Brokers Face FINRA Flash Crash Sweep

By Christopher Westfall
08/23/10 - 11:14 AM EDT

NEW YORK (TheStreet) -- Wall Street firms that gave high-frequency traders direct access to the equity markets and contributed to last May's "Flash Crash" could face sanctions from market watchdogs.

Broker/dealers will be the subject of regulatory "sweep" by the Financial Industry Regulatory Authority. The regulator will try and determine whether the broker/dealers have the proper risk management controls in order to police clients that buy and sell securities quickly through computer driven algorithmic trades. (FINRA) that will focus their dealings with high-frequency traders, according to an article in today's Financial Times.

FINRA chairman Richard Ketchum said that the regulator would focus on whether broker/dealers - which act as gatekeepers to the equity and bond markets - are monitoring their clients trading closely enough to prevent another market meltdown. "The brokers should be satisfied they know who's really operating these systems," Ketchum told the FT.

On May 6th the trading in stock market became highly volatile and within the span of a few minutes the Dow Jones Industrial Average (DJI) plummeted nearly 1,000. At the time, many on Wall Street were at a loss for the violent swing in stock prices. However, later many pointed the finger at high-frequency trading firms.

The exchanges most affected by the flash crash were the New York Stock Exchange, which is operated by NYSE Euronext (NYX) and the Nasdaq Stock Market, which is operated by Nasdaq OMX Group (NDAQ).

Next month, the Securities and Exchange Commission and the Commodity Futures Trading Commission will come out with their own report on the flash crash.

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For more information regarding the May 2010 "flash crash," please visit this WSJ article.

FINRA arbitrators order UBS to pay $81 million for ARS sales to paygo cellular marketer

Wed Aug 4, 2010

* UBS to pay Kajeet Inc $80.8 mln in damages

* UBS says will challenge ruling

By Joseph A. Giannone

NEW YORK, Aug 4 (Reuters) - A FINRA arbitration panel ordered UBS AG (UBSN.VX) on Tuesday to pay $81 million in damages to a Bethesda, Maryland-based cellphone marketer that purchased auction-rate securities through the U.S. brokerage.

FINRA documents posted online showed a panel comprised of three public arbitrators ordered to pay the damages to Kajeet Inc, which purchased student-loan auction-rate securities that lost value during the credit crisis.

Kajeet, which sells pay-as-you-go cell phones aimed at children, had claimed $110 million in losses.

"We strongly disagree with the arbitration panel's decision on a legacy auction-rate matter and we will file a motion to overturn that decision," UBS spokeswoman Karina Byrne said. "We believe the outcome is unwarranted under both the facts and the law."

Auction-rates securities were long touted as cash-like investments, but became impossible to trade after credit markets seized up in 2007.

State and federal regulators have forced UBS to repurchase $22.7 billion of auction rates from individual investors. The Securities and Exchange Commission continues to investigate the role of individual executives at the firm.

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