John Reed, interim chairman of the New York Stock Exchange, on Tuesday proposed that the specialist firms accused of violating trading rules compensate investors through a "superfund".
In an interview with the Financial Times, Mr Reed estimated that negotiations for the compensation fund would start at about $150m, the total losses caused by the specialists' misbehaviour, according to an unpublished report from the Securities and Exchange Commission.
"I want to be able to say to American investors that if we mishandled your transaction we're going to pay you back," he said. In addition, the specialists would have to admit their guilt, discipline staff involved and accept other penalties.
Mr Reed's plan would follow the model used in the 1980s by the Environmental Protection Agency to punish polluters and ensure they compensated those harmed by their actions.
Mr Reed has discussed his plan with the five specialist firms under investigation. He expects to present the idea to the SEC next week when he is due in Washington to testify to the Senate banking committee.
Without SEC approval, Mr Reed accepts the plan has little chance of being implemented. But he believes it would allow the NYSE and the specialists to put behind them a damaging controversy and avoid protracted litigation that could further undermine public confidence in the NYSE.
"If they [the specialists] are not willing to accept those [conditions], then forget it," he said.
People familiar with the specialist firms said the traders were unlikely to admit guilt for losses of $150m because the specialists did not believe that was a reasonable amount.
The five leading firms are examining trading data from the exchange that detail trading violations over the six "worst" months between 2000 and 2002 and for the 20 "worst" stocks - the months and stocks in which most violations occurred.
This involves trawling through hundreds of individual records, ranging from completed trades to the keystrokes behind them. Hundreds of thousands of transactions are examined.
Mr Reed expects feedback from the specialists in the next two weeks.
Three types of wrongdoing are being investigated: trading ahead of customers' orders, unnecessarily interfering with transactions and failing to execute orders. The five firms targeted are LaBranche & Co, Fleet Specialist, Van Der Moolen, Bear Wagner, and Spear, Leeds & Kellogg.
Mr Reed's insistence on an admission of guilt from the specialists together with a restitution of investor losses contrasts with the approach of Wall Street regulators. In the settlement with leading investment banks over conflicts of interest, the banks paid $1.4bn in damages but did not admit any wrongdoing.
Separately, Mr Reed made clear his belief that the NYSE's specialist system was robust and helped reduce stock price volatility. But he said the exchange and the specialists had to articulate their role and value more clearly to investors and the public.
Executives at at least two specialist firms have acknowledged the need for their business to evolve and address criticism.
Michael LaBranche, chief executive of LaBranche & Co, has said: "Specialists are different from what they were 10 years ago and will be different 10 years from now."