NYSE Regulation Fines Seven Specialist Firms $2.8 Million For Trading Violations - Specialist Firms Cited For Violations Of Order Handling Obligations, Firm Quotes, Limit Order Displays, Short Sales And Intermarket Trading System Commitments

NEW YORK, January 16, 2007—NYSE Regulation, Inc. announced today it has censured and fined seven member organizations a total of $2.8 million for multiple trading violations, including failure to honor firm quote obligations. NYSE Regulation also censured and fined the seven specialist firms for their lack of written supervisory procedures relating to the firm quote rule. 

“It is critically important for firms conducting business on the floor of the New York Stock Exchange to honor the publicly displayed price quotes in the course of buying and selling,” said Susan Merrill, NYSE Regulation Chief of Enforcement. “These commitments are essential elements of the rules that govern trading and are codified in the NYSE Rules and federal securities regulations.”

Under the firm quote rule, NYSE specialists are generally required to execute buy or sell orders that are presented to them at prices that are at least as favorable as the NYSE’s published bid or offer at the time the orders enter the Exchange’s electronic display book. On multiple occasions over a four-year period from 2003 through 2006, however, marketable orders did not receive the price of the published quote in effect at the time the order became viewable on the Exchange’s electronic display book.

Similarly, the specialist firms failed to honor Intermarket Trading System (ITS) commitments to buy or sell. The ITS electronically links participating market centers and enables market professionals to interact with their counterparts in other markets whenever the nationwide Consolidated Quote System (CQS) shows a better price in another market. An ITS commitment to buy or sell must be priced at the offer or bid displayed by the market center to which the commitment is sent.

On multiple occasions during the relevant period, the specialist firms received ITS commitments from another market, yet the orders were not executed at the NYSE’s published quotation before the commitment expired. 

The specialist firms also failed to immediately display eligible limit orders, and improperly executed short sales on minus, or zero-minus ticks. Additionally, the firms lacked written supervisory procedures specifically relating to the Firm Quote Rule during the period from January 2003 through August 2005.  Bear Wagner Specialists LLC also failed to establish adequate written policies or procedures governing freezing of the Display Book.

The disciplinary actions against the seven member firms arose as a result of surveillances conducted by NYSE Regulation’s Market Surveillance division and concern violations of Rule 11Ac1-1(c) under the Securities Exchange Act of 1934 (now designated as Rule 602(b) under Regulation NMS), and NYSE Rule 60, Rule 11Ac1-4 under the Securities Exchange Act of 1934 (now designated as Rule 604 under Regulation NMS), and NYSE Rule 79A.15, NYSE Rule 440B and Section 10(a) of the Securities Exchange Act of 1934 and Rule 10a-1(a) thereunder, and NYSE Rule 342.

The fines for the specialist firms are as follows (click on the firm name to access each individual Hearing Board Decision):                               

These violations occurred prior to the launch of Hybrid Market^SM trading system enhancements that significantly limit the possibility of similar violations from occurring due to automatic execution and safeguards embedded into the Display Book.

In reaching these settlements, NYSE Regulation, Inc. took into consideration that the seven specialist firms assisted the NYSE by proposing enhancements and protective measures to the NYSE’s systems and technology, and that the activity described herein did not appear to have been undertaken with the intent to benefit the specialist firms. In agreeing to settle with NYSE Regulation, the specialist firms neither admitted nor denied the charges.