NYSE to Fine Floor-Trading Firms Involved in Improper Practices
Thursday, October 16, 2003
NEW YORK — The New York Stock Exchange (search) said on Thursday it will seek hefty fines against five floor-trading firms (search) for improper practices that could have cost clients millions of dollars.
The exchange did not disclose the names of the firms, known to be its five biggest specialist members, but said it informed the Securities and Exchange Commission (search) of its plans and is working with the federal regulators to bring the probe to a close.
The announcement comes at a critical moment for specialist firms, which manage the buying and selling of shares on the exchange floor, and for the NYSE, which is still reeling from the resignation last month of former Chairman Richard Grasso (search).
The 211-year-old exchange is the last major exchange still using the traditional open outcry trading system, handled by specialist member firms. The specialist system is increasingly finding itself under attack, with Fidelity Investments, the largest mutual fund, saying earlier this week the exchange should replace specialists with computers.
The NYSE is also finding itself under attack for the way it runs its own shop. Interim Chairman John Reed (search) was recruited out of retirement to revamp the exchange's governance after Grasso resigned last month following disclosure of his $188 million compensation and benefits package.
Grasso's pay deal was developed and approved by executives from some of the firms he was charged with regulating, and critics have long contended the exchange is soft on regulating member firms.
The five firms targeted by the probe, disclosed earlier this year, are LaBranche & Co. Inc. (LAB), , Van der Moolen Holding NV (VDM), Goldman Sachs Group Inc. (GS)'s Spear, Leeds & Kellogg; FleetBoston Financial Corp. (FBF)'s Fleet Specialist; and Bear Wagner Specialists LLC, partly owned by Bear Stearns Cos. Inc. (BSC).
The NYSE said the firms in question at times inappropriately enacted their own trades before executing 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.
Speaking before Congress, Reed said the specialist trading system was working well for investors and the "benefit of having an auction system seems to rest on solid ground."
The NYSE said in a statement that it will implement new software to deter similar conduct in the future.
But large traders do not agree the system is working well.
"Nothing has really changed (in the past few days) other than people having been more vocal about these long-standing concerns," said John Wheeler, manager of equity trading at fund company American Century Investment Management.
He said the NYSE had a "once-in-a-hundred-year opportunity" to make structural changes.
The SEC declined to comment.
Meanwhile, shares of LaBranche fell 11 percent, to $11.15 in trading action in New York, and Van der Moolen fell 16 percent in Amsterdam.
Fleet said it had no details on the news, and Bear Stearns declined to comment. Goldman Sachs said it would not comment on the investigation until it had greater clarity. A spokesman for the NYSE declined to comment beyond the exchange's release.
"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."
LaBranche said it was told in September by the NYSE that its trading activity under investigation amounted to roughly $5 million for the period of 2000 to 2002.
But on Wednesday, the NYSE told LaBranche that figure could be higher, although LaBranche said it would still be less than 5 percent of its total trading revenue during that period.
LaBranche said that based on its own review it believes that the amounts in question are "substantially less."
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.
"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 of Van der Moolen to "sell" from "buy."
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