The New York Stock Exchange announced Thursday it will seek fines of up to $150 million against five specialist firms for engaging in improper trading practices.
The disciplinary actions will allege that the floor-trading firms that match buy and sell orders failed to comply with fundamental auction market procedures and related securities regulations during a three-year period ended last Dec. 31. Essentially, they are accused of putting their own trades ahead of customer orders and stepping between customers whose trades should have been matched.
The NYSE did not disclose which firms committed these violations but sources close to the matter have said the five biggest specialist firms are under investigation including LaBranche & Co., Van der Moolen Holding, Spear, Leeds & Kellogg, a division of Goldman Sachs, Fleet Boston Financials Fleet Specialist unit and Bear Wagner, a partly owned subsidiary of Bear Stearns.
"While our investigation in coordination with the SEC is not yet complete, our Market Surveillance and Enforcement Divisions are working to bring this matter to a responsible and expeditious close," said Edward Kwalwasser, group executive vice president of regulation, in a prepared statement.
Speaking at a Congressional hearing in Washington, interim NYSE Chairman John Reed told lawmakers the fines would be in the ballpark of $150 million. In addition to the fines, the exchange will also look to make improvements in the self-monitoring and compliance practices at specialist firms, as well as reimburse potential investor losses.
The news further strengthens the case for eliminating the open-outcry system, which all other major exchanges around the world have abandoned in favor of electronic trading platforms. Earlier this week, Fidelity Investments, the nations largest mutual fund complex, said that it is in favor of moving toward automated trading, a report that caused specialist firms to shift in their seats.