Stock exchange specialists charged with fraud

Fifteen specialists who managed trades on the floor of the New York Stock Exchange were indicted today, charged with fraudulent and improper trading practices by the Justice Department.

The Securities and Exchange Commission filed civil charges against 20 specialists and the NYSE.

The SEC’s division of enforcement said that between 1999 and mid-2003, specialists at five firms put their firms’ orders ahead of customers’ orders, causing those customers to get inferior prices.

The SEC also charged the NYSE with failing to enforce its own rules, charges that the NYSE has already settled. The NYSE will be censured and must spend £10 million on regulatory audits every two years.

The criminal probe of the NYSE traders by federal prosecutors grew out of a civil case against specialist firms that employ the traders, according to The Wall Street Journal said.

Specialists’ job is to keep trading orderly by handling trades for customers. They match buy and sell orders for customers of the stocks they oversee and use their firm’s money to buy shares when nobody else wants to buy and to sell shares from their own inventory when nobody else wants to sell.

Last year, NYSE specialist firms paid €190m to settle charges that their employees interfered with customer orders so they could trade their firm’s own money, taking advantage of their knowledge of which way the market was moving.