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SEC Steps Up Inquiry on Trading

Agents are interviewing NYSE floor specialists. Separately, an exchange executive resigns after Grasso's exit.

September 23, 2003|From Reuters and Bloomberg News

Federal regulators have begun interviewing individual specialists on the floor of the New York Stock Exchange about an investigation of possible illegal trading.

As the NYSE awaits the arrival next week of a temporary replacement for its ousted chairman, Richard Grasso, sources close to the Securities and Exchange Commission said the agency's review of the probe is "a very high priority."

The SEC has been monitoring an NYSE inquiry into suspected trading violations by floor specialists, including possible failure to stand aside in adequately liquid markets and possible "trading ahead" of customer orders, the sources said.

Specialists are being called in for private talks with SEC agents, marking a step forward in the agency's review of whether the NYSE is "fulfilling its responsibilities to investigate specialists," said a source familiar with the matter.

Specialists manage the flow of most trading on the floor of the NYSE. Because they see buy and sell orders before anyone else on the floor, they know which way markets will go, giving them an advantage from which they are not supposed to profit.

But regulators are looking into whether specialists failed to hold aside their firms' own interests in markets with adequate buy and sell orders from customers.

In addition, they are probing whether specialists put their own firms' interests ahead of customers' to profit from some advantageous trades.

The NYSE's biggest specialist firms have been involved in the NYSE probe.

LaBranche & Co., the biggest such firm, and the exchange have been locked in a public dispute over NYSE investigators seeking access to the firm's e-mails.

Shares of LaBranche, down 40% this year, fell $1.76, or almost 10%, to $16.05 in NYSE trading Monday. They dipped as low as $15.74 earlier in the day.

LaBranche is the only publicly traded U.S. firm that makes most of its money from being a specialist on the NYSE floor.

News of progress in the floor-trading probe came just a day after John Reed, former Citigroup Inc. co-chief executive, was named interim head of the NYSE. An SEC spokesman declined to comment on the exchange floor trading probe or on when a governance report was expected, what it would recommend and how the agency viewed it.

But a source close to the SEC said, "Everything is on the table," including possibly splitting the NYSE's regulatory and business functions and separating the chairman and CEO jobs.

An NYSE spokesman was not available for comment on the trading probe.

Also on Monday, SEC Chairman William Donaldson commented publicly on NYSE executive salaries.

The NYSE board has to "develop a plan with compensation that is fitting for an organization with regulator oversight," Donaldson said in comments after a speech in New York.

Grasso's controversial pay packages were awarded by compensation committees that included directors whose securities firms and listed companies were regulated by the NYSE. This created potential conflicts of interest, say critics such as Sarah Teslik, director of the Council for Institutional Investors, which represents 130 public and private pension plans.

Frank Ashen, an NYSE staffer who worked with the board committee that awarded Grasso's pay package, resigned Monday. Ashen, 59, the exchange's executive vice president for human resources, joined the exchange in 1977 and was promoted from senior vice president in 2000.

"He's been considering it for the last four years, and he met with his family over the weekend and decided to do it," said Michael Cohen, a Big Board spokesman.

Ashen's resignation takes effect Oct. 1.

Also Monday, the NYSE postponed for one week a members' meeting scheduled for Wednesday so it could be led by Reed, people familiar with the matter said.

Reed, who is now in France, is expected to take over as head of the exchange on Monday.

The members' meeting was set on Sept. 18, a day after NYSE directors forced Grasso to resign. Some members attending a standing-room-only session that evening called for the 25 remaining board members to resign.

Director Robert Fagenson, vice chairman of Van Der Moolen Specialists USA, ended the meeting by calling for another one this week for the exchange's 1,366 seat owners.

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