Series on Nasdaq Market Panned and Praised
Your recently concluded series on the Nasdaq stock market (Oct. 20-25) projected an incredibly distorted and biased view of our market. It also failed to take into account the many improvements both made and under way at Nasdaq that are quite literally revolutionizing our market.
The distortion and bias result primarily from the almost exclusive use of sources who are directly antagonistic to our market, many of whom have engaged in activities that are antithetical to the interests of millions of investors who participate both directly and indirectly in our market. The views and opinions of this group do not in any way represent the mainstream thinking of the overwhelming majority of firms in our industry. Actions taken by the National Assn. of Securities Dealers Inc., the operator and regulator of Nasdaq, to prevent this fringe group from abusing our small-order execution system (SOES) underlie the group’s aggressive campaign to disparage our market. SOES was built for the exclusive benefit of individual investors--and not professional traders.
Many of the other sources are questionable as well. They include the very academics who authored the studies referenced in the series and upon which a number of class-action suits are based. These are the same academics who took the unusual step of using a public relations firm to promote their research. One of these same academics is now on the payroll of counsel for plaintiffs in the same suits his research triggered.
Another key source is the very same person whose long-proposed automated black-box trading system has been rejected by the Securities and Exchange Commission and the major markets in this country, since it would eliminate market makers and exchange specialists, the marketplace intermediaries which provide the liquidity that make our U.S. markets the envy of the world.
By basing the story on the input of those who have their own agendas (none of which were disclosed in the articles), the series was devoid of journalistic balance. It misleads, misstates and mischaracterizes our market. On top of all that, it misses the point. Nasdaq has achieved success because it offers advantages to investors and companies that are unavailable anywhere else: superior liquidity and market depth; sponsorship of companies through research and capital committed to market depth; sponsorship of companies through research and capital committed to market making; more continuous markets, and reliable, immediate execution of orders.
To state the obvious, millions of investors and thousands of companies have been served well by this innovative market. Incredibly, the series fails to include even one single quote from one single person from among this huge cadre of Nasdaq beneficiaries. Why? It certainly isn’t because none could be found.
We have been, are now and will continue to be an aggressive regulator and an innovative leader in providing market participants with securities markets that are fair, efficient and liquid. We have an excellent track record in making a good thing better. Much has been done; there is more to do, and we’re doing it.
JOSEPH R. HARDIMAN
President
and Chief Executive
National Assn. of Securities Dealers
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“Tightening the Screws on Nasdaq Exchange” (Oct. 29) pinpointed skulduggery by the 510 NASD dealers. They skim tens of billions of dollars of their customers’ money each year. But the real solution involves our ineffective Securities and Exchange Commission demanding that by Jan. 1, 1996, all stock exchanges must operate under these rules:
* The exchange-owned and -operated computerized system, not dealers, shall execute all orders and implement the “best execution rule.”
* Dealers must date-time stamp customer orders and place orders with the exchange at once.
* Before ordering, a customer can get from the dealer an unexecuted order summary, summarizing unexecuted buy and sell orders and recent sales for that security. (That eliminates the inside information a “market maker” uses to profit inappropriately today. Everyone would be a market maker.)
* The oldest “sell-at-market” order gets the highest-stated-price buy order. The oldest “buy-at-market” order gets the lowest-stated-price sell order. When no “at-market” orders can be executed, and the highest buy order is lower than the lowest sell order, no sales of that security will occur.
* The sole profit of a dealer executing a buy or sell order for a customer would be from the competitively priced transaction fee charged (part of which goes to the exchange for its services).
HOWARD L. SARGENT
Los Angeles
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Your series on Nasdaq was an excellent expose of abuses in stock trading. Nasdaq advertises itself as the “stock market for the next 100 years.” If so, individual investors will see a century of trouble.
Front-running, in which brokers trade for themselves ahead of their customers; market makers who fail to make a market at their posted prices, committing the fraud of making a public offer to buy or sell they do not intend to fulfill; excessive spreads, which cause excessive price changes; failure to report large trades promptly, which gives brokers inside information on potential price swings that is denied outside investors--rules against these abuses are vigorously enforced by the New York Stock Exchange and the SEC. Yet brokers on the NYSE still prosper.
Why then does NASD defend these abuses on the Nasdaq as necessary to ensure profits for its brokers? For example, the NYSE requires its specialists to make a market in a stock by trading against the market, buying in a falling market and selling in a rising market if necessary to stabilize prices. On the Nasdaq, however, it appears that market makers participate only by trading with the market, buying in a rising market and selling in a falling market, which only makes prices more volatile.
For the sake of broker profits, we see the NASD justifying abuses from the 1920s that were supposedly abolished by law. Perhaps we will soon see the revival of bucket shops. (Or are they already here in the form of option futures?)
DAVID E. ROSS
Agoura
