SEC Says Order Display Rules Ignored

Limit order handling rules passed in the wake of the Nasdaq price collusion scandal have been widely ignored, according to the SEC.Based on exams conducted over the past three years, the SEC found that most market makers and SROs have no audit trail of limit orders. And samples from three larger market makers uncovered "violation rates" of 92 percent, 58 percent and 46 percent, says the May report

Limit order handling rules passed in the wake of the Nasdaq price collusion scandal have been widely ignored, according to the SEC.

Based on exams conducted over the past three years, the SEC found that most market makers and SROs have no audit trail of limit orders. And samples from three larger market makers uncovered "violation rates" of 92 percent, 58 percent and 46 percent, says the May report detailing the SEC's findings.

Typical violations were entering the wrong order size, failing to display the order within 30 seconds and failing to route the order for display.

One troubling pattern the agency found was that specialists and traders could "routinely display eligible customer limit orders at the 30th second after receipt without [supervisory systems] flagging such trading for review."

The rules require display as quickly as possible--not simply within 30 seconds, the report says.

None of the offending firms or SROs were identified by name. An SEC spokesperson says examiners did not inspect every market maker, so the agency did not want to give the impression that a firm not cited had a clean bill of health.

The report notes that until the agency inspection began, no SRO had ever imposed a monetary penalty for violations. The report also claims that market makers and SROs have made improvements since being examined. And in June, the NASDR hit J.P. Morgan with a 200,000 dollar fine. The NASDR says it brought 50 limit order handling cases in the past two years.

Limit order handling rules covering the equity markets were implemented in 1997. Options markets are supposed to display orders under their own rules, but the SEC found that options markets also had limited surveillance and audit trails.

The report concludes that the industry's lack of an audit trail "makes determining overall compliance rates impossible."

To read the entire report, go to www.sec.gov/news/studies/limitorm.htm.

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