NYSE to Discipline Five Market Makers
Thursday, October 16, 2003 7:35 a.m. ET
By Nicole Maestri
NEW YORK (Reuters) - The New York Stock Exchange said on Thursday it will discipline and "seek substantial fines" against five floor-trading firms for improper practices that included trading ahead of customer orders and could have caused clients millions of dollars in losses.
The NYSE did not name the firms, but shares in Dutch Van der Moolen -- one of the top five market makers in New York -- plunged to seven-month lows after it said the exchange had accused it of irregularities.
The Wall Street Journal and New York Times named the firms notified by the NYSE as Van der Moolen ; LaBranche & Co. Inc. ; Goldman Sachs Group Inc.'s Spear, Leeds & Kellogg; FleetBoston Financial Corp. Fleet Specialists; and Bear Wagner, owned by Bear Stearns .
The exchange said in a news release it has informed the Securities and Exchange Commission of its plans and is working with the SEC to "bring this matter to a responsible and expeditious close."
Michael LaBranche, chief executive of LaBranche, declined to comment. His firm runs the largest specialist operation on the NYSE floor and has said in the past that it is part of the probe but believes it acted appropriately.
Representatives for the firms other than Van der Moolen were not immediately available for comment. A spokesman for the NYSE declined to comment beyond the exchange's release.
The NYSE said the firms at times traded inappropriately ahead of customer orders. At other times, it said, a specialist had customer buy-and-sell orders on the electronic order book that should have been executed with or against each other, but instead the specialist traded for the firm account to the disadvantage of the customers.
"The viability of the business model is at stake following the NYSE investigation, with possible SEC intervention," said analyst Ralf Jacobs at Kempen & Co, which cut its rating for Van der Moolen to "reduce" from "neutral."
BAD TIMING
The announcement comes at an especially bad time for the specialist firms.
Earlier this week, Fidelity Investments, the largest mutual fund company, said the exchange should replace floor traders with computers. It said the centuries-old system hurts investors.
The 211-year-old NYSE is the last major exchange still using the traditional open outcry trading system, handled by a batch of specialist member firms. London switched to an electronic platform in 1986 and Australia in 1990.
Meanwhile, Interim NYSE Chairman John Reed is attempting a broad overhaul of the exchange's governance. Reed was brought in out of retirement to lead the exchange after Richard Grasso resigned under scrutiny for his $188 million compensation and benefits package.
INVESTIGATION TAKES A TOLL
Van der Moolen shares, which have lost more than half their value since the beginning of the year, plunged as much as 15 percent in Amsterdam -- easily the market's biggest loser. Analysts rushed to cut their recommendations.
"This is obviously very painful news, particularly now that the viability of the specialist function is under mounting pressure," said Fortis Bank analyst Maarten Bakker, who cut his recommendation to "sell" from "buy."
Asked whether he could guarantee his firm had done nothing wrong, Van der Moolen Chief Executive Fred Boettcher told CNBC Television: "I don't guarantee that. I can't guarantee that before I've seen the facts."
The NYSE contended Van der Moolen's clients could have lost $10 million over three years through "interpositioning," when a market maker gets between a buyer and seller to pocket a profit, the Dutch firm said.
The NYSE also pointed to cases of "one-sided trading" in which a specialist is believed to have traded unnecessarily as dealer on one side of the market only, which could have caused clients extra losses around $25 million, said Van der Moolen.
"The NYSE has further indicated that it intends to initiate disciplinary proceedings against VDM-USA, seeking restitution of the amounts by which customers were allegedly disadvantaged, as well as fines and other remedies," it said.
Van der Moolen spokesman John Abbink said his firm was likely to feel the effect of any fine in the fourth quarter, taking it either as a charge or a provision.
SNS Securities cut Moolen to "reduce" from "buy." FBS Bankiers and broker Petercam reiterated "reduce" ratings. |
