The NYSE Response to Specialist Misconduct: An Example of the Failure of Self-Regulation

TABLE OF CONTENTS Introduction................................................. 104 I. An Illustration of the Problem ......................... ...... 108 A. NYSE Operations ............................ ...... 108 1. The NYSE as an Auction Market .............. ...... 108 2. The Role of the Specialist ..................... ..... 109 B. The Regulatory Environment of the NYSE ...... .............. 111 1. The Nature of the Regulatory Scheme.............. ........ 111 2. The Regulation of Specialist Behavior ................. 113 C. Specialist Misconduct ......................... ...... 115 1. The Specialist Scandals of the Early 2000's ...... ....... 115 2. Inadequacy of NYSE Regulation ..........................117 3. Inadequacy of SEC Oversight.. ..................... 119 4. Inadequacy of the Threat of a Private Cause of Action..........121 D. The Free Ride ............................................. 127 II. NYSE Reform............... ...................... ..... 128 A. Governance Issues ............................... 128 B. Retention of the Specialist System........... .. .......... 129 C. The Current NYSE Structure ..................... ..... 130 D. Inadequacy of Reform. ......................... ...... 131 III. The Role of the Specialist .................................. 131 A. Arguments in Favor of Retaining Specialists ........ ......... 132 1. The Need for Human Judgment ............................. 132 2. Maintenance of Fair and Orderly Markets .................... 133 3. Reduced Volatility ......................... ...... 133 4. Enhanced Liquidity. .............................. 134 5. Increased Efficiency ........................ ...... 135