One Step Ahead

[Ignutz]

Resurrecting Richard Ney

By Ronald L. DeLegge - March 15, 2004

“Hidden behind the facade of pompous jargon and noble affections, there is more sheer larceny per square foot on the floor of the New York Stock Exchange than any place else in the world.” Those were the venomous words of Richard Ney, an actor turned investment advisor in the early 1970s. Remember him?

Mind you, Mr. Ney's characterization of floor specialists and the exchanges they peruse was made during a time period far removed from routine days of billion share volume and sophisticated electronic trading platforms. Yet, the echo of his voice still lingers - “The money stolen from many is divided among few.”

In retrospect, was Richard Ney correct in his brash assessments of floor trading specialists? What about the exchanges? Why should ETF investors care? “The money stolen from many is divided among few.”

Well in mid-February 2004, a full 34 years after Mr. Ney attacked Wall Street's untouchables, the five largest floor trading specialists on the NYSE formed a tentative agreement to pay $240 million to settle charges of ill-gotten gains reaped from innocent investors. Can you believe that? This was proceeded by a December 2003 bombshell announcement of a lawsuit from CalPERS, America's largest pension fund, alleging seven floor trading firms used their knowledge of pending orders to profitably trade their own accounts and that the NYSE failed to correct the matter. Without surprise, this mess caught the attention of the SEC and they've begun to investigate the practices of specialists on the NYSE, (currently home to 5 ETFs), the American Stock Exchange, (home to 100+ ETFs), and others that still use this archaic system to trade stocks, ETFs, and options. Can order matching technology reach humanity before it's too late?

Without going into anymore gory details, let's just say Mr. Ney called it, though it took everyone (us included) a few decades to notice the subtle financial gimmickry of the specialist system. Forget about the valuable services market makers say they perform. The impact of a rigged marketplace for investors of individual stocks and ETFs are clearly negative. “The New York Stock Exchange is not an auction market – prices are controlled absolutely by the specialists.” For years, Richard Ney was passed off as an outdated kook – but now he's anything but. Perhaps this explains why he would ride around Beverly Hills in his Rolls Royce all alone – just him and his dog.

Thankfully, we sense meaningful change on the way. Even Lucky Luciano, a confirmed criminal and mobster took note of all this. After he visited the floor of the NYSE and someone explained to him the role of the floor specialist, he commented, “A terrible thing happened. I realized I'd joined the wrong mob.”*

*The Wall Street Jungle 1970 Grove Press, Inc. by Richard Ney

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