Regulators band together to fight insider trading

By Karey Wutkowski and Rachelle Younglai

WASHINGTON (Reuters) - Investigators from major U.S. stock exchanges and the U.S. Securities and Exchange Commission have formed an elite unit to investigate suspicious trades and tackle insider trading.

Investigators from the Financial Industry Regulatory Authority (FINRA), the Options Regulatory Surveillance Authority (ORSA), NYSE Regulation and the SEC have created "scheme teams" to crack serial insider trading rings.

The securities cops also meet informally as a larger group every three months or so to share tips and information, and strategize. They have been getting together for about a year.

An increase in the level of merger and acquisition activity has forced securities officials and government prosecutors to take a closer look at questionable trades ahead of market moving news, especially those by hedge funds and other institutional traders.

"We can talk at a high level about what is happening and what we're seeing, with no red tape," said Cam Funkhouser, vice president in charge of market regulation for the Financial Industry Regulatory Authority.

Self-regulated organizations like the NYSE have increased communication and coordination with each other domestically and internationally.

"It's a way as a cop on the beat to keep up," said David Steiner, NYSE Regulation's vice president of market trading analysis and a former prosecutor.

The number of irregular hedge fund trades referred to the SEC by NYSE Regulation rose from 20 in 2002 to 88 in 2006. This year, the tally already stands at 56 cases, most related to insider trading, Steiner said.

What securities cops have on their side is the technology to track every single trade.

"There is no such thing as a trade falling under the radar," said Stephen Cutler, former chief of enforcement at the SEC and now JP Morgan Chase & Co.'s (JPM.N) general counsel.

It is that electronic footprint that investigators use to start connecting the dots.

ANALYZING TRADES

FINRA's market surveillance operation is run out of an office building on the outskirts of Washington, D.C.

Investigators analyze trades on the Nasdaq and the American Stock Exchange with desktop computers that sift through a plethora of information. The software matches up company news releases against graphs displaying share trading, research and trading volume, and then flags suspicious market activity.

The SEC has two carpeted rooms dedicated to market surveillance in its 10-story glass building in downtown Washington.