SEC Probing Cases of Phantom Quotes on Nasdaq, Nazareth Says
Washington, Jan. 11 (Bloomberg) -- The Securities and
Exchange Commission is investigating several cases in which people
may have tried to manipulate the Nasdaq Stock Market by entering
false quotes for a few seconds before canceling them, an SEC
official said.
The practice, known as ``spoofing'' or entering ``phantom
quotes,'' seeks to spur ``momentum traders (to) exacerbate short-
term price swings,'' SEC market-regulation director Annette
Nazareth said. The originators of the scheme can capitalize on the
price swings by buying or selling stock, she said.
In addition to the current investigations it has under way,
the SEC also may open inquiries into some other cases referred to
it by the National Association of Securities Dealers, a self-
policing industry group, Nazareth said.
``These investigations are proceeding, and the recent
enforcement referrals from NASD Regulation appear to be
promising,'' Nazareth said in a Dec. 21 letter to Representative
John Dingell, a Michigan Democrat.
The letter, released today by Dingell, gave no details about
those under SEC investigation. SEC spokesman John Heine, declining
comment, said, ``The letter speaks for itself.''
Many rapid order cancellations occurred in volatile Nasdaq
stocks in late 1999 and early 2000 and stemmed from limitations in
Nasdaq's computer capacity rather than illegal schemes, Nazareth's
letter said.
Order Backlogs
Some market participants canceled their Nasdaq quotes to cope
with order backlogs that accumulated shortly after the market
opened in the morning, Nazareth said. They canceled these orders
``as a precaution against receiving executions at unfavorable
prices,'' she said.
Nasdaq has largely addressed its technological shortcomings
in this area, she said. A Nasdaq spokesman declined comment.
In a spoofing scheme, someone may enter a large order to try
to trigger a market movement, NASD Regulation President Mary
Schapiro said in a Dec. 28 letter to Dingell that also was
released today.
A flash ``sell'' quote may spark a stock decline, for
instance, at which point the scam artist may buy the stock,
Schapiro said. Conversely, he may try to sell the stock after
entering a phantom ``buy'' quote that causes the market to rise,
she said.
An NASDR spokeswoman declined comment.
The SEC filed a 1998 case involving spoofing, Nazareth has
said previously. SEC probes can lead to fines, ousters from the
securities industry, or referrals to criminal investigators.
Surveillance Program
NASD Regulation started a surveillance pilot program last
May, which it expanded in September. It plans upgrades of the
project in coming months.
Since May, the NASD program has found 80 instances of
questionable activity, most of which turned out to be ``non-
problematic,'' Schapiro's letter said.
NASDR also has received five complaints about possible
spoofing, Schapiro said. Dingell asked the SEC for a follow-up
report in six months.
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