Federal authorities are looking into allegations that stock daytrading firms paid brokers for the privilege of listening in on internal strategy calls at several big Wall Street firms, people familiar with the inquiry say.
The allegations of daytraders paying brokers are a new twist in the Wall Street "squawk box" investigation,
first reported last week by
The inquiry, which has been going on for at least six months, has focused on whether brokerage employees tipped off outsiders about block trades their firms were arranging.
Regulators are looking into reports that brokers gave hedge funds, daytraders and small, trading-oriented brokerages unauthorized access to internal communications in order to gather potential market-moving trading information. They're trying to find out if brokers were compensated for providing the access.
Sources say federal prosecutors in Brooklyn, who are conducting the investigation in tandem with the
Securities and Exchange Commission
, are close to filing a criminal charge in the matter. A spokesman for Roslynn Mauskopf, the U.S. attorney for the Eastern District of New York, declined to comment.
Getting a tip about a planned block trade can be an advantage to traders trying to cash in on sudden price movement in a stock. That's especially the case when it involves a small-cap stock with few shares outstanding.
A block trade generally involves 10,000 or more shares traded at once.
A squawk box is the conduit for the internal morning call at brokerage houses, during which research analysts and traders communicate with a firm's brokers about changing opinions on stocks and other market developments. 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.
At this point, prosecutors and regulators don't know how widespread the alleged scheme is. A person familiar with the investigation said at least two big Wall Street securities firms had been contacted by regulators.
Several Wall Street firms contacted by
said they weren't aware of the inquiry, according to the firms' spokespeople. An SEC spokesman declined to comment.
Investigators are focusing on so-called proprietary daytrading firms, which employ teams of fast-fingered traders who conduct business for both their own account and the firm's.
Allegations of daytraders buying access to squawk box calls have been around for a while.
Bill Singer, a New York securities lawyer and former
enforcement attorney who has represented a number of large daytrading firms, said he heard similar allegations two or three years ago. Singer said some daytrading operations touted their access to squawk box calls as an inducement to get traders to sign up with their firm.
"For a number of years I had heard of stories that certain daytrading firms in the morning were broadcasting squawk communications coming in from major firms," said Singer, who said he was not aware of the investigation.
Singer said he didn't believe the alleged practice was widespread in the daytrading industry. He said most of the outfits that allegedly paid brokers for access to squawk box communications were small companies on Long Island in New York that are no longer in operation.