Gee, This Is A Real Surprise

The Securities and Exchange Commission has come out with news that more than 25% of brokerage firms broke the law by allowing late day trading in mutual funds by certain select investors. Further, they have discovered that 70% of the firms know about customer's market timing activities.

What does this mean? Well, it means that 30% of the brokerage firms are lying. They all know that they have customers who are trying to time the market. Nothing is done about the timing because you can always blame the failure on the client and it can be awfully profitable while they're self-destructing. At a time when trade revenue is down, does anyone really think that there is going to be a brokerage firm out there that is going to discourage trading, no matter how ill-advised it might be? I don't think so.

As for the late day trading, I'm guessing that the 25% number is probably about right. Before now, late day trading was really viewed as a distasteful thing, not a significant illegality. Even at firms that did everything through computerized trading systems instead of on paper tickets, it would have been simple to get around the 4 o'clock cutoff times. Time stamp a couple of paper tickets beforehand, do something to lock up your computer right at four o'clock, and then hand in the paper tickets with the time stamps after the client makes the decision.

Gaming the system like that would work, because there are really no controls on the paper ticket system. The last firm I worked at was completely computerized, yet I had a stack of paper tickets two inches thick on my desk, just in case the system went down. Getting them stamped would have been simple. Just claim to be checking the time, date or function of the time stamp. Probably would have shown up on a review as taking the initiative or some such positive.

Most established, respected brokers are going to have your best interest at heart. The article talks about brokers being dismissed from Merrill Lynch and Prudential, but I'm guessing that the vast majority of illegal activity was talking place among the boiler room crowd. Use diligence in selecting your broker. If they offer to "bend a rule" for you, take your money elsewhere. In the securities industry, rules don't bend - at least not legally. And the SEC will come after individuals also. Don't let your broker get you into trouble. Use your common sense and your sense of right and wrong.

If it doesn't feel right, it probably isn't.