Nasdaq changes designed to help the little investor

SUNDAY OUTLOOK

March 26, 1995|By Timothy J. Mullaney

The past year has been a tough one for the Nasdaq stock market, the second largest in the nation. Its competitive edge has always been its reliance on multiple broker-dealers who "make markets" in individual stocks, compared to the specialist system on the New York Stock Exchange, where a single firm coordinates the trading of each listed company's shares.

Not everyone is agreed that the system works. Two academics, William Christie of Vanderbilt University and Paul Schultz of Ohio State, contend that market makers routinely round stock prices off to the nearest 25 cents when trading with small customers, while institutions and other market makers get prices rounded off by as little as 2 cents.

After Christie and Schultz released their work, the Justice Department began investigating whether Nasdaq's management of small orders violated antitrust laws, and private attorneys filed a class-action lawsuit.

Last week, Nasdaq unveiled a new system, even as it denied the investigation and lawsuit were the reason why. The Aqcess small order system will let customers trading up to 3,000 shares see prices offered by other small investors for buying and selling their favorite stocks, in addition to the prices quoted by market makers. But will the new system give small investors the service they deserve or just keep padding the accounts of brokerage firms?

Richard Ketchum

Chief operating officer, Nasdaq Stock Market Inc.

What Aqcess is going to allow your readers to do is that when they place an order with a specific price in the Aqcess system, it will be displayed to all market makers nationally and to the public, through their brokers and through information vendors.

Effectively, the first thing it allows you to do is participate directly in the market, rather than through market makers. You get two things: immediate display to all participants in the market and price protection. You are not going to see the market trade away from your order without your order getting satisfied.

It's separate from the lawsuit. Our effort is to provide investors with new opportunities to get into the market and get better prices. We have not seen any basis shown to date that indicates there is collusion in the marketplace. Economic studies that come out in the next few weeks will refute the work done by Christie and Schultz. This is about giving investors a better opportunity to participate in the market and to reduce their transaction costs.

We believe it will increase investor confidence in the market and participation in the market. With stronger participation in the market comes a stronger opportunity for companies to raise capital.

Junius W. Peak

Former governor, National Association of Securities Dealers

The technological changes of the last 20-30 years have created an environment where trading can be done in a way that creates a much more level playing field. However, the market makers in the over-the-counter market design and control the markets to tilt the playing field so it is not quite as level as it ought to be.

If bank tellers ran banks, how many ATM machines would we have? So long as the market intermediaries design, build, operate and regulate our financial markets, there will not be equal access and equal opportunity for all investors.

Until the invention of the computer and global telecommunications, there probably was no way to build a level playing field. People understood that there had to be advantages and responsibilities for the intermediaries. Today, technology has made those requirements moot. You can create a worldwide, global trading arena electronically in which every participant, individual and professional alike can see the bids and offers at each price. When consenting adults agree, a trade can occur at a mutually agreeable price.

I'm not trying to put all brokers or intermediaries out of business. But if their services are not needed in a particular transaction, they should not be a tollkeeper ready to collect a fee at every step.

William R. Rothe

Head of Nasdaq/OTC trading, Alex. Brown Inc., Baltimore

Aqcess will add an increased measure of transparency to the market. The more information that is available out there, the better it is for the market.

If participants have access to information about prices in the marketplace, it enables them to access those prices. If you don't know there's someone out there willing to pay $18.13, you think the best price is $18. Transparency means you can see more of the market. This will increase the transparency.

Nasdaq is the second-largest market in the world, and it is only 24 years old. It has been undergoing continuous modification and improvement. It takes a long time, from a technology standpoint and a study standpoint, to enact sweeping change.

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