Specialist Trading Practices
This is another illustration of how thespecialist system works against the averageinvestor. On Thursday April 17
th
2003, thefollowing news story came across theReuters News Service. In part the articlewas as follows:
NYSE Probing Specialists TradingPractices
:A report published on Thursday in the WallStreet Journal said that, according topeople familiar with the matter, the NYSEwas investigating whether at least two of itslargest specialist firms may have engagedin trading shares ahead of clients in apossible abuse of the exchanges tradingsystem.The report said that the exchange wasexamining whether the specialist firms, whomanage the buying and selling of shares onthe floor of the exchange, had offeredinferior prices to investors who send ordersto buy and sell shares through theexchanges main trading system.The exchange has run its auction model of trading stocks, which is mediated byspecialists, since it’s founding in 1792.Specialists have an obligation to maintain a“Fair And Orderly Market”, which at timesforces them to use their own capital andmake unprofitable trades to match buy andsell orders.The temptation to do “
Front-running
” hasrisen as volume has fallen sharply. When“front-running”
a trader places their ownorders for stocks before carrying outcustomer’s orders
.Institutional investors, such as large mutualfund companies, have complained for yearsthat improper trading by specialists has costtheir investors huge sums of money. Marketexperts say individual investors attemptingto buy and sell shares through the NYSE’sauction system, in which a human beingrather than a computer matches buyers andsellers, also can be hurt by front running.Essentially the abuse of power works likethis: An individual investor wants to buyshares in
Company A at $30.00
. Theinvestors brokerage firm transmits the order to the floor broker at the exchange. Thebroker takes the order to the specialistsbooth where he conducts his trades in
Company A’s
stock.The specialist is supposed to match theinvestor’s buy order to a sell order at thebest possible price. Illegal front-runningoccurs when the specialist uses hisknowledge of the pending $30.00 buy order to buy shares for his own investmentaccount, knowing the stock he is buying willgo up.After buying the stock for himself at $30.00,the specialist then executes the individualinvestors order, but at a higher price,perhaps at $30.10. The specialist sells himthe shares he has purchased and takesadvantage of the increase in price causedby the buy order.
While individualinstances of front-running may onlyaccount for only a few hundred trades aday, front running profits can add upquickly
in a market that trades over twobillion shares a day
.The Securities and Exchange Commissionwas ordered by Congress in 1962 toconduct an investigation of the NYSE todetermine what role it played in the marketcrash of that year. When the staff issued itsfindings in 1963 it was clear that the staff
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Hi , thanks for sharing all of that knowlege