The NYSE is in the midst of a shake up

The NYSE said on Thursday it would seek "substantial fines" and that the floor-trading firms would have to repay investor losses.

It said it was investigating allegations that the floor-traders had traded stocks on their own behalf before fulfilling customer orders, a practice that could mean customers missing out.

The NYSE did not say how much the fines would be, though press reports have suggested they could total $150m, while investor losses may have amounted to $100m.

Outdated system?

The troubled NYSE is conducting a review of how it regulates itself and its member firms as it struggles to recover from the forced departure of chief executive Richard Grasso amid public anger over his $140m pay packet.

It said it had notified them the five firms, which it did not name.

It has also told the US Securities and Exchange Commission - which is jointly running the investigation - of the action it was prepared to take, said Edward Kwalwasser, NYSE Group Executive Vice President, Regulation.

The NYSE is the sole major stock market that has not replaced the open outcry stock trading system with electronic trading.

The open outcry system needs floor-trading firms, also called the 'specialists', to match trades.

John Reed, the NYSE's new, interim chief executive, defended the open outcry system to a US Congressional subcommittee on Thursday.

Mr Reed said it was not the right time to review the specialist system.

He confirmed that he wants to reduce the size of the NYSE's board when he presents a review of the NYSE's governs itself and conducts it regulatory role by the end of October.

Mr Reed is an ex-chairman and co-chief executive of the investment bank Citigroup, from which he retired 2000.