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To: Jon Koplik who wrote (53609)	12/12/1999 1:25:00 AM
From: Jon Koplik	Respond to of 152472

To all - NYT article about NASDAQ market manipulation. December 12, 1999 MARKET WATCH Chasing Ghosts at Nasdaq By GRETCHEN MORGENSON NEW YORK -- Why do some NASDAQ stocks zoom and swoon each trading day? And why do these moves seem wilder all the time? Although several factors contribute to the increasingly common roller-coaster action in stocks, some veteran traders have an intriguing theory about what's driving many of the moves. They say many of the biggest price swings are a result of manipulation by traders who place sizable orders to buy stocks on electronic trading systems and withdraw them seconds later. This lures in other traders who, thinking a new buyer is in town, jump in to ride what they hope will be a buying wave. Yet even as unknowing investors pour into the stocks and drive them higher, the pretenders have already withdrawn their bids and are selling. The shares soon fall. Traders in New York call these phantom bids. In London, the practice is called "spoofing" the market. Spoofing has increased substantially in recent years, traders say, and is now a regular practice in many NASDAQ stock trades. The National Association of Securities Dealers, which runs NASDAQ, recently told the Securities and Exchange Commission that it was experiencing a big increase in canceled orders on its SelectNet system, which connects NASDAQ market-makers. The jump in cancellations is a concern to NASDAQ, because it taxes the capacity of the system. J. Patrick Campbell, NASDAQ's chief operating officer, said he did not believe that the increase signaled market manipulation or that phantom bids influenced investor behavior. "But there are two sides to every story," he said. One stock that a trader said was subject to phantom bids in recent weeks is Diversinet, a developer of e-commerce technology. The shares, which traded at $1.50 a year ago, peaked at $29 this month. The stock opened on Friday around $19, spiked to $25 about 45 minutes later, quickly fell back and closed at $19.6875. Spoofing the market is easier these days for three reasons. First is the rise of electronic communication networks, which allow traders to place orders anonymously and to cancel them immediately with no consequence. The NASD system requires traders to keep their bids and offers available to other investors for 10 seconds. Propelling stocks this way is also easier because firms that make markets in NASDAQ stocks are unwilling to commit big capital to many stocks, instead limiting their exposure to 100-share blocks at a time. Even a 1,000-share buy order can move the market. The growing use of computers to trade stocks is also helping spoofers. Now that sophisticated trading equipment allows investors to watch second-by-second changes in NASDAQ stock prices on their screens, throngs of traders looking for a rocketing stock jump on board. Is it any wonder that volatility is near record levels in the stock market today? Leuthold Weeden Research of Minneapolis says the Standard & Poor's 500 has moved up or down 1 percent or more on 39 percent of trading days this year. Only during the vicious bear market in 1974 were stocks more volatile. That year, stocks moved more than 1 percent on 45.1 percent of trading days. Meyer Berman is a veteran hedge fund manager in Boca Raton, Fla., who specializes in stocks. He says he is very concerned about spoofing and the volatility that it creates. "It destroys the integrity of the market," Berman said. "An individual investor may gain at times, but in the end he'll lose because he'll get caught in an issue that's falling." Copyright 1999 The New York Times Company