The New York Stock Exchange is looking into nipping "VWAP," an increasingly common trade-order and hedging technique, in the bud, according to this morning's Wall Street Journal.
As part of ongoing scrutiny of more than 10 of Wall Street's largest brokers, NYSE's regulatory unit is now looking into how they handle Volume Weighted Average Price.
In VWAP, brokers splice up large block orders from mutual funds and other large institutions, tying them to an average, over a period of time. The potential problem with the increasingly popular VWAP, NYSE argues, is when brokerages place their own proprietary trades ahead of customer orders under the guise that house trades are being made to hedge against price movements, as well as to ensure inventory is on hand for the client.
Robert Marchman, EVP, market surveillance, NYSE, said that the exchange is concerned brokerages used their knowledge of these large buy or sell orders to make money at their clients' expense. NYSE is "in the process of evaluating" VWAP before it should become "a major problem for the investing public," Marchman told The Journal.
While NYSE's chief regulator declined to name the firms under review, NYSE issued a letter to members Monday about VWAP, reminding them of their obligation to protect their clients' best interests. NYSE's letter was "sorely needed," Michael Sobel, U.S. head trader, Barclays Global, said.
The Big Board began looking into Volume Weighted Average Price in March 2004, and NASD is handling a VWAP investigation of its own. What prompted NASD's investigation was an earlier examination, fine and settlement in the U.K. by the Financial Services Authority against Deutsche Bank's Morgan Grenfell securities unit.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.