The New York Stock Exchange targets five floor trading firms with penalties for improper trading.
By wire services
Published October 17, 2003
As the New York Stock Exchange announced Thursday that it would discipline and seek tens of millions in fines against five floor trading firms, the Big Board's interim chief, John Reed told a House subcommittee how he intends to remake the exchange's board, making it smaller and more independent.
The world's largest stock exchange said Thursday it will seek to compensate investors after it completes its widening probe into improper trading that may have cost those investors millions. The investigation so far has found the specialist firms ignored their primary duty to directly match buy and sell orders when possible and instead intervened from their own account for a profit.
The exchange also said it would seek improvements in self-monitoring and start implementing surveillance software next week as a deterrent. The investigation examined trades Jan. 1, 2000, through Dec. 31, 2002, and found suspect activity in about 2-billion shares, which is slightly more than a single day's volume.
The exchange refused to disclose the amount of the fines saying, it was subject to change pending the conclusion of its investigation. Reed said in testimony before Congress that reports that the fines would total $150-million were "in the ballpark."
"We have told the companies the amount of money that we believe the customers have been disadvantaged and that it is our position to turn those funds over to investors," said Edward A. Kwalwasser, NYSE executive vice president for regulation.
The five firms being targeted are LaBranche & Co.; Goldman Sachs Group's Spear, Leeds & Kellogg; FleetBoston Financial Corp.'s Fleet Specialist unit; Van Der Moolen Holdings NV's Van Der Moolen Specialists USA unit; and Bear Wagner Specialists, which is minority-owned by Bear Stearns Cos.
Four of the five specialist firms said they wanted to see the stock exchange's records of the trades before deciding whether to appeal any fines. Bear Wagner did not immediately return phone calls. Specialists maintain a smooth flow of trading by matching buyers and sellers and by publishing prices. When there is a wide price gap between buyers and sellers, a specialist keeps trading going by buying or selling shares from his own account.
Critics said the revelations pointed to a need for a major overhaul of the NYSE's 211-year-old human auction system, citing inherent conflicts of interest among specialists.
The SEC also is considering possible rules changes that could make it easier for Nasdaq and other electronic markets to compete with the exchange. Electronic markets have said their systems are faster and free of the inherent conflicts of interests that human brokers face.
Reed, however, told Congress that he didn't think a major change to the auction system was appropriate at this time.
In discussing his plans for the board of governors, the interim chairman said the NYSE's governance structure "failed" in setting executive compensation and its handling of the uproar over former chairman Richard Grasso's $140-million payout.
The current structure provides for a 27-member board, with 12 representatives from the securities industry.
Reed, who plans to make formal proposals to NYSE members at the end of the month, said he is considering a board with "a substantial majority" of independent directors. Among those who would not qualify as independent are members from the trading floor and broker-dealer industry or chief executives of firms listed on the exchange.
In response to a question from Rep. Brad Sherman, D-Calif., Reed said he opposed a statute to limit the pay of the NYSE's boss but agreed that qualified people could be hired for less than $5-million a year. Grasso averaged more than $12-million during each full year as chairman.
Reed also said he wants members from large pension funds and other institutional investors on the board - a change urged by state officials and pension fund leaders.
Reed also said he would ensure enhanced disclosure of potential conflicts of interest.
- Information from the Associated Press and Chicago Tribune was used in this report.
