Exchange Handbook: SEC Institues Enforcement Action Against 20 Former New York Stock Exchange Specialists Alleging Pervasive Course Of Fraudulent Trad

Exchange Handbook: SEC Institues Enforcement Action Against 20 Former New York Stock Exchange Specialists Alleging Pervasive Course Of Fraudulent Trading - Respondents Include Two Former Ceos Of Spear Leeds & Kellogg Specialists And Four Former Members Of Van Der Moolen Specialist' Management Committee

"The Division of Enforcement alleges that the named specialists abandoned one of their most basic obligations, the obligation to refrain from trading from a specialist' proprietary account when customer buy and sell orders could have simply been paired off with one another. Instead of doing so, these specialists treated customer orders that should have been paired off as personal trading opportunities, often to the detriment of customer orders. The fraudulent conduct took at least two forms: "interpositioning" and "trading ahead." In the first form of trading, the specialists "interpositioned" their firms' proprietary accounts between two customer orders by trading into both customer orders in succession – for example, buying into a customer sell order first, and then selling, at a higher price, into the opposite market buy order. In this fashion, the specialists were able to make guaranteed, riskless profits for their firms' proprietary accounts at the expense of customer orders. In the second form of trading, the specialist filled one agency order through a proprietary trade for the specialist firm' proprietary account – and thereby improperly "stepped in front" of, or "traded ahead" of, the other agency order – simply to allow the specialist firm to take advantage of market conditions promptly. By "trading ahead," the specialist locked in a better price for the proprietary trade, and then later filled the agency order at an inferior price, thus disadvantaging the agency order. The 20 specialists charged in this action committed thousands of these illicit trades, causing customer losses in the millions of dollars between 1999 and 2003.

The order also charges that several of the specialists engaged in particularly egregious conduct. For example, in several instances of 'interpositioning,' the specialists not only disadvantaged both a buy and a sell order, but also moved the price up or down from the last sale price to further advantage the specialist firm' proprietary account. In other instances, several of the specialists punctuated their improper trading with statements such as 'f—k the DOTs' and 'screw the DOTs' as they were in fact disadvantaging agency orders."