SEC Investigating Several Cases of Nasdaq ‘Spoofing,’ Letter Says

The Securities and Exchange Commission is investigating several cases in which people may have tried to manipulate the Nasdaq Stock Market by entering false quotes for a few seconds before canceling them, an SEC official said.

The practice, known as “spoofing” or entering “phantom quotes,” seeks to spur “momentum traders [to] exacerbate short-term price swings,” SEC market regulation director Annette Nazareth said in a recent letter to Congress. The originators of the scheme can capitalize on the price swings by buying or selling stock, she said.

In addition to the investigations it has underway, the SEC also may open inquiries into other cases referred to it by the National Assn. of Securities Dealers, a self-policing industry group, she said.

“These investigations are proceeding, and the recent enforcement referrals from NASD Regulation appear to be promising,” Nazareth said in the Dec. 21 letter to Rep. John D. Dingell (D-Mich.).

The letter, released Thursday by Dingell, gave no details about those under SEC investigation. SEC spokesman John Heine declined to characterize the kinds of traders being investigated.

Many rapid-order cancellations occurred in volatile Nasdaq stocks in late 1999 and early 2000 and stemmed from limitations in Nasdaq’s computer capacity rather than illegal schemes, Nazareth’s letter said.

Nasdaq has largely addressed its technological shortcomings in this area, Nazareth said. A Nasdaq spokesman declined to comment.