Nasdaq Offers Reforms

March 21, 1995|By Timothy J. Mullaney | Timothy J. Mullaney,Sun Staff Writer

The National Association of Securities Dealers released yesterday a package of reforms it said will make Nasdaq, the nation's second-biggest stock market, fairer to small investors.

The moves come after a year in which Nasdaq members' current practices have come under fire from academics and under investigation by the U.S. Justice Department Antitrust Division. The electronic market's procedures also have inspired a class-action lawsuit, which was broadened yesterday to include charges that prices of more than 1,600 stocks had been fixed.

The new system for processing trades of up to 3,000 shares, dubbed Aqcess, should be working by December, Nasdaq President Joseph Hardiman said.

"The primary beneficiary of this will be the small investor," Mr. Hardiman said. "The system is open and fair."

Critics have charged that competition among dealers in the market has been less than vigorous, leading to overcharges when small customers buy and underpayments when they sell. Meanwhile, Nasdaq's detractors contend, institutional investors have been able to use their clout to get a better deal from their brokers.

Robert Skirnick, the New York attorney who brought the class action case against 33 brokerage firms, including Legg Mason Inc. and Alex. Brown Inc. of Baltimore, said the inefficiencies of the Nasdaq market cost small investors up to $1 billion a year.

The controversy goes to the heart of the difference between Nasdaq and the more established New York Stock Exchange.

Under the Big Board's model, a single firm makes a market for a certain company's stock. That firm, called a specialist, assumes the responsibility to buy that company's stock when the market is falling and provide stock when the market is rising.

Under the Nasdaq system, several brokerage firms compete to match buyers and sellers of a given stock. These "market makers" advertise their willingness to buy stocks at one price and sell them at a higher price. They make part of their money on the spread between the two prices, which can be as wide as $1 a share for thinly traded securities.

The class action suit claims these firms conspired to keep the spreads artificially wide to inflate profits. A Justice Department investigation launched last fall is studying whether that is true.

Under the proposed Aqcess system, a customer can direct his or her broker to place orders that offer to buy or sell stocks for prices between the brokers' purchase and sale prices. The system will automatically match orders in between the prices, letting the market adjust prices with less mediation from the brokerage firms.

Bill Christie, a Vanderbilt University business professor and co-author of a study critical of the existing system, said the new system will give investors more information about the market and a better chance to get a fair price.

"It looks like they are heading in the right direction," Mr. Christie said, reflecting a cautious optimism shared by Mr. Skirnick and the Justice Department. Nonetheless, both the class-action suit and the investigation are moving ahead, they said.

"Our preliminary reaction is that their proposed changes will offer the possibility of more competition in the Nasdaq market and provide greater protection to small investors," said Justice Department spokeswoman Gina Talamona. She added that the new proposal addresses many of the concerns the department had raised with the Securities and Exchange Commission.

Mr. Skirnick said the changes won't make up for the price fixing he has alleged in his lawsuit. "It's an effort to make the system more responsive to shareholders, but it won't undo the damage," he said.

In a filing yesterday, Mr. Skirnick's clients for the first time identified 1,646 Nasdaq stocks that they claim had excessive spreads. The filing came in response to the industry's motion asking a federal judge to dismiss the class action.

Officials of Legg Mason and Alex. Brown declined to comment.

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