Exchange to Fine Firms Responsible
The New York Stock Exchange said yesterday it has found evidence that the five largest of seven "specialist" firms that control trading on the exchange regularly engaged in abusive practices over the past few years. NYSE regulators estimate the abuses have cost investors as much as $150 million, sources said.
NYSE officials, who police the exchange on behalf of the Securities and Exchange Commission, said they plan disciplinary action against the five firms on charges that they violated "fundamental" exchange rules by making trades that enriched themselves at investors' expense. Exchange regulators said they will seek to have the traders return the overcharges, pay fines and beef up self-monitoring systems.
The amount of the fines has not been set and the size of the alleged overcharges could change, industry sources said, as the firms learn more about the allegations and possibly challenge them.
Separately, interim NYSE chairman John S. Reed, testifying before a congressional subcommittee examining how to rid the exchange of conflicts of interest, said the NYSE also plans in the coming weeks to install computer software to "deter" such trading. News of the regulatory action and Reed's testimony come as some critics say the exchange should be stripped of its regulatory self-policing role and others call for an end, or at least a substantial revision, to the "specialist" system in favor of electronic trading.
Specialists conduct trading on the exchange floor in individual stocks. They are supposed to match buyers and sellers at a given price whenever possible. But some investors have complained that the specialists frequently and unnecessarily step in between orders, buying from a seller and then selling to a buyer at a slightly higher price, pocketing the difference.
NYSE officials said the conclusions are their first from an ongoing investigation that began over a year ago and that now has been joined by officials at the SEC. Officials say the abuses may have gone on longer than the three-year period ended Dec. 31, 2002, but that there is no way to know because firms are not required to keep records longer than that.
The firms involved are LaBranche & Co.; Spear, Leeds & Kellogg; Fleet Specialist; Van der Moolen Specialist; and Bear Wagner Specialists.
Spokesmen for Goldman Sachs & Co., which owns Spear Leeds, and for Bear Wagner, owned in part by Bear Stearns, declined to comment. Fleet said in a statement that the potential amount of overcharges it would have to return would not have a significant effect on the company.
But publicly traded LaBranche and Van der Moolen issued statements saying that paying back the alleged overcharges would have a significant effect on them. Van der Moolen said NYSE regulators have told it they suspect about $35 million in abuses. LaBranche declined to be specific, but industry sources say regulators suspect $40 million in abuses there. LaBranche stock closed yesterday at $11.26, down $1.29. Van der Moolen closed at $9.05, down $1.56.
The NYSE is charged by the SEC with regulating its members, mainly specialists and large brokerage houses, that are also its owners. Critics say the recent scandal over former NYSE chairman Dick Grasso's compensation package showed that the exchange faces inherent conflicts of interest that call into question its ability to regulate.
Grasso resigned last month after the exchange revealed it had awarded him a deferred-compensation package worth $187.5 million. The NYSE announced last week that it paid six other top executives tens of millions of dollars. These pay packages were approved in part by directors who come from firms the NYSE regulates.
In an interview yesterday after the hearing, Reed said he thought the NYSE and its specialist system had worked well but that he would welcome the SEC's throwing out rules that have favored the specialist system.
A senior SEC official said this week that within months the agency plans to propose rules to foster competition by making specialists operate on equal terms with other market traders. That would force them to survive based on the merit of their work, not on special privileges such as access to trading orders and other pricing information that others don't have. "A level playing field resonates with us," Reed said.
In response to a question from lawmakers, Reed also promised that any reform of the NYSE's governing structure will include giving a voice to pension funds, mutual funds and others that trade through the exchange but say they have been largely ignored by the investment-banking community that historically has controlled the exchange's board of directors.
The New York Stock Exchange said yesterday it has found evidence that the five largest of seven "specialist" firms that control trading on the exchange regularly engaged in abusive practices over the past few years. NYSE regulators estimate the abuses have cost investors as much as $150 million, sources said.
NYSE officials, who police the exchange on behalf of the Securities and Exchange Commission, said they plan disciplinary action against the five firms on charges that they violated "fundamental" exchange rules by making trades that enriched themselves at investors' expense. Exchange regulators said they will seek to have the traders return the overcharges, pay fines and beef up self-monitoring systems.
The amount of the fines has not been set and the size of the alleged overcharges could change, industry sources said, as the firms learn more about the allegations and possibly challenge them.
Separately, interim NYSE chairman John S. Reed, testifying before a congressional subcommittee examining how to rid the exchange of conflicts of interest, said the NYSE also plans in the coming weeks to install computer software to "deter" such trading. News of the regulatory action and Reed's testimony come as some critics say the exchange should be stripped of its regulatory self-policing role and others call for an end, or at least a substantial revision, to the "specialist" system in favor of electronic trading.
Specialists conduct trading on the exchange floor in individual stocks. They are supposed to match buyers and sellers at a given price whenever possible. But some investors have complained that the specialists frequently and unnecessarily step in between orders, buying from a seller and then selling to a buyer at a slightly higher price, pocketing the difference.
NYSE officials said the conclusions are their first from an ongoing investigation that began over a year ago and that now has been joined by officials at the SEC. Officials say the abuses may have gone on longer than the three-year period ended Dec. 31, 2002, but that there is no way to know because firms are not required to keep records longer than that.
The firms involved are LaBranche & Co.; Spear, Leeds & Kellogg; Fleet Specialist; Van der Moolen Specialist; and Bear Wagner Specialists.
Spokesmen for Goldman Sachs & Co., which owns Spear Leeds, and for Bear Wagner, owned in part by Bear Stearns, declined to comment. Fleet said in a statement that the potential amount of overcharges it would have to return would not have a significant effect on the company.
But publicly traded LaBranche and Van der Moolen issued statements saying that paying back the alleged overcharges would have a significant effect on them. Van der Moolen said NYSE regulators have told it they suspect about $35 million in abuses. LaBranche declined to be specific, but industry sources say regulators suspect $40 million in abuses there. LaBranche stock closed yesterday at $11.26, down $1.29. Van der Moolen closed at $9.05, down $1.56.
The NYSE is charged by the SEC with regulating its members, mainly specialists and large brokerage houses, that are also its owners. Critics say the recent scandal over former NYSE chairman Dick Grasso's compensation package showed that the exchange faces inherent conflicts of interest that call into question its ability to regulate.
Grasso resigned last month after the exchange revealed it had awarded him a deferred-compensation package worth $187.5 million. The NYSE announced last week that it paid six other top executives tens of millions of dollars. These pay packages were approved in part by directors who come from firms the NYSE regulates.
In an interview yesterday after the hearing, Reed said he thought the NYSE and its specialist system had worked well but that he would welcome the SEC's throwing out rules that have favored the specialist system.
A senior SEC official said this week that within months the agency plans to propose rules to foster competition by making specialists operate on equal terms with other market traders. That would force them to survive based on the merit of their work, not on special privileges such as access to trading orders and other pricing information that others don't have. "A level playing field resonates with us," Reed said.
In response to a question from lawmakers, Reed also promised that any reform of the NYSE's governing structure will include giving a voice to pension funds, mutual funds and others that trade through the exchange but say they have been largely ignored by the investment-banking community that historically has controlled the exchange's board of directors.
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