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Spoofing, Surveillance and Supervision

Jay Biondo, Product Manager - Surveillance at Trading Technologies, co-authored an article along with James Lundy and Nicholas Wendland, both of Drinker Biddle & Reath LLP, reviewing the CFTC's regulations and expanding efforts, 21st century surveillance and supervision, as well as strategic recommendations.

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December 1, 2001

Listed Traders Fall Into Penny Abyss'

By Peter Chapman

Penny trading is frequently causing interruptions in trading at the New York Stock Exchange.

That's what a panel of listed traders recently told the Investment Company Institute's annual Equity Markets Conference.

Barry Small, chief executive and head of listed trading at Weeden & Co., complained that quotes "freeze" as often as 20 or 30 times a day, as spreads balloon to 50 cents or even $2.00.

The phenomenon occurs when specialists are hit with a barrage of orders in a short period.

Small noted the glitch is not new, but has been aggravated by decimalization. [see Special Feature]. When it happens there is no published imbalance of orders; no indication of price; no ability to change the prices of limit orders; and no guarantee of an execution within that spread.

"We call it the abyss,'" Small told the crowd. "When your orders are in the abyss, you don't know what to do," he said. "You don't know whether you should cancel the order electronically; whether you should tell your floor broker to cancel it; or whether you should put a limit on it. These little blips have been happening more and more frequently."

Small did not get an argument from the Big Board specialist sitting next to him. He did get an explanation, though.

"I do see situations where the velocity of transactions and the associated increase in volume does create an abyss," said Robert Fagenson, vice chairman at Van der Moolen Specialists, U.S.A. "The spread widens as we are trying to gather all the participants together to discover the right price," he added. "Remember, we're talking about a huge influx of orders."