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July 31, 2001

Locked Market Violations Corrected

By Gregory Bresiger

Several recently fined and suspended firms, whose IPO actions caused crossed and locked markets according to NASD Regulation, have filed corrective action plans.

Ten firms were fined and five of them were also suspended from market-making activities because the after market of their IPOs caused locked and crossed markets, regulators said. "Locked crossed quotations," said NASD Regulation in a statement announcing the fines, "may occur in fast-moving markets and can have significant impact on the opening of newly traded securities. Many secondary trading markets were opening crossed by several points and in some cases, the locked or crossed condition existed for many minutes into the secondary trading period." These actions hurt orderly market and price discovery procedures, the regulators said.

Small Sum

The cumulative fines of the 10 actions come to $473,000, a small amount for most of these firms, which are some of the biggest on Wall Street.

Among the big trading firms censured and fined were Fleet Securities, NDB Capital Markets LP, which is part of Deutsche Bank AG's National Discount Brokers, Merrill Lynch's Herzog Heine Geduld and Spear Leeds & Kellogg, which is part of Goldman Sachs. The suspended firms will be out of the IPO market from 10 to 30 days.

Locked and crossed markets happen when brokers submit an ask price for a stock that is either lower or equal to the bid price. An NASD Regulation official said the severity of the sanction - whether a fine or a suspension or both - depends on the circumstances of the violation.

"Suppose there's a large volume of orders and it results in a crossed market," said Richard Wallace, the chief counsel for NASD's Market Regulation Department. "That's more understandable than if there's a low volume of orders and it's just laziness." He noted that the length of a suspension is also negotiable.

NASD Regulation, over the past year and a half, has brought about 35 cases on charges of locked and crossed market violations.

A head trader at one of the bigger firms on Wall Street, who declined to be quoted by name, complained that it was the regulators who are at fault in locked and crossed markets. "The regulators and their system are at fault. They could easily design a software system that would prevent these things from ever happening. As far I'm concerned, they're imposing these fines just to make themselves look good."