Stock Exchanges Join Forces To Police Insider Trading
Richard Ketchum, chief executive of the NYSE's regulation arm.
(Jay Mallin - Bloomberg News)
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Thursday, August 14, 2008
NEW YORK, Aug. 13 -- Ten exchanges agreed Wednesday to consolidate their insider-trading surveillance and investigation efforts, turning over the responsibility to the regulation arm of the New York Stock Exchange and the Financial Industry Regulatory Authority.
The arrangement will eliminate the overlap that frequently arose when each exchange ran its own surveillance program, and it gives NYSE Regulation and FINRA greater jurisdiction to enforce market rules, said Richard Ketchum, chief executive of NYSE Regulation and chairman of Washington-based FINRA.
FINRA, a private regulator, will handle insider-trading surveillance for Amex- and Nasdaq-listed securities, while NYSE Regulation will examine NYSE- and NYSE Arca-listed stocks, no matter where in the country they are traded. In the past, NYSE Regulation would not have had jurisdiction in cases involving members of exchanges other than the NYSE, even if the trades in question were in NYSE-listed stocks.
"I think we all recognize that in a world of electronic trading, where there are more venues and more opportunities where people may be able to hide their activity, consolidating the review of insider-trading activity was critical," Ketchum said.
The Securities and Exchange Commission, which in 2006 approved a similar consolidation of surveillance duties in the options market, will accept public comment on the exchanges' proposal for three weeks. "We have immediately published this proposal for public comment because of its potential to increase the likelihood that those who engage in insider trading will be caught and punished," SEC Chairman Christopher Cox said in a statement.
NYSE Regulation last year referred 141 suspected cases of insider trading to the SEC, up from 100 in 2002. Typically, more than half the referrals lead to investigations by the SEC, Ketchum said.
An increasing number of suspected insider-trading violations involve hedge funds, reflecting the rapid growth of that industry, Ketchum said. Last year, more than 45 percent of the referrals from NYSE Regulation to the SEC involved hedge funds, up from 16 percent in 2002, according to NYSE Regulation data. In the first half of 2008, just over half of the 90 referrals involved hedge funds.
NYSE Regulation has its own enforcement division, but its jurisdiction is limited to cases in which only exchange members are involved. Suspected violations involving any party outside the division's jurisdiction, such as hedge funds, are automatically turned over to the SEC.
Joining the NYSE in the surveillance-consolidation plan are the American Stock Exchange, Boston Stock Exchange, CBOE Stock Exchange, Chicago Stock Exchange, International Securities Exchange, Nasdaq Stock Market, National Stock Exchange, NYSE Arca and Philadelphia Stock Exchange.
