Computers Hone Nasd Oversight Next Challenge Is Monitoring Trades On The World Wide Web

Bright yellow beams zapped across Dale Kirkland’s computer screen as he swooped through the cavernous brokerage houses to watch stock trades between the firms.

Kirkland, a regulatory analyst, uses a high-tech tool, the Advanced Detection System, to find signs of misdeeds - insider trading, anti-competitive activity and market manipulation. It’s the latest weapon of NASD Regulation Inc., which monitors stock transactions of all U.S. stockbrokers and brokerage firms on the Nasdaq exchange.

About 1,600 people work for NASD Regulation, a separate company formed by the National Association of Securities Dealers. The association itself was set up in 1938 by the U.S. Securities and Exchange Commission to help regulate the firms and brokers who buy and sell stock. But the job has gotten a lot bigger since then.

More than 5,500 companies are traded by more than 530 firms and brokers on the Nasdaq stock exchange. Last year, Nasdaq recorded 163.9 billion shares traded, more than the New York Stock Exchange.

After charges of price-fixing among dealers on the Nasdaq stock market in the early 1990s, the NASD spun off its regulation unit to make it more effective.

The regulators’ $222 million budget last year, funded by membership and transaction fees and fines, was up from $153 million in 1995.

Unlike the NYSE, with its floor of dealers on Wall Street, Nasdaq exists only in cyberspace, with stocks being bought and sold over the computer.

From an industrial park in suburban Washington, Kirkland and other regulators use their computers to look for signs that someone is breaking the rules: an unusual amount of activity in a stock just before a merger announcement, a broker selling at a price that seems too high.

“To take action against a broker you have to prove intent,” Kirkland said. “Instead of a speeding ticket for a one-time thing, we look for a pattern of speeding over time.”

Every transaction shows up in the regulation unit’s computers - who did it, how much, when it occurred, what the prevailing market was at that time.

The Advanced Detection System, with visuals like a computer game, is a spectacular improvement over the old bar graphs, line charts and printouts full of numbers and letters that analysts had been using to monitor billions of trades.

For example, the flashing yellow lights that Kirkland was monitoring alerted him to a trade that needed closer scrutiny. A private customer paid more than $70,000 for a block of stock his brokerage house bought just minutes earlier from another house for significantly less. The computer program recognized the pattern as showing possible collusion between the firms and highlights the trade as one that needed examination.

The next technological challenge for NASD Regulation is to better monitor the Internet, to find out if brokers are hyping stock or violating regulations.

Cameron Funkhouser, director of market regulation, checked out the Web site of a company that claimed it would capture the world lumber market because it had a tree that grew to 80 feet in three years.

“I said I was kind of interested and ‘boom,’ I was connected to a broker,” he said.

Partly as a result of Funkhouser’s call, the SEC ordered the company to take down its Web site and suspended trading.

xxxx