This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

How About an Occupy New York Stock Exchange?

NEW YORK ( TheStreet) -- At the Occupy Wall Street demonstrations on Monday, protesters surrounded the New York Stock Exchange building at Wall and Broad, and the police made 150 arrests. Yet for much of its history, it was the people working inside that pseudo-Classical structure who have been breaking the law -- and far more profoundly than any demonstrators outside.

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?

The SEC's 2005 action found that "the NYSE, over the course of nearly four years, failed to police specialists, who engaged in widespread and unlawful proprietary trading on the floor of the NYSE." Specialists are traders who are required to buy and sell shares of stock on the exchange floor in a manner that stabilizes the markets. That gives them access to proprietary information, which the SEC said they systematically abused and which the NYSE systematically let them abuse. Sounds a lot like the charges that were filed against the NYSE the other day, doesn't it?

It gets better. One of the accused floor brokers back in the late 1990s, John D'Alessio, fought the charges -- which were eventually dropped against him -- and dragged the NYSE through the courts through the early part of the decade. What resulted were a series of revelations that were embarrassing to the exchange, and showed that the NYSE had knowledge of the trading improprieties for which some traders went to prison.

In one deposition extracted by D'Alessio's lawyer, an NYSE executive acknowledged participating in several meetings about floor-broker trading, and taking handwritten notes that said things like "Do not tell the SEC" and "Nothing in writing."

The American Stock Exchange, which was acquired by the NYSE a few years ago, was even more of a cesspool. Over the years, as it shifted to focus largely on options trading crummier small-cap stocks, the Amex was periodically hit by floor-trading scandals. These usually resulted in the malefactors being quietly (or not so quietly) ejected from the exchange floor, usually without SEC or criminal charges being filed against them. The Amex was the subject of SEC enforcement actions, because of its lousy record of self-policing, in 2000 and again in 2007. The result of its serial incompetence was a slap on the wrist, a censure.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $118.05 -0.70%
FB $105.39 -0.33%
GOOG $748.82 0.07%
TSLA $229.71 5.30%
YHOO $33.16 0.62%


Chart of I:DJI
DOW 17,813.39 +1.20 0.01%
S&P 500 2,088.87 -0.27 -0.01%
NASDAQ 5,116.1430 +13.3350 0.26%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs