U.S. probes allegations of Nasdaq price-fixing

October 20, 1994|By New York Times News Service

NEW YORK -- The Justice Department said yesterday that it was investigating the dealers who make Nasdaq markets, an inquiry that intensifies the pressures on Nasdaq to change in ways that could fundamentally alter the nature of the market.

At a minimum, the pressures seem likely to cut profit margins for the dealers at the center of the market.

The federal inquiry appears to be focusing on suspicion of price-fixing in what investors are charged when they buy and sell stocks on Nasdaq, the network of securities dealers linked by computer and phone.

The department declined to give details on the inquiry by its antitrust division, which was first reported in the Los Angeles Times, but it appears to stem from civil suits that were filed after an academic study raised the possibility of collusion among market makers.

Named in the class-action suits filed this summer are two dozen brokerage firms, including Alex. Brown & Sons Inc. and Legg Mason Wood Walker Inc.

The Justice Department inquiry comes just as the Securities and Exchange Commission is pushing to change rules in ways that will allow investors to trade at better prices more often than they have in the past.

That initiative has led market makers to voice fears that their profits will be slashed, perhaps forcing independent market makers out of business.

Richard Ketchum, chief operating officer of Nasdaq, said he was confident that the Justice Department would conclude "that the Nasdaq market is incredibly competitive" and that there was no reason for antitrust charges to be brought.

Wall Street executives also denied collusion in Nasdaq trading and said they had no knowledge of the investigation.

"It's hard for me to conceive of a more competitive industry than ours, and probably the most competitive part of it is in trading," said Alex. Brown Inc. Chief Executive A. B. "Buzzy" Krongard.

A study by two professors, William Christie of the Owen Graduate School of Management at Vanderbilt University and Paul Schultz of Ohio State University, showed that not only were spreads of 25 cents common on Nasdaq, as had been well known in the past, but also that quotes at odd-eighths were rare.

In other words, when a stock is quoted with a bid price (the price at which a market maker will buy the stock) of $50 and an asked price (the price at which the market maker is willing to sell the stock) of $50.25, it is unlikely to move by only 12.5 cents, to a spread of, say, $50.125-$50.375.

Bids tend to rise or fall by 25 cents, they concluded, and to stay at even quarters of a dollar. In the above example, when the price rises it would likely be to $50.50 from $50.25.

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