How About an Occupy New York Stock Exchange?
For years, floor traders and brokers at the Big Board and the American Stock Exchange have been periodically caught up in scandals, usually by taking advantage of their privileged position to screw their customers. Only this past Friday, the Securities and Exchange Commission accused the NYSE itself of rooking customers, fining the exchange $5 million for giving some customers an advance access to automated trading data. In an era in which even a nanosecond can give a trader an edge, it was an extraordinary breach of trust. The NYSE agreed to the fine without admitting or denying the charges.
As so often happens when bad news is released on Friday, the NYSE charges faded immediately into the ether. They sounded awfully technical. But this was actually a seminal event, which raises a question that needs to be addressed: What is the point of having a quasi-public stock exchange, supposedly serving as a neutral intermediary between buyers and sellers, if it can't keep its hands out of the till?
I mean that more literally than you may think. Richard Whitney, who was president of the NYSE in the 1930s, went to prison for embezzlement. But it's the activity on the floor, and in the back offices of the exchanges -- the subject of the SEC action on Friday -- that have proven the most problematic. The most recent scandal to hit the exchange took place a few years ago, when traders at a firm called Oakford systematically engaged in illegal trading on the stock exchange floor. Some of them pleaded guilty to securities fraud and were sentenced to prison terms.
That was just the tip of the iceberg. At the time the charges were announced in 1999, the U.S. attorney in Manhattan had probable cause that 64 floor brokers had been illegally trading on the floor of the exchange. Few were caught up in the Feds' dragnet. The NYSE itself was subject of an SEC enforcement action that year for doing a lousy job of policing its trading floor, and was slammed again by the SEC in 2005 for the same infraction.
Come to think of it, it seems a little odd that the SEC said on Friday that its most recent penalties against the NYSE were "first-of-its-kind charges." The media, predictably, picked up on that phraseology. In fact, there have been at least three SEC enforcement actions against the NYSE in recent years, all dealing with the failure of the exchange to properly police itself. Doesn't the SEC know how to count?