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March 7, 2008

Buyside Asks for "Honesty"

By Peter Chapman

Buyside traders, in the wake of actions taken by the Financial Industry Regulatory Authority, are imploring their brokers to act honestly when they advertise their completed trades.

Their pleas come following FINRA's decision to fine 19 broker-dealers a collective $2.8 million for overstating the amounts of their completed trades in their advertisements over the systems of three service providers. Those fined included Merrill Lynch, Bear Stearns and Deutsche Bank.

"I had a situation the other day," Cheryl Cargie, the head trader at Ariel Capital Management, told a gathering of traders in Chicago in January, "where the broker said they traded 30 [thousand shares] but they only traded 12. They're lying to me." Cargie, who has warned brokers she would not trade with them if they falsify their ads, asked the sellside to be "honest."

Brokers overstating trade advertisements rankles Kain Cederberg, a trader with Institutional Capital, as well. "I've made guys take them down," Cederberg told attendees at the annual meeting of the Security Traders Association of Chicago (STAC), referring to inflated trade reports. "We did 50 [thousand shares], not 250. Take that off."

Sellside desks use systems from TradeWeb's AutEx, Bloomberg and Bridge to advertise their completed trades to the buyside in hopes of attracting new business. That the amounts are inflated has long been an open secret in the industry.

FINRA, which issued a warning to sellside desks not to overstate their traded amounts in September 2006, fined the 19 firms between $50,000 and $200,000 each for violations that occurred in August 2006. In its investigation, the regulator compared the firm's actual amounts traded against the amounts advertised.

"Please just advertise the real stuff," Cargie told the STAC crowd. "Don't double-count."

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