A:

In 2002 and 2003, t

he day traders at Watley Group seemed to have an uncanny knack at predicting the movements of institutional investors. Whenever a large order to buy or sell a stock came in from institutional investors, Watley day traders would already be there to profit from the fluctuations that follow when an elephant gets in or out of a pool.

The prescience of the Watley traders eventually caught the attention of the Securities and Exchange Commission (SEC). As it turned out, a day trader named John J. Amore was paying brokers at Merril Lynch (NYSE:MER), Citigroup (NYSE:C), and Lehman Brothers (NYSE:LEH) to keep an open phone line next to the squawk boxes in their respective brokerages. The Wately traders sat next to these phones all day and traded ahead of the institutional investors. This is called front running when brokers do it, but the traders were using illegal material insider information, so in this case, it was just plain securities fraud.

In return for giving up their professional ethics, the brokers were given kickbacks in the form of cash and commissions on trades from the Watley traders. Over a period of two years, the Watley traders traded ahead of institutional investors at least 400 times, making more than $500,000 in the process. By August 15, 2005, the SEC had enough evidence to press charges, and the squawk box scheme was shut down.

To read about more fraud cases, see The Ghouls And Monsters On Wall Street.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. What was "Operation Wooden Nickel"?

    On November 19, 2003, the Commodity Futures Trading Commission (CFTC) and the FBI announced the completion of an 18-month ... Read Answer >>
  2. What's the difference between institutional and non-institutional investors?

    There are a number of differences between institutional investors and non-institutional investors. If you are considering ... Read Answer >>
  3. What qualifies a person as a day trader?

    As of Sept 28, 2001, the NASD (now, FINRA) and NYSE amended their definitions of day traders. A new term that they use is ... Read Answer >>
  4. What is the difference between investing and trading?

    Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing ... Read Answer >>
  5. A company I recently looked up showed institutional holdings of more than 100%. How ...

    It is obviously not technically possible for any shareholder or category of shareholder to hold more than 100% of a company's ... Read Answer >>
  6. What is the difference between extensive margin and intensive margin in economics?

    Find out why it is important for traders to understand the difference between initial margin requirements and maintenance ... Read Answer >>
Related Articles
  1. Investing

    What's an Elephant?

    In the financial world, an elephant is a large institution that influences the markets and prices in big ways whenever it makes high-volume trades.
  2. Trading

    Top 10 Brokerage Firms For Day Trading

    Day traders have different needs from long-term investors. Investopedia rates the top 10 brokerage firms for day traders.
  3. Personal Finance

    A Day in the Life of a Day Trader

    Day trading has many advantages and, while we often hear about these perks, it's important to realize that day trading is hard work.
  4. Trading

    An Introduction To Day Trading

    This article will take an objective look at day trading, who does it and how it is done.
  5. Investing

    Institutional Investors And Fundamentals: What's The Link?

    Big-money sponsorship might make a company look good, but it's not always a reliable gauge of stock quality.
  6. Trading

    Broker Or Trader: Which Career Is Right For You?

    A day in the life of a broker or trader is an exciting and varied one. Find out how to decide between these two financial professions.
  7. Trading

    Is Your Forex Broker A Scam?

    While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business.
  8. Trading

    Introduction to Options Types

    Options are often the bread and butter of day traders. Here are some of the more common types of options.
  9. Trading

    What Can Traders Learn From Investors?

    Discover tips from a long-term strategy that can help you make better short-term trades.
RELATED TERMS
  1. Squawk Box

    An intercom speaker often used on brokers' trading desks in investment ...
  2. Elephants

    Slang for large institutions that have the funds to make high ...
  3. Day Trader

    A investor who attempts to profit by making rapid trades intraday. ...
  4. Trader

    An individual who engages in the transfer of financial assets ...
  5. May Day

    Refers to May 1, 1975, when brokerages changed from a fixed commission ...
  6. Institutional Investor

    A non-bank person or organization that trades securities in large ...
Hot Definitions
  1. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  2. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
  3. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. ...
  4. Dark Pool

    A dark pool is a private financial forum or exchange for trading securities.
  5. Quadruple Witching

    The expiration date of various stock index futures, stock index options, stock options and single stock futures. All stock ...
  6. American Opportunity Tax Credit

    A tax credit that enabled more student and parents to pay for part of their college expenses in the 2009 and 2010 tax years ...
Trading Center