Watley Touted Pricey Access -- Trader
AB Watley
(ABWG)
, the brokerage at the center of an illegal stock tips investigation on Wall Street, told its traders that it spent "thousands of dollars" to acquire access to internal communications at three big Wall Street brokerages, a former Watley trader claims.
So dear was the access, says the trader, that Watley executives directed employees to base trading strategies solely on information gleaned from the big brokerages' communication systems, which are known in the securities industry as the "squawk box." The trader said he received access to the calls through Watley.
"They said it was costing thousands of dollars a month," the trader, who spoke on condition of anonymity, said. "We had orders to trade only off of the squawk box."
As previously reported in
TheStreet.com
, federal prosecutors in New York and the
Securities and Exchange Commission
are looking into allegations that daytrading firms and hedge funds paid brokers to secure unauthorized access to internal brokerage communications over the squawk box. The traders wanted insights into big block trades by institutional customers of the brokerage houses.
The investigation, which began last summer, is focusing on allegations that the brokers received kickbacks or other compensation for connecting traders to the calls.
People familiar with the eight-month investigation say the initial focus is on brokers at
Lehman Brothers
(LEH)
,
Merrill Lynch
(MER)
and
Citigroup's
(C) - Get Report
Smith Barney unit.
The former Watley trader says brokerage officials never explained how they were getting access to the Lehman, Merrill and Smith Barney squawk boxes. He says the arrangement never sat well with him, but there was little discussion about it at Watley.
"I tried to figure out how they were getting it," he says.
Getting a tip about a block trade, a single trade of 10,000 or more shares, can be advantageous to traders trying to cash in on sudden price movement in a stock. Such tips could have permitted daytraders to engage in front-running, an illegal practice in which a person buys or sells shares ahead of a trade he suspects will move a stock's price.
Watley Vice Chairman and President Robert Malin did not return several phone calls. The company has acknowledged receiving subpoenas from the government in the investigation.
Merrill and Lehman, as they have since the scandal first broke earlier this month, continue to decline to comment on the matter. Citigroup, without confirming the investigation, says its policy is to cooperate with regulators.
The former Watley trader was part of a proprietary daytrading operation set up by Watley. Traders in the so-called prop shop traded stocks both for their own accounts and the firm's. Watley closed its proprietary operation in early 2004. People familiar with Watley say the firm's daytraders were able to listen in on the brokerage squawk box conversation for several months in 2002 and 2003.
A squawk box is part of a network used by brokerage houses to permit direct communications between research analysts, traders and brokers. The communications generally come through a desktop speaker system.
Sources say brokers allowed traders to listen in on these conversations, which can occur throughout the day, by simply leaving a telephone off the hook and placing the receiver next to the speaker.
Earlier this week,
TheStreet.com
reported that former Watley CEO John Amore often touted the firm's access to broker squawk box communications in trying to recruit new proprietary traders. One potential recruit says Amore told him that the squawk box gave Watley's traders an "advantage."
Amore, fired by Watley in September 2003, had overseen the firm's proprietary trading operation.
Amore, meanwhile, is emerging as a key figure in the investigation and is believed to be cooperating with the authorities, people familiar with the inquiry say. Last summer federal prosecutors indicted Amore on an unrelated securities charge stemming from a small hedge fund he once ran,
Amore Capital Group
.
It's believed Amore is cooperating with investigators in the hopes of striking a plea bargain in the hedge fund case. Nelson Boxer, Amore's lawyer, declined to comment.
The investigation into the potential misuse of squawk box communication is part of a broader inquiry by prosecutors and the SEC into the misuse of confidential trading information. Last week, in what's believed to be a related action, federal authorities
filed criminal and civil charges against Frank Furino, a former
New York Stock Exchange
floor clerk, for allegedly facilitating an illegal front-running scheme involving an unnamed daytrader at
Andover Brokerage
.