NYSE 'investigation'

Discussion in 'Order Execution' started by chasinfla, Apr 18, 2003.

  1. Pardon if this has been addressed elsewhere.

    Thursday's Wall Street Journal carried an article describing an NYSE investigation of specialist abuses, including front-running and giving preferential fills to some at the expense of those sending orders 'via the exchange's main trading system' (in other words, DOT).

    Some of us have been posting about this for quite a while. Some of us have complained to the NYSE about it.

    This is at least a nice change from hearing over and over specialist fraud is not taking place. Of course, it would be nice if it really weren't happening. But, you know...
  2. say he gets a market order to buy 100k, FRONT RUNNING
    would be to swipe all the little guys's offers before printing
    higher where he can liquidate his longs.

    where I come from this is about the most crooked form of cheating
    imaginable, ive seen a firm get closed down (gnp) at the CBOT
    for tiny front running abuses.

    If its true, Fleet Boston specialist group is in a world of trouble. Just for starters, they will lose all their corporate customers who allow them to handle their specialist duties.

    Its a shame he had to steal, this shit might get real ugly before it all shakes out
  3. Tea


    From today's New York Times:


    "People close to the exchange said that traders on the floor had complained to exchange officials about how specialists were handling orders that came in electronically. These people said that the traders suspected specialists were occasionally "freezing" their books of orders to buy and sell shares of some heavily traded stocks, then buying some of the shares and reselling them for a quick profit of a few pennies a share. Doing so would provide virtually risk-free profit for the specialists but would defy the exchange's frequent claim that it is the fairest venue for trading stocks.

    Mr. Grasso said the exchange was looking into "trading patterns" but declined to say whether any specialists were suspected of front-running customer orders, as the practice of using information about incoming orders to trade profitably for themselves is known. "Anyone who approaches putting the customer second is going to be off this floor and out of this industry," Mr. Grasso said on CNBC.""

    I think a cover-up is in the works - otherwise they would have to remove the entire floor.
  4. i don't know how i feel about this -- this has been my livelihood for years, and i have been so incensed at what's been going on in the past 6-9 months.

    I was doing 150+ trades per day. I was traded through probably 30% or more of the time; had failed cancellations another 30% of the time; perhaps more -- it was impossible for me to document, even if it seemed fruitful to do so, which was questionable.

    Reading these articles I realize just how affected I have been by this. I actually reacted emotionally. I was disappointed that it took a call from American Century to get Mr. Grasso's attention; the little guys don't seem to matter. It's tough to do business in that sort of environment. One would think the individual trader would be valued for, as the GE specialist alluded to, the little bits add up to hundreds of millions of dollars.
  5. Tea


    Partial quote from today's LA Times:

    "Specialists, who work at circular trading posts on the NYSE floor, are the dealers responsible for "making markets" in the stocks of the 2,700 companies listed on the Big Board. Their job is to keep the trading fair and orderly in the stocks assigned to them as orders flow in via computer or through face-to-face bidding on the exchange floor.

    The seven specialist firms are required to maintain enough capital to enable them to step in and buy a stock when a seller has trouble finding a buyer, or to sell shares out of their own inventory when a buyer can't find a seller.

    Because all orders flow through them, the specialists have better information about buying and selling interest -- and thus pricing of stocks -- than others on the floor. But they are prohibited by NYSE rules from taking unfair advantage of this knowledge.

    Some critics say specialists have abused their roles and used their insight into daily trading patterns to profit at their customers' expense.

    Specialists were profitable in the late 1990s, but earnings have cratered in the bear market.

    "They're under a lot of pressure to produce profits," said John Wheeler, head of equity trading at American Century mutual-fund group.

    Profitability also has been hurt by the NYSE's 2001 switch to pricing stocks in decimals. Until then, stocks traded in increments of eighths and sixteenths, which reformers said was inefficient and confusing to the public. One effect of decimalization was to shrink the markup that dealers made on trades. Note: tighter spreads

    In some ways, decimalization also made it easier for specialists to front run their customers, some experts say.

    Previously, a trader had to pay at least an extra 6.25 cents a share to buy stock ahead of another investor. Now, they must pony up only an extra penny per share.

    The NYSE probe may have been prompted by complaints from mutual funds and other large investors, experts said. Those players may have accepted questionable specialist trades while notching big gains in the 1990s, but now must watch their trading costs very carefully.

    One area that the NYSE might be scrutinizing is the "SuperDot" system that electronically funnels buy and sell orders to the specialists' posts. More than three-quarters of all NYSE orders arrive this way, although very large orders are typically handled the old-fashioned way: phoned in to floor brokers who then physically bring the orders to the specialists' posts.

    Fleet said it is cooperating with the NYSE probe. It also said it has placed trader David Finnerty on administrative leave. Finnerty had handled trading in the stock of General Electric Co., according to a person familiar with the matter.

    Michael LaBranche, chief executive of LaBranche & Co., the biggest specialist firm, said "we always put the interests of our customers first." Note: I hope he's not saying that with a straight face

    Bottom line: if the NYSE just went all electronic as an ECN, natural competition would keep spreads tight and the market efficient versus the current system where we all have to rely on the goodness of the gentlemen of the NYSE to follow their rulebook - which they seem to hold in the same regard as toilet paper.
  6. Tea


    Here is a partial quote from a Wall Street Journal article, edited to meet the 1000 word limit.

    If you have had a similar experience you may want to write to the two WSJ reporters who give their email addresses at the bottom of the article.


    NYSE's 'Specialist' Probe Puts Precious Asset at Risk: Trust

    A trader for American Century, a big mutual-fund company, was outraged last month when he tried unsuccessfully to buy stock on the floor of the New York Stock Exchange. John Wheeler, the trader, says he called a Big Board hotline to complain that the "specialist" -- the floor trader who matches buyers and sellers of the stock -- hadn't filled his order, and the stock had risen in the meantime.

    Within an hour, Mr. Wheeler says, an official from the specialist firm called back to say the firm had erred. And the next day he got another call, he says, from a surprising source: Richard Grasso, the NYSE's chairman and chief executive. Mr. Wheeler says Mr. Grasso apologized and told him the incident "was embarrassing, it shouldn't happen, and they would take measures to make sure it didn't happen again." Note: would be nice to get that kind of service!

    Heart of the System
    The specialist is at the heart of the system, and it sets the NYSE apart from all other markets. If there is an imbalance between buyers and sellers, the specialist steps in to fill it, buying shares for his firm's own account or selling out of the firm's inventory. Many regulations govern that "principal" trading to ensure it does not hurt public investors. In return for meeting these obligations, the specialist is allowed wide knowledge of how much buying pressure and how much selling pressure there is, an immensely profitable advantage.

    Critics have long complained that specialists sometimes take advantage of their position to make huge profits at public investors' expense. "Everybody who does what I do feels like it's basically a stacked deck down there," says James Malles, the head of U.S. equity trading at UBS Global Asset Management. "There's an inherent conflict: The specialists have to provide a fair and orderly market but they can trade for their proprietary account. Those are clearly in conflict with each other."
    Such criticism has led to countless predictions that the stock exchange, with its reliance on a physical floor to bring traders together, would one day be made obsolete by faster, cheaper electronic markets. Those predictions reached a peak with the 1990s bull market as the technology-rich Nasdaq Stock Market's volume and glamour appeared to eclipse the stodgy NYSE. Young entrepreneurs introduced electronic communications networks, or ECNs, that traded stocks electronically without human intervention. The hope was to siphon off the NYSE's volume.
    But ECNs had difficulty reaching the critical mass of trading volume they needed. Unless they had lots of volume, big traders wouldn't be confident of getting the best possible price on them. At the same time, without those big traders, reaching that volume was difficult.

    The Big Board investigation has been under way for at least four months, according to several specialists. The NYSE's surveillance department audits all the specialist firms randomly each year, looking at things such as trading records, compliance, supervision and capital. Last year, some firms failed their annual audits, according to these specialists. Mr. Grasso urged an industrywide sweep and the exchange launched a more thorough investigation of each firm. The NYSE sent letters out to the major firms requesting documents on specific stocks and traders.

    Mr. Wheeler at American Century recalls a panel discussion of institutional traders and specialists earlier this year where he complained of this behavior. David Finnerty, who handles the stock of General Electric Co. for Fleet Specialist, a unit of FleetBoston Financial Corp., replied: "What the specialists do is capitalism at work." FleetBoston put Mr. Finnerty on administrative leave earlier this week amid the current investigation. Mr. Finnerty couldn't be reached for comment.

    Consider the beef of St.-John Dinsmore, a day trader with Momentum Securities, a division of E*Trade Group. He estimates that he lost nearly $150,000 on June 21, 2002 -- trading through a Big Board electronic system where specialists help with orders -- in the stock of International Rectifier Corp. Mr. Dinsmore says he placed a number of buy orders starting at $27.50 and while approximately 50,000 shares were purchased at $28, a full two minutes passed before the remaining buy orders, about 80,000 shares, went through at approximately $30. As Mr. Dinsmore watched the stock rise, he tried desperately to cancel the orders, but failed.

    In a letter of complaint to the NYSE, Momentum Securities said this price discrepancy "gives the impression that orders were being accumulated over a significant period of time and then executed at prices that did not seem appropriate."
    In a response to Momentum's complaint, the exchange said that, in the absence of sufficient "sell" orders from the public to fill Mr. Dinsmore's order, the specialist had to sell a significant volume of its own stock. It was only after that, says the exchange, that other sellers entered the market.

    But Mr. Dinsmore argues that it is nearly impossible to believe that there were no sellers of the stock between $28 and $30, when minutes after the specialist sold his stock at a profit to fill his order there were sellers for the stock at $28.81, according to trading records.

    The complaints about specialists partly stem from a transformation in how these trading firms do business. A decade and a half ago, there were more than 50 specialist firms, mostly family-owned. They derived the bulk of their revenue from commissions for matching buyers and sellers, rather than principal trading -- buying and selling for their own account, and attempting to profit on the difference. But since then, mergers have reduced the number of firms to seven, and the largest are all either public firms or parts of public firms with a greater emphasis on profit.

    Furthermore, the Big Board's efforts to resist competitive inroads from competing exchanges have led it to abolish commissions for many small trades. It also introduced "electronic-order matching," which allowed investors to bypass specialists. The specialist once benefited from exclusive knowledge of all the buy and sell orders other than the best-priced that there were in a given stock. Last year, the stock exchange opened up that "book" to anyone on the Internet.

    Finally the introduction of decimals has vastly increased the number of potential trading points in a given stock. This has all led specialists to trade far more, and more aggressively.
    In 2001, specialists bought or sold for their own account in 32% of all Big Board transactions, compared with 18% of such principal trades in 1996. In the remainder, buyer and seller traded directly with each other with no participation by the specialist.
    This trading activity hasn't saved specialists from the ravages of the bear market. Although trading volume at the NYSE has held up much better than that on the Nasdaq, at 1.3 billion shares a day, the introduction of decimals has narrowed considerably the difference between bid and ask prices. That spread helps determine how profitably a specialist can trade. Specialists' after-tax return on capital fell to 9% last year from 26% in 2000.

    Specialists remain among the most profitable business on Wall Street. Last year, LaBranche & Co., one of the largest firms, had a pretax profit margin on its specialist activities of a lofty 56%. Still, the company caught analysts and investors off-guard earlier this month when it announced it would miss earnings estimates by nearly 20 cents a share. On Wednesday, the firm said its first-quarter net income was $4.4 million, or seven cents a share, down about 80% from $25.6 million, or 43 cents a share, a year earlier.

    Write to Greg Ip and Susanne Craig at
    greg.ip@wsj.com and susanne.craig@wsj.com
  7. MVP



    - big nyse trader
  8. taodr


    They really are a bunch of thieves.
  9. BSAM


    What was that thread someone started a couple of weeks ago? Something about "Changing the NYSE into an ECN". Say what you will about Nasdaq, but I'll take it over NYSE anyday.:cool:

  10. Babak


    Isn't it about time that the people woke up and realized that you simply can not reconcile the conflicting motivations of a specialist with his stated purpose?

    On the one hand they are supposed to keep fair and orderly markets at all times. And on the other hand they are seeking profit. One does not go hand in hand with the other. In fact one flies in the face of the other.

    I've said it before and I'll say it again, the specialist system is corrupt, useless, unnecessary and obsolete. It is simply a matter of time before it is swept away into the history books.

    Good riddance.
    #10     Apr 19, 2003