’s Relationship Status With Nasdaq: It’s Complicated)
Investor confidence has been pretty low this year, average daily volume (ADV) for U.S. cash products in August was down 54.6%, compared to the same month in 2011. The latest controversy will do little to assuage investors despite NYSE’s claim that it eliminated the issues in question through modifications in 2011. The exchange has also agreed to hire an independent consultant to assess its systems to prevent a future mishap. We currently forecast a gradual recovery in cash products trading volume, there is a potential downside of 10% to our price estimate, should the annual shares handled fall to around 500 billion.
You can gauge the effect of a change in trade volume on our price estimate, by modifying the interactive charts above.Notes:
- NYSE Euronext Statement Regarding Settlement Agreement with Securities and Exchange Commission, Press Release, 14th September, 2012 [↩]
- NYSE Data Violations Extend U.S. Exchanges’ Reputation Woes, Bloomberg, 15th September, 2012 [↩]