The lawsuit said improper trading by the specialist firms went unchecked by the NYSE.

"We are filing today a landmark lawsuit to recover losses and to right a serious wrong that exists at the New York Stock Exchange," Calpers said.

A spokesman for the NYSE declined to comment on the action.

Rules 'violated'

"As a matter of policy, we don't comment on litigation," NYSE spokesman Ray Pellecchia told the Reuters news agency.

The specialist trading firms named in the suit are involved in matching buyers and sellers of shares on the NYSE's trading floor.

Calpers - the California Public Employees Retirement System - manages about $154bn and represents about 1.4 million members.

The Calpers lawsuit alleges that "NYSE orders were not being filled at the best available prices" and "financially advantaged" the specialist firms.

"The lawsuit alleges that the exchange looked the other way most of the time when these rules were violated," said Sean Harrigan, president of the Calpers board of administration.

"We intend to seek recovery of every single dollar lost," he added.

New boss in clean-up

Calpers' action comes a day before the US financial watchdog, the Securities and Exchange Commission (SEC), is due to vote on reforms introduced by the NYSE's interim chairman John Reed.

Those reforms have been criticised by Calpers for not separating out the exchange's regulatory arm.

Mr Reed stepped into the NYSE's top job in September, replacing the ousted Richard Grasso, who stepped down amid an outcry over his $140m pay deal.

Calpers weighed in heavily in against Mr Grasso, a move that was widely seen as sealing his fate.

Mutual fund scandal

The air of scandal surrounding the supervision of traders and insider dealing by staff of major US financial institutions was deepened by news of more sackings at Putnam Investments.

Putnam, the fifth biggest US mutual fund, said on Tuesday it had fired nine staff for improper trading.

Putnam has now fired 15 staff since financial regulators began investing trading practices at the firm.

Putnam faces charges from the state and from federal regulators and the state of Massachusetts, whose pension trustees have sacked the firm as their fund manager.

"This revelation reaffirms the justification for our thoroughness, and there may well be additional charges," said Massachusetts Secretary of the Commonwealth Bill Galvin.

Putnam is one of several mutual funds being investigated by regulators as a result of pressure from crusading New York Attorney General Eliot Spitzer who has declared war on market-timing.

This is the practice of trading in the funds stock on a quick-turnaround basis which damages the value of long-term savers' holdings.

More than half of all US households have savings in mutual funds.