SEC Takes Actions Against 14 Specialist Firms

Faced with the Securities and Exchange Commission charges, Goldman Sachs Group (GS), Susquehanna Intl. Group and 12 other specialist trading firms agreed on Friday to pay collectively almost $70 million to settle regulatory claims that they made trades from 1999-2005 on the AMEX, the Chicago Board Options Exchange, and the Philadelphia Stock Exchange for their own benefit that disadvantaged customers by trading ahead, interpositioning, and trading ahead of un-executed, open or canceled orders.

The SEC brought Friday enforcement actions against 14 specialist firms for engaging in unlawful proprietary trading. According to the Commission charges the firms engaged in improper trading on the above-mentioned exchanges, where these companies inserted trades before and between customer orders for options, causing as a result millions of dollars of customer harm. In certain instances the SEC found the firms participated on both sides of trades where the specialist would capture the spread between the purchase and sale prices, subsequently disadvantaging the other parties to the transactions. In some other instances, after the specialists traded ahead, the opposite-side executable agency orders were left open until the end of the trading day, or were cancelled by the customer prior to the close of the trading day before receiving an execution.

The SEC said in a statement, the companies violated the public trust by abusing the privileged position they had as specialists on the various exchange and more importantly neglected the “fundamental obligation” to put clients’ interests ahead of their own.

That fundamental obligation unfortunately, exists only on paper. Specialists have in the past and will continue to handle their interactions with corporate executives to their benefit and as a source of market-moving information or as a pressure point for that matter to manipulate prices whenever they can. Pretending otherwise from the floors ; is just unrealistic.

While insider trading has a negative impact on market liquidity, the fact is : the notion of specialists adhering to the rules is unfortunately, a practice that rarely gets applied.

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