NYSE Probes Market Maker IMC Financial
October 05 2016 - 7:00PM
Dow Jones News
The New York Stock Exchange's internal regulators are
investigating the decisions of a market maker who operates on the
trading floor after several investors said he caused them losses
Monday, according to people familiar with the matter.
Market makers are supposed to help stocks trade in an orderly
fashion, especially during special events when volume may increase
several fold. But in this case, several firms trading the stock
told NYSE regulatory staff the market maker made things worse and
cost them money, the people said.
The focus of the investigation is what happened to shares of
Versum Materials Inc., which was spun off from of Air Products
& Chemicals Inc. on Monday and began its first day as a
separate publicly traded company. The stock was heavily traded
because many mutual funds that use a strategy to track the S&P
500 index needed to sell it and those that follow the midcap
S&P 400 needed to buy it, traders said.
As of 3:59 p.m. Monday, shares of Versum were trading around
$25.63. But the designated market maker in charge of the stock, Don
Himpele of IMC Financial Markets, closed the shares at $28 at 4:05
p.m., an increase of more than 9%. The decision caused losses for
several firms that had entered large orders during the closing
auction because the stock dropped back to a lower price range
Tuesday morning, according to the people familiar with the matter.
The trade would likely have been profitable for IMC, the people
said.
Typically, a market maker attempts to balance out the supply and
demand of a stock at the end of the trading day by running the
closing auction and setting the price.
The NYSE investigation into Mr. Himpele's decision will seek to
determine why he chose such a high price for the shares during the
auction and didn't wait for more orders to accumulate, the people
familiar with the matter said.
Separately, Mr. Himpele's actions during the market volatility
of Aug. 24, 2015, were reviewed by NYSE and the Securities and
Exchange Commission, The Wall Street Journal reported last
year.
Representatives for Intercontinental Exchange Inc., parent of
NYSE Group that runs the New York Stock Exchange, and the SEC
declined to comment.
Mr. Himpele didn't respond to a request for comment. A spokesman
for IMC said "the first day of trading in a new issue can exhibit
significantly heightened trading interest, especially at the close,
but we believe the NYSE model helps facilitate a more orderly
process in those instances."
A representative for Versum declined to comment.
The NYSE is the only exchange operator to use a "hybrid model,"
in which most trading is handled electronically, but human market
makers control the opening and closing auctions of stocks, among
other responsibilities. The NYSE said the system makes trading more
orderly.
With their colorful vests, floor-based market makers and brokers
are a vestige of an earlier era in which all trading was handled at
11 Wall St. inside the historic exchange. But with the domination
of electronic trading, the floor is better known as a backdrop for
financial television shows and for the daily opening and closing
bells, a big marketing opportunity for companies.
In the incident last year, trading on Aug. 24 was
extraordinarily volatile, and problems were exacerbated by
stock-market circuit breakers, which temporarily halt trading when
prices swing too fast. There also was criticism of how some market
makers handled the opening of stocks that morning.
On that day, Mr. Himpele chose to open shares of private-equity
firm KKR & Co. at $10, about half the $19.55 at which they
closed the previous Friday despite there being no significant news
affecting the company. It also was much lower than the $17-to-$18
range at which the stock was trading on other exchanges in the
preceding three minutes.
For a brief period, the decision caused the net worth of KKR's
founding cousins and co-Chief Executives Henry Kravis and George
Roberts to drop by about $930 million and $1 billion, respectively.
KKR considered replacing IMC as its market-making firm at the time,
but ultimately didn't.
J.P. Morgan Chase & Co. replaced its designated market
maker, KCG Holdings Inc., in part due to poor performance on Aug.
24, the Journal reported in December.
On Wednesday, Versum's shares fell 3.3%, to $23.68.
Write to Bradley Hope at bradley.hope@wsj.com
(END) Dow Jones Newswires
October 05, 2016 18:45 ET (22:45 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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