Some charges the SEC makes against MMs and brokers.
1. Market Manipulation. Market makers coordinated the
entry of bid and/or ask quotations into the Nasdaq system
for the purpose of artificially affecting the market price
of a particular security in order to obtain an unfair
trading advantage for the participating market makers.
These undisclosed arrangements typically involved one market
maker requesting another market maker to move its quotations
in a manner that changed the inside spread or disadvantaged
customers or other market participants. Such coordinated
activity violated the antifraud provisions of Section
15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder, and
the prohibition on the entry of fictitious quotations
provided in Section 15(c)(2) of the Exchange Act and Rule
15c2-7 thereunder.
2. Undisclosed Coordination of Quotations. Another type of
misconduct involved undisclosed arrangements between market
makers to coordinate the entry of quotations that did not
have a manipulative impact. In many instances, this
activity was intended to paint a deceptive picture of market
conditions, or induce another market participant into buying
or selling at an artificial price. Although the Commission
did not find that, in these instances, there was any
manipulative impact, such as a change in the inside market,
or harm to a customer or other market participant, such
conduct violated the rules prohibiting undisclosed
coordinated quotations. In other instances, one market
maker would enlist another market maker to disseminate a
quotation to buy or sell Nasdaq stocks on its behalf, such
as a request to the second market maker to join the existing
inside bid or ask, or create a new inside market price, in
the hopes of buying or selling stock. These undisclosed
arrangements violated the prohibition on the entry of
fictitious quotations provided in Section 15(c)(2) of the
Exchange Act and Rule 15c2-7 thereunder.
3. The Intentional Delaying of Trade Reports. In a number
of instances, market makers intentionally delayed reports of
significant trades to the Nasdaq market. The purpose of
delaying these trade reports was to provide the relevant
trader with an unfair informational and trading advantage
over other market participants. The failure to properly
report trades in such cases violated the antifraud
provisions of Section 15(c)(1) of the Exchange Act and Rule
15c1-2 thereunder.
4. Other Market Maker Misconduct. Market makers engaged
in other manipulative activity which did not involve
arrangements for the entry of quotations. This activity
involved transacting with other market makers that were
quoting the inside bid or inside ask, for the specific
purpose of altering the inside market prices where customer
orders were executed, which resulted in a worse price for
the customer (or for another market participant, in some
instances). Such conduct improperly benefitted the market
maker and harmed the interests of its customer (or another
market participant), in violation of the antifraud
provisions of Section 15(c)(1) of the Exchange Act and Rule
15c1-2 thereunder.
5. Best Execution Violations. In a number of instances,
Nasdaq market makers failed to provide best execution for
their customers' orders. These instances involved a market
maker deliberately favoring its own interests, or those of a
cooperating market maker, over the interests of its
customers, such that the customer did not receive the most
favorable price reasonably available under the
circumstances. This violated the antifraud provisions of
Section 15(c)(1) of the Exchange Act and Rule 15c1-2
thereunder.
6. Failure to Honor Quotations. Another type of misconduct
was the failure by market makers to honor their Nasdaq
quotations in various instances. In these instances, the
market makers did not honor their quotations because they
did not like the trading practices of firms that presented
the orders or because of other improper reasons, in
violation of the Commission's firm quote rule (Exchange Act
Rule 11Ac1-1, 17 C.F.R. 240.11Ac1-1).
7. Failure to Keep Accurate Books and Records. In many
instances, market makers failed to create or maintain
records of their trading activity, particularly with respect
to the terms and conditions of customer orders, or the times
of entry or execution of such orders. These failures
violated the recordkeeping requirements of 17(a) of the
Exchange Act and Rules 17a-3 and 17a-4 thereunder .
8. Failure to Reasonably Supervise Nasdaq Trading. Most of
the respondent firms failed to reasonably supervise traders
and other persons involved in transactions in Nasdaq stocks.
Most of the respondent firms did not prescribe procedures or
guidelines for their traders or supervisors concerning the
potential problems of discussing quotations with traders at
other firms. Other respondent firms had inadequate
procedures in this regard. In addition, most respondent
firms had no procedures or guidelines for supervisors to
review activities of traders for potential coordination or
collaboration with respect to quotations. Other respondent
firms had inadequate procedures or guidelines for such
supervisory reviews. Certain respondent firms relied on
their head Nasdaq trader to perform much or most of the
supervisory function without effective oversight of the head
trader's activities. This proved to be a flaw in the
supervisory structure in some instances when the head trader
engaged in one or more of the violations of the federal
securities laws found by the Commission in these proceedings
to have occurred. Further, certain respondent firms did not
provide their Compliance Departments with resources adequate
to perform their assigned responsibilities relating to
trading in the Nasdaq market. The complexities of the
Nasdaq market and trading in Nasdaq stocks will often
require, at firms with sizeable Nasdaq trading departments,
a substantial commitment of compliance resources.
:=) Gary Swancey
