NYSER

Securities Roundup: FINRA Heightens Focus on Options Industry & Wants More Investors to Use BrokerCheck, Lawmaker Hopes SEC is Taking Closer Look at National Exchanges, and US Senator Calls For Reform of Money Market Mutual Fund Industry

Published on: September 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

At the Security Traders Association’s yearly market conference in DC, Richard Ketchum, Financial Industry Regulatory Authority’s chief executive officer and chairman, said that due to growing problems the SRO is heightening its surveillance and exam focus on the options industry. He noted that there has been an increase in complaints about the use of algorithmic activities to perform possible manipulations to “move underlying equity” and that this could cause a financial firm to “take advantage” of options positions that were pre-established.

Per BNA, Ketchum said that FINRA has set up surveillance alerts to catch too much messaging traffic from algorithms that update quotes at vicious rates when options are involved. It is also looking at firms to make sure they have adequate controls related to algorithms and it will keep checking for options orders that may have possibly inaccurate coding.

The week before, Ketchum reported that the FINRA Board of Governors had given the SRO’s staff the authority to propose to the SEC rule changes to promote greater investors use of BrokerCheck. This free tool allows investors to look up former and current firms and brokers that are registered with the SRO, and representatives and investment advisers, to decide whether the should work with them. (This information would also have to be available on websites that were maintained by/for an individual associated with these firms.) Per amendments that have been proposed to the FINRA Rule 2267, which covers the education and protection of investors, member firms would have to make sure that their company sites provide a direct link to BrokerCheck. Meantime, a change has also been proposed to FINRA Rule 8312 that would give the public permanent access to information available through BrokerCheck about foreign and state cases against associated persons who were let go after a settlement was reached. It would also per the board’s approval, make downloads of BrokerCheck information available.

Goldman Sachs Fined $450,000 by NYSE Regulation for Short Sale Rule Violations. Are they being persecuted?

Published on: May 5, 2010 | by Shepherd Smith Edwards & Kantas, LLP

It was announced by Reuters News today that regulators at the New York Stock Exchange have fined Goldman Sachs Execution & Clearing Corp. $450,000 in connection with roughly 385 orders to “short” equity securities for clients that resulted in “fail-to-deliver” positions without first borrowing or arranging to borrow the securities as collateral. The nearly 400 infractions occurred in a seven-week period in December 2008 – January 2009.

So that timely delivery of the shares sold can be made to buyers, a rule has existed for decades that says investors cannot sell securities short unless arrangements have been made to borrow such securities. Stock shares can be made available to lend by anyone who owns those shares. For example, when margin agreements are signed at a brokerage firm by investors, the agreement contains language which allows their securities to be rented to those seeking to sell the shares short, (The rent charged is almost always kept by the firm.) This can happen at the same brokerage firm or arrangements can be made by one firm to lend available securities to another firm to transact short sales for itself or its clients.

There have been many examples of “short squeezes”, some undoubtedly intentional, in which shares are either not available to meet borrowing demand, or shares previously lent are reclaimed. This caused short sellers to have to scramble to find shares or be “bought in” on the open market. In some situations in the past, the law of supply and demand for shares has caused the price of the stock to rise to two or three times its pre-squeeze price, wiping out the short sellers. Thus, rampant short selling had its own unique deterrent.

It is up to the brokerage community to police the borrowing rule. Through computers, availability of shares can be very easily learned before a short sale is executed. In the “heydays” of day trading firms during the 1990s, day traders would seek to “block up” shares in advance of a short sale to avoid the delay of locating shares when the desired price was reached. (There were some tricks used to try to accomplish this while not telegraphing to professional traders and specialists that short sales were imminent, but we will not attempt a full explanation of these at this time.)

As part of the deregulation which occurred prior to the market crash of 2008-2009, while short sale regulations remained in place, the hard rule of making certain that shares are available at the time the short sale is executed was modified to allow firms to simply act in “good faith” to attempt to locate the shares. As wild flections were occurring in the stock markets during the crash, professional traders often reaped huge profits on short sales. The “good faith” crack in the door for those selling short grew to an open door policy of simply not enforcing this and other short sale rules. While the term “naked shorts” became a part of the culture, this was nevertheless simply deregulation by non-enforcement of the borrowing rule.

There has been no information revealed as to whether the Goldman Sachs’ admission of some 400 borrowing rule violations over a 7 week period is indicative of thousands of such violations by Wall Street during the years regulators were looking the other way. However I – for one – would not be shocked to learn that this is a mere “drop in the bucket” of the total borrowing violations which actually occurred. If Goldman Sachs claims it is being singled out on this one, that is likely the truth. However, I quickly learned as a teenager that the defense of “everyone else is doing it” was not going to work with my regulators.
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HSBC Securities, Citigroup Global Markets Inc., UBS Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Inc., and Interactive Brokers LLC Among Firms Disciplined by NYSER

Published on: October 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The New York Stock Exchange Regulation Inc. is disciplining nine companies and eight people for numerous violation. The firms disciplined include:

Merrill Lynch, Pierce, Fenner & Smith: Fined $100,000 for violating rule 123c about 480 times when it cancelled or submitted securities orders after the mandatory cutoff period.

Citigroup Global markets Inc: Find $300,000-half of this to be payed to NASDAQ; the other half to be paid to NYSE. The firm made inaccurate reports about short interest positions in securities that were listed on the NYSE.