NASD Skirted Around The Issue

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[Policing Wall Street]

The National Association of Securities Dealers (NASD) always highlighted a pretty face on Wall Street to “prove” that there was equality in the marketplace. But the question is: Was that pretty face technically sophisticated? We’ll let you decide.

As readers of my column know, I frequently review shenanigans that occurred in both the distant and recent past on Wall Street—many such practices still continue.

This past weekend I was researching some long ago illegal trading in the options of Chase Manhattan Bank. These options were listed on the American Stock Exchange. The specialist unit was Spear Leeds and Kellogg. The specialist on the account was Penelope “Penny” Collins.
While scrolling through various links I came across the NASD Annual Report for 1999. Now at the time, NASD owned the Amex. Frank Zarb, a personal friend of Bernie Madoff, was Chairman of NASD. And Sal Sodano, a mignon of Zarb, was Chairman of the Amex.

Zarb and the Amex were always pushing a few pretty faces; Wall Street egalite. Of course, the women never went very far in the hierarchy; frequently because they were promoted on the basis of good looks and not on trading acumen.

As I scrolled through the old NASD Report, what should I come across? A full page photo of Penny Collins. And NASD proudly proclaimed that Penny was the specialist in the options of Chase Manhattan Bank. NASD was bragging about Penny. 

NASD even quoted Penny saying: “The Amex system of specialists and market makers is being copied now by every other options exchange in the country.”

Unknown to NASD, in June 1999 Penny had found herself in the midst of a price fixing investigation-with respect to the options of Chase Manhattan Bank. A Vietnamese-American trader had been kept out of the options of Chase Manhattan Bank. The specialist, the same Penny Collins who was proudly displayed as a success story, had cut him out of trades.

So what course of action could this trader pursue? He tape recorded the rigging of the options of Chase Manhattan Bank and then provided copies of the tapes to the Amex Trading Analysis Division.

A hue and cry was raised. Eventually the Floor Governors said the tapes could be used as evidence. Aaron Rolley, a former specialist and employee of Derivative Trading Analysis, was sent to investigate. I was told that Rolley informed the Amex market makers and the specialist that if they cooperated, the investigation would yield nothing.

The same Aaron Rolley, in 2000, did investigate price fixing in the SPY and QQQ Exchange Traded Funds; another major scandal. This price fixing in the QQQ alone yielded the specialist approximately $80 million in illegal profits for a 5 year period. The investigation was squashed.

Penny Collins was exiled to Spear Leeds and Kellogg’s offices in New Jersey.  That was sufficient punishment; she was, after all, young and pretty. She no longer appeared in the NASD Annual Report.

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