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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Finra Extends Pilot Arbitration Program By One Year

By Suzanne Barlyn Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The Financial Industry Regulatory Authority is extending a pilot program that gives investors the option of an arbitration panel without an industry-affiliated arbitrator.

The program was set to end after two years on Oct. 5, but brokerages participating in it agreed to let it continue until the same date in 2011, according to Finra's website. Finra, Wall Street's internal watchdog, oversees the arbitration process in securities disputes.

Most arbitration cases are heard by a three-person panel. One of those members is typically affiliated with the securities industry, while two others are so-called public arbitrators.

Investor advocates have long argued that an industry affiliation raises concern about possible bias or conflict of interest, in some types of cases, particularly those involving broad practices. An example they commonly cite is the sale of auction rate securities by numerous brokerages before the market for them froze up and left investors stranded.

Giving investors the option of a panel comprised of three public arbitrators would eliminate that potential bias, but they still can choose an industry arbitrator in cases where that expertise could be helpful, says Stuart Meissner, a New York-based securities lawyer. Those types of cases may involve complex issues, such as allegations that a firm failed to hedge. Industry arbitrators, in that context, can help explain intricacies to the public arbitrators, says Meissner.

"It's a very good program. It shouldn't be a pilot," says Meissner.

Scott Shewan, president of the Public Investors Arbitration Bar Association, or Piaba, a Norman, Okla.-based group of lawyers who represent investors in securities arbitration says the program's extension may have been prompted by favorable results.

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A Letter from the FINRA Chairman & CEO - 2009 Year in Review

Chairman and CEO, Rick Ketchum, issued FINRA's 2009 Year in Review statement recently.

• Introduction

• Enhancements to FINRA’s Regulatory Program

• Ongoing Enforcement of Rules and Regulations

• Initiatives to Improve Surveillance
  

• Expansion of Transparency Initiatives

• FINRA Financial Results

• Continued Investor Education Efforts

• Regulatory Reform

• The Road Ahead

• Financial Summary

The full year-end statement can be viewed here.

Nasdaq Proposes Circuit Breakers Supplementing SEC’s

By Nina Mehta

June 2 (Bloomberg) -- Nasdaq OMX Group Inc. proposed an expansion on its markets of measures to halt stocks during periods of volatility, adding circuit breakers to all the companies it lists and a tiered system that pauses trading based on different percentage moves.

The Nasdaq program would add halts for faster price changes than are covered by a Securities Exchange Commission proposal last month. While the agency will begin a pilot next week in which Standard & Poor’s 500 Index stocks that swing more than 10 percent within five minutes are delayed, Nasdaq will pause trading for a minute during moves over 30 seconds or less, said Eric Noll, executive vice president at New York-based Nasdaq.

Exchanges and regulators are examining ways to slow down trading during investor panics after the market plunge on May 6 showed how conflicting rules across as many as 50 different U.S. equity venues may worsen selloffs. The rout erased $862 billion from the value of U.S. equities in less than 20 minutes and drove the Dow Jones Industrial Average to an almost 1,000-point decline, according to data compiled by Bloomberg.

“We’ve always seen this as an issue,” Noll said. “With the circuit-breaker bands now being introduced in the marketplace, we can provide solutions that affect specific volatility concerns in our market.” The events on May 6 caused Nasdaq to pursue this mechanism “in a much more aggressive way,” he said.

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After Senate passage, what's next for financial reform bill?

Negotiations with the House over the final financial reform bill are expected to be more transparent than they were with health-care reform. Exemptions or special deals sought by industry lobbyists are likely to stir intense debate.

By Gail Russell Chaddock, Staff writer / May 21, 2010

Washington

On a barely bipartisan 59-to-39 vote, the Senate on Thursday approved the most sweeping overhaul of financial-industry oversight since the New Deal era. Next: negotiations with the House, final passage expected by July 4, and a reprise of the main themes of the debate in partisan ads for the fall midterm elections.

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The Senate bill gives Washington broad new powers to shut down large, failing firms or require that businesses deemed at risk hold more capital. A new Consumer Financial Protection Bureau will be tasked to establish new rules for mortgages, auto loans, and credit-card lending, as well as other financial products. The bill extends government oversight to the vast $600 trillion financial derivatives market, including new limits on trading by Wall Street banks.

“The recession we’re emerging from was primarily caused by a lack of responsibility and accountability from Wall Street to Washington,” President Obama said in the White House Rose Garden after a key procedural vote on Thursday that all but ensured that the Senate bill would pass. Next to health-care reform, financial regulation is a top domestic priority for the administration.

“The reform I sign will not stifle the power of the free market – it will simply bring predictable, responsible, sensible rules into the marketplace. Unless your business model is based on bilking your customers and skirting the law, you should have nothing to fear from this legislation,” he added.

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WSJ - AT A GLANCE: Financial Overhaul Advances In Senate

THE EVENT: The Senate cleared the way for a final vote on legislation that would constitute the biggest overhaul of U.S. financial regulations since the 1930s, voting, 60-40, to end more than three weeks of debate on the sweeping measure. President Barack Obama called the action a "major step forward."

KEY POINTS IN DEBATE: Republican critics have generally opposed the bill as an excessive intrusion by government into the markets. They also said the legislation doesn't deal with the circumstances that led to the severe decline in housing prices.

SUMMARY OF BILL: The legislation, broadly, is designed to close the regulatory gaps and end the speculative trading practices that contributed to the 2008 financial market crisis. Among other things, the bill would create a regulatory system to manage the collapse of a failed financial institutions; create a new consumer protection agency; change the way mortgages and credit cards are regulated and how financial firms interact with regulators; and boost the government's ability to deal with systemwide failures.

MARKET REACTION: Bank stocks briefly pared some of their losses after the vote, but closed lower. Concerns about exposure to Europe's debt woes continued to weigh on bank shares and on the broader market, with the Dow Jones Industrial Average falling 376.36 points, or 3.6%, to close at 10068.01, off 10.15% from its 2010 closing high hit on April 26.

WHAT'S NEXT: Senate Democrats would need to clear a handful of procedural hurdles for a final vote to occur Thursday evening, but leadership was discussing the possibility, according to several congressional aides. If the Senate approves the bill, it will have to be reconciled with a version in the House of Representatives. The House passed its version of the bill last year and the two chambers have approached a number of issues, including how the government should fund the cost of winding down a large financial firm, in very different ways.

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