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November 11, 2008

FINRA Sees Gaming at 4 p.m.

By Nina Mehta

Trying to strong-arm the close may be back in fashion in some quarters. The Financial Industry Regulatory Authority says its surveillance unit is focusing on what it describes as efforts by some firms "to try to raise the price of [a] stock for marking" at the close of the trading day.

This is something "we are worried about, something we're looking into," Thomas Gira, executive vice president and head of market regulation at FINRA, said in October at an Investment Company Institute conference.

The concern is that reduced liquidity in the market as a result of the Securities and Exchange Commission's September ban on short sales in nearly 1,000 financial stocks may have prompted some firms to try "to set an artificial price" at the close, Gira said. They may have done this by injecting a lot of volume into the market in the closing minutes.

The SEC's ban was in effect from Sept. 19 through Oct. 8. The short-selling ban caused some firms to stay out of the market in financial stocks, as well as other names, reducing sell and buy liquidity across the board. Executives at the New York Stock Exchange and Nasdaq said publicly this led to increased intraday volatility and dramatic moves in the closing minutes of trading.

Gira noted that there appeared to be some efforts to game the close in financial stocks in particular, which saw less volume because of the ban. He added that the stocks affected were not those that were extremely liquid, but those "further down the list."

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