SEC delayed probe of Nasdaq Collusion charges arose nearly 2 years before investigation


WASHINGTON -- The Securities and Exchange Commission learned of possible broker collusion on the Nasdaq stock market as early as December 1992, but didn't open a formal investigation for nearly two years, SEC documents show.

"The SEC had ample warning, and didn't act. We allowed the problem to linger and grow," said Richard Roberts, an SEC commissioner from 1990 to 1995. Roberts said he and other SEC officials heard oral allegations of broker collusion on Nasdaq even before receiving a letter of complaint from the competing American Stock Exchange in December 1992.

The 35-page Amex letter, obtained yesterday, said "price 'discipline' is effectively maintained by the concern that other dealers will refuse to 'play ball' " with any dealer who offers better prices to investors.

Some of the oral complaints came from broker-dealers who said they were bullied into maintaining uniform pricing practices to avoid undercutting competitors, Roberts said.

Roberts said SEC officials believed, with undue optimism, that pricing problems on the rapidly growing Nasdaq would correct themselves.

Nasdaq's parent, the National Association of Securities Dealers, was charged by the SEC last week with failing to investigate indications of trader collusion, bullying and price manipulation.

The NASD, a self-policing industry body, agreed to settle the charges, the first against a major stock market in 35 years.

The SEC formally began its investigation of Nasdaq, the nation's second largest stock market, in October 1994, almost two years after receiving the letter from the American Stock Exchange, the nation's third largest stock market.

In that letter, which the Amex submitted for the SEC's Market 2000 study on problems in U.S. markets, Amex officials said that "in the Nasdaq marketplace, quoted spreads almost never vary" referring to the difference, or "spread," between what Nasdaq broker-dealers paid for shares, and the price they sold them for.

"Trading operates in a manner which corresponds much more to a cartelistic, rather than a competitive, model," said the Amex's Dec. 8, 1992 letter, signed by former Chairman James R. Jones.

The NASD, which runs Nasdaq and polices all U.S. brokers, declined to comment.

The Amex declined to comment on the letter, and SEC spokeswoman Jennifer Scardino said she didn't remember it.

"We could have been a little more aggressive in pursuing some of the early hints," said Steven M.H. Wallman, who has been an SEC commissioner since July 1994. "You don't always fully understand the implications of things until they're put in a broader context."

Richard Lindsey, the SEC's market regulation director, defended the SEC's handling of the inquiry.

"I think the SEC moved pretty well on this," said Lindsey, who joined the SEC in July 1995. "It was a complicated issue and took a lot of digging to uncover."

He said SEC staff informally began examining Nasdaq brokers' conduct around the fall of 1993, though he couldn't remember what prompted the inquiry. This probe picked up in early 1994 in response to a surge of complaints that large firms were "backing away" from posted stock quotes, and with the publication of the Christie-Shultz study later that spring, he said.

Pub Date: 8/14/96

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