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.
Clearly, the stock exchange trading model is prone to abuses. It's also obvious that stock exchanges aren't even necessary, and haven't been for a long time. The problem is that there is no reasonable alternative. Dark pools are obviously not the answer -- the occasional spasms caused by automated trading are proof enough of that. The good news is that automation has actually reduced the opportunities for chicanery of the kind that has plagued the NYSE and Amex in the past. In fact, the increasing automation of the NYSE has resulted in a decrease in the number of floor-trading abuses since the bad old days of Oakford. But Friday's enforcement action shows that the exchanges still haven't been able to prevent their systems from benefitting the few at the expense of the many. What's needed is a kind of balance, a largely automated market that has sufficient controls to allow for regulatory oversight. Instead of deploying cops to hassle demonstrators who are rightly outraged by the Street's depredations, it's time for the securities cops to police the really nasty stuff going on inside that building. Gary Weiss's most recent book is AYN RAND NATION: The Hidden Struggle for America's Soul, published by St. Martin's Press. Follow him on Twitter: @gary_weiss