NASD Probing 11 Cases of Possible ‘Spoofing’

The National Assn. of Securities Dealers is investigating 11 cases of possible “spoofing” by brokerage traders who try to manipulate stock prices by entering false quotes, then canceling them.

Traders’ use of these “phantom quotes” has persisted even though regulators have tightened surveillance of the Nasdaq Stock Market and filed charges against seven brokers and investors since 1998, NASD Executive Vice President Stephen Luparello said.

The NASD, the brokerage industry’s self-policing group, has referred 21 other possible spoofing cases for Securities and Exchange Commission inquiry in the last 2 1/2 years, including two in May, he said.

“The integrity of the market suffers from this practice because the quotes indicate that something might be happening with a stock when it’s really just manipulation,” Luparello said. Big price swings can attract other active traders or buy-and-hold investors looking for strong stocks.

Spoofing, which can be considered fraud, typically occurs on thinly traded Nasdaq stocks with wide “bid” and “asked” price spreads, Luparello said.

A trader engaged in spoofing might enter a phony order at a specified price intended to drive up the best “buy” quote on a stock so he can sell his shares to another trader at more favorable prices. The spoofer then cancels his initial order soon after executing sales at better prices.

The NASD has imposed financial penalties totaling $177,353 against four brokers for this offense in the last year, according to documents provided by Luparello. The SEC has brought cases against three traders since 1998.

“Traders are very creative and keep coming up with techniques that aren’t kosher,” said Washington lawyer Anthony Djinis, who advises brokers on spoofing rules. “The problem is of sufficient magnitude that [brokerages] need to develop better supervisory and policy procedures.”