Something special
Stock exchange traders face charges of self-dealing
In its continuing drive to clean house, the New York Stock Exchange keeps turning up more dirt. And that has heightened warnings that the new broom might sweep out a unique feature of the Wall Street institution: the traders with their colorful jackets who mingle on the floor, buying and selling shares by shouts and hand gestures.
Twenty former floor traders were charged last week with lining their firm's pockets at the expense of investors. At the same time, the exchange conceded it had done a poor job of monitoring traders from 1999 through 2002 and agreed to a censure by the Securities and Exchange Commission.
Gaming the system. The accused traders, all of whom had been under investigation and have been off the floor for months, were "specialists," who handled the stocks of some of America's best-known companies: Merrill Lynch, Hewlett-Packard, Pfizer, and many others. Specialists are supposed to get customers the best prices by matching one customer's buy order with another's sell. But instead, investigators allege, if the specialists saw that the flow of orders indicated prices were likely to rise, they would sometimes buy quickly for their own account at that moment's lower prices, execute the customer orders that drove prices up, and then sell at the higher price to reap a quick profit.
David Kelley, U.S. attorney for the Southern District of New York, estimated that the 15 indicted traders had caused their clients $32.5 million in harm. Five other traders face only civil or administrative charges.
All of the criminally charged traders, except for one who has not yet turned himself in, pleaded not guilty.
Exchange officials said that reforms such as better electronic monitoring instituted since the scandal first broke in 2003 have made it much more difficult to cheat investors. What's more, chief regulatory officer Richard Ketchum says, "We are going beyond even where we are today" to make sure specialists don't take advantage of customers. The investigation is continuing. The exchange plans to add surveillance video cameras, among other tools, to watch traders. In addition, he says, the exchange will soon offer investors a choice of a specialist or a computer to execute buy and sell orders.
"They are much cleaner now," says Benn Steil, a finance expert at the Council on Foreign Relations and a longtime critic of the NYSE. But that may not be enough to save the specialists. Their commissions have been squeezed by computerized competitors. And the continuing regulatory crackdown may only hasten their demise.
This story appears in the April 25, 2005 print edition of U.S. News & World Report.
advertisement
