NYSE starts front runners' inquiry

The New York Stock Exchange is investigating the practices of some of the floor trading firms at the heart of its operations, delivering a fresh blow to Wall Street investor confidence.

The NYSE confirmed that it has launched an inquiry into several of the so-called specialist firms whose floor traders carry out brokers' transactions.

The Wall Street Journal had earlier reported that two of the seven specialist firms working on the floor of the exchange, FleetBoston Financial division Fleet Specialist and LaBranche & Co, are the subject of an inquiry.

The inquiry is said to focus on "front running" - buying shares on a trader's own account ahead of placing an order for a client in the expectation that the trade is likely to lift the price. In some instances, a front runner can buy the shares and then sell them on to the customer they are supposed to be working for at a higher price, taking a quick profit for themselves.

The auction market has changed little in over 200 years, with brokers physically gathering in front of a "specialist" trader to buy and sell.

The exchange declined to comment on specific firms being investigated. "While exchange policy precludes us from commenting on regulatory matters, the NYSE does confirm that, as part of its commitment to surveilling [sic] the marketplace, it is conducting a review of trading practices at several specialist firms," it said.

The investigation will further damage sentiment already shaken by accounting scandals and inquiries into the practices of investment banks in the late 1990s. The NYSE has also been hit by controversy: five of its board directors in the past year have been ousted by their own company or dragged into accounting scandals.