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April 2, 2012

Manipulation or Market Making?

By Editorial Staff

Before Reg NMS went into effect, the government had this big crackdown on the [New York Stock Exchange] specialists. They were sued civilly. They were indicted. I defended some of them. It was probably the greatest embarrassment in the history of the U.S. Attorney's Office of the Southern District of New York. They lost case after case. They had to dismiss them. They accused the specialists of manipulating the market; of trading ahead of customer orders; of failing to execute readily executable orders; and of putting in phony quotes to move the market.

All of this supposedly to enrich themselves. When those cases actually went to trial, the government had a horrendous time proving it because, you know what? It wasn't manipulative. Those practices were legitimate market-making practices. In fact, when you look at a lot of trading practices ... Do they affect the price? Of course they affect the price. Anytime you buy or sell, you can have a manipulative effect in the sense that you are changing the price. But you have to do it with a manipulative intent. And if you are doing it not with a manipulative intent, but you are executing trades to maintain an orderly market-to profit, to execute orders, to take advantage of market anomalies-that is not a manipulation.

There are a relatively small number of trading practices-which have been well identified by the courts as manipulative-such as marking the close, wash sales and matched orders. But it has been very difficult for the government to show that there's a manipulation. In these specialists' cases, they lost most of the cases. For the Southern District, it was probably the worst black eye in all of their history. They had to dismiss a lot of these cases."

Rick Marshall, attorney with Ropes & Gray LLP, on the failure of the federal court between 2003 and 2008 to ultimately convict 15 NYSE specialists for illegal trading.

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