NYSE to take back policing duties from Wall Street watchdog
By John McCrank NEW YORK (Reuters) - NYSE Group said on Monday it would take back the majority of the policing duties for its two U.S. options exchanges and three stock markets, including the New York Stock Exchange, from Wall Street's self-funded watchdog at the end of 2015. Exchanges are self-regulatory organizations (SROs), meaning in part that they are responsible for monitoring and enforcing certain rules within their industry. But all 11 U.S. stock exchanges have outsourced some of their regulatory duties to the Financial Industry Regulatory Authority (FINRA). The move by NYSE follows a similar one by Nasdaq OMX Group last year. It is significant because some in the industry, such as the Securities Industry and Financial Markets Association (SIFMA), have been calling for exchanges to be stripped of their SRO status, saying it creates conflicts of interest and that a single SRO, such as FINRA, might be better-suited to do the work. As for-profit operations, exchanges compete with broker-dealers, which they help regulate, for much of the same business - nearly 40 percent of stock trades happen away from the exchanges. Exchanges are also granted legal protections when acting in a regulatory function, so if something goes wrong at an exchange during the opening or closing of the markets, or during an initial public offering, their liability is limited. "One of the reasons they may be taking this step is to hang on to their SRO status," James Angel, a finance professor at Georgetown University, said of NYSE's announcement. NYSE's not-for-profit regulatory subsidiary, NYSE Regulation, outsourced its market surveillance and enforcement functions to FINRA in 2010, while retaining an oversight role, as well as making sure NYSE-listed companies comply with listing standards. But the exchange group, which has been undertaking an extensive review of operations since its acquisition by Atlanta-based Intercontinental Exchange Inc nearly a year ago, now believes that it could do a more efficient job of policing its markets, said a person familiar with the matter. The move will also mean a fairly substantial increase to NYSE Regulation's staff of around 55 people, said the person, who did not have permission to be quoted in the media. NYSE said it has partnered with financial technology firm Cinnober to build a new surveillance system from scratch. FINRA will continue to conduct cross-market surveillance for NYSE, which incorporates data from other exchanges to spot abusive trading patterns, as well as the registration, testing, and examinations of broker-dealer members of NYSE's exchanges. BATS Global Markets, the No. 2 U.S. stock market operator, just behind NYSE, said in February that it would outsource part of the surveillance of its four U.S. stock markets to FINRA. (Editing by Matthew Lewis)
