NYSE to Fine Five Floor-Trading Firms
By Ben White and Kathleen Day
Washington Post Staff Writers
Thursday, October 16, 2003; Page E01
NEW YORK, Oct. 16 -- The New York Stock Exchange plans to discipline five "specialist" firms that conduct trading on the exchange floor for practices that benefited themselves at investors' expense, sources close to the situation said Wednesday night.
The disciplinary actions could be announced as soon as Friday and fines may eventually exceed $100 million, sources said. The firms involved are LaBranche & Co.; Spear, Leeds & Kellogg; Fleet Specialist; Van der Moolen Specialist; and Bear Wagner Specialists.
NYSE officials declined to comment. A spokesman for LaBranche did not return a call. A spokesman for Goldman Sachs & Co., which owns Spear Leeds, declined to comment. Officials at Fleet, Van der Moolen and Bear Wagner could not be reached. Two sources familiar with the investigation into alleged trading abuses, which was underway before the recent forced resignation of exchange chairman and chief executive Dick Grasso, said the firms have not yet agreed to pay and the size of the fines has not yet been finalized.
Reports of the pending fines come as some critics of the exchange say it should be stripped of its regulatory authority and major investors, most notably Fidelity Investments, push for the specialist system to be scrapped. They want to see the exchange convert to a system that, like the Nasdaq Stock Market and most others globally, electronically matches buyers and sellers.
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 step in between orders, buying from a seller and then selling to a buyer at a slightly higher price, pocketing the difference.
Sources said the NYSE investigation turned up multiple instances in which specialists intervened when they should have let buyers and sellers meet. The Securities and Exchange Commission is also investigating possible trading abuses.
The NYSE, a not-for-profit organization owned by its for-profit members, is charged by the SEC with regulating its members, mainly specialists and large brokerage houses. But critics say the scandal over 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 the chairman 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.
Interim NYSE chairman John S. Reed, who testifies on Capitol Hill on Friday, has said he believes the NYSE has been a good regulator. He has said the regulatory function should remain "tightly coupled" with the NYSE's business of attracting listings and increasing orders.
Meanwhile, big mutual funds are putting renewed pressure on the SEC to change the rules governing the NYSE. Officials at these funds say the specialist system is outmoded and costs investors money but is protected by SEC rules.
"In my opinion the political clout of the NYSE has kept [the SEC] from doing good work on market structure issues," said Harold S. Bradley, senior vice president at American Century Investments. "Now it's time for the NYSE to give up its 25-year-old framework and join the computer age."
SEC officials said in Senate testimony Wednesday that the agency's review of securities markets -- and its recommendations for how their structure should change in light of new technology and competition -- won't be ready for months. SEC Chairman William H. Donaldson said the agency is "pretty much at the end of fact gathering," knows the arguments on all sides and now "must sort it out."
Among the changes the agency might make is to let customers decide whether they want trades executed in the quickest time or at the best price. Current rules say it must be at the best price.
Donaldson made no mention of eliminating the specialist system. But a senior SEC official said that the agency's goal is to update rules favoring that system, replacing them with rules intended to "create a level playing field" that will foster competition and force specialists to survive or fade away based on the merit of their work.
Day reported from Washington.
© 2003 The Washington Post Company |
