NASD Probes 11 Brokers for Nasdaq Stock `Spoofing' (Update1)
NASD Probes 11 Brokers for Nasdaq Stock `Spoofing' (Update1)
(Adds Luparello comments in fourth, fifth, last paragraphs;
NASD case in 15th-17th paragraphs)
Washington, Aug. 22 (Bloomberg) -- The National Association
of Securities Dealers is investigating 11 cases of possible
``spoofing'' by brokers who try to manipulate stock prices by
entering false quotes and then canceling them.
Traders' use of ``phantom quotes'' has persisted even as
regulators have tightened surveillance of the Nasdaq Stock Market
and filed charges against seven brokers and investors since 1998,
NASD Executive Vice President Stephen Luparello said in an
interview.
The NASD, a self-policing brokers' group, has referred
another 21 possible spoofing cases for Securities and Exchange
Commission inquiry in the last 2 1/2 years, including two this
past May, he said.
``The integrity of the market suffers from this practice
because the quotes indicate that something might be happening with
a stock when it's really just manipulation by spoofing,''
Luparello said.
Spoofing, which can be considered fraud, typically occurs on
thinly traded Nasdaq stocks with wide spreads between buying and
selling prices, and might become less profitable because spreads
have narrowed with the switch to decimal pricing by U.S. markets,
Luparello said.
A trader engaged in the practice enters limit orders at
specified prices intended to drive down the best ``sell'' quote in
the market so he can buy the stock from another trader at the more
favorable price. He then cancels his initial order soon after the
trade is executed, often just seconds after entering it.
The process is reversed on ``buy'' quotes.
Past Cases
The NASD has imposed financial penalties totaling $177,353
against four brokers for this offense in the last year, according
to documents provided by Luparello. The SEC has brought cases
against three traders since 1998.
In a recent case, the SEC alleged that day trader Robert
Monski entered a limit order to buy 100 shares at $5.81, which was
above the best Nasdaq buy price of $5.06. That order was displayed
nationally on Nasdaq, and dealers were required to honor it.
Monski then sold 500 shares at this $5.81 price, making 76
cents a share more than he would have, the SEC said. He withdrew
his smaller 100-share buy order before anyone offered to sell
stock at that price, and the national buy price fell back to
$5.06, the SEC said.
Monski, who placed hundreds of such orders, according to the
SEC, agreed to pay $25,000 in May while neither admitting nor
denying wrongdoing.
``Traders are very creative and keep coming up with
techniques that aren't kosher,'' said Washington lawyer Anthony
Djinis, who advises brokers on spoofing rules. ``The problem is of
sufficient magnitude that firms need to develop better supervisory
and policy procedures.''
Congressional Interest
Regulators also should clarify guidelines because ``there's
very little definition as to what traders are permitted and not
permitted to do in this area,'' said Djinis, whose Pickard &
Djinis law firm represents about 200 brokers on different matters.
Luparello declined to say when the NASD will decide whether
to charge any of the 11 brokers under investigation. An SEC
spokesman declined comment on its investigations or rules.
A year ago, the NASD charged a broker at ING Barings Furman
Selz, now known as ABN Amro, with making $12,800 on 36 trades by
entering phantom quotes on Instinet Corp., the largest electronic
trading network, according to documents supplied by Luparello.
The broker, Alan Lawrence Goldstein, admitted trading on the
new prices he helped create by placing telephone orders through
accounts at the Charles Schwab Corp. and Waterhouse Securities
Inc. discount brokerages, according to the documents. He agreed to
pay a $17,500 fine and surrender his profits.
An ABN Amro spokesman didn't respond to a request for
comment, and Goldstein couldn't be reached. Instinet, Schwab and
Waterhouse weren't accused of wrongdoing.
The regulators' policing efforts have drawn the attention of
Congress. U.S. Representative John Dingell, a Michigan Democrat,
has requested regular briefings from the SEC and NASD on their
progress in identifying spoofing activity.
The NASD has been testing improvements to its spoofing
detection system and plans to begin operation on an experimental
basis by the end of the summer, NASD Regulation President Mary
Schapiro said in a June letter to Dingell. The SEC has been
reviewing these NASD upgrades, then-SEC Acting Chairman Laura
Unger said in another letter to Dingell.
``I commend the progress that you have made in ferreting out
violative conduct and punishing the evildoers,'' Dingell wrote to
Schapiro and Unger in July.
Spoofing began after 1997 SEC rules required Nasdaq dealers
to display the best available quotes from any source. Traders in a
number of spoofing cases have used electronic trading networks
like Instinet, which automatically match buyers and sellers,
because they think they can trade anonymously, Luparello said. In
fact, regulators can identify suspects on these networks, he said.
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