The New York Stock Exchange said today it will discipline five floor-trading firms and "seek substantial fines" for improper practices that included trading ahead of customer orders that could have caused clients millions of dollars in losses.
LaBranche & Co, which runs the largest specialist operation on the NYSE floor, said the NYSE has told it that its trading activity under review in the inquiry could be "substantially higher" than $5 million.
Dutch firm Van der Moolen, one of the exchange's top five floor trading firms, said the exchange accused it of irregularities.
Media reports named the other firms as Goldman Sachs Group Inc.'s Spear, Leeds & Kellogg; FleetBoston Financial Corp.'s Fleet Specialists; and Bear Wagner Specialists LLC.
The NYSE said the firms at times traded inappropriately ahead of customer orders. At other times, it said, a specialist had customer buy-and-sell orders on the electronic order book that should have been executed with or against each other, but instead the specialist traded for the firm account to the disadvantage of the customers.
The announcement comes at an especially bad time for the specialist firms, which manage the buying and selling of shares on the exchange floor. The 211-year-old exchange is the last major exchange still using the traditional open outcry trading system, handled by a batch of specialist member firms.
Earlier this week, Fidelity Investments, the largest mutual fund company, said the exchange should replace floor traders with computers. It said the centuries-old system hurts investors.
The NYSE has repeatedly defended its practice of using human traders combined with technology to execute trades, saying it gives investors the best of both worlds.