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NYSE's VWAP' Probe Investigating House Trades


The New York Stock Exchange is looking into nipping Volume Weighted Average Price, or "VWAP," an increasingly common trade-order and hedging technique, in the bud.

As part of ongoing scrutiny of more than 10 of Wall Street's largest brokers, NYSE's regulatory unit last week issued a letter to members reminding them of their fiduciary responsibility to customers, The Wall Street Journal reports.

In VWAP, brokers splice up large block orders from mutual funds and other large institutions, tying them to an average, over a period of time.

The potential problem with the VWAP, NYSE argues, is when brokerages place their own proprietary trades ahead of customer orders under the guise that house trades are being made to hedge against price movements, as well as to ensure inventory is on hand for the client.

Robert Marchman, EVP, market surveillance, NYSE, told WSJ the exchange is concerned brokerages used their knowledge of these large buy or sell orders to make money at their clients' expense.

NYSE is "in the process of evaluating" VWAP before it should become "a major problem for the investing public," Marchman said.

While NYSE's chief regulator declined to name the firms under review, NYSE's letter to members last Monday on VWAP stressed the brokerages' obligation to protect their clients' best interests.

NYSE's letter was "sorely needed," commented Michael Sobel, U.S. head trader, Barclays Global.

The Big Board began looking into Volume Weighted Average Price in March 2004.

Meanwhile, NASD is handling a VWAP investigation of its own, prompted by an earlier examination, fine and settlement across the pond in the U.K. by the Financial Services Authority against Deutsche Bank's Morgan Grenfell securities unit.

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