Nasdaq Spreads Have Narrowed, Study Shows : Investing: A computer analysis of the top-selling issues shows a significant change in the trading margin for 49 of 50.

NEW YORK — A computer study has found that the “spreads” on 49 of the 50 biggest-selling Nasdaq stocks have narrowed significantly--potentially saving investors hundreds of millions of dollars--in the wake of allegations of collusion by dealers to set prices on the nation’s busiest stock market.

According to the study by Bloomberg Business News, some spreads narrowed at the end of May, following news reports on an academic study that found evidence of price fixing. The spreads for many of the stocks in the survey have shrunk since late October, after disclosure that the Justice Department had launched an anti-trust investigation of Nasdaq dealers.

Spreads are essentially dealers’ profit margins, the difference between the price at which they are willing to buy a stock and the higher price at which they offer to sell it. Spreads for many of the biggest Nasdaq stocks had been 25 cents or more, compared with 12.5 cents for similar stocks listed on the New York Stock Exchange.

Critics of Nasdaq said the move to narrower spreads may reflect pressure on the dealers stemming from the investigation and disclosures of other allegedly unfair practices on Nasdaq.

“It shows that when they want to close the spreads they can,” said Robert Skirnick, the lead lawyer in a class-action lawsuit filed by investors against many of the largest dealers. “In the past, the spreads were wide because they made a concerted effort to do that, so that they could reap tons and tons of extra money every year.”

The National Assn. of Securities Dealers, which operates Nasdaq, and leading market makers have denied that any price fixing took place. An NASD spokesman said the association had no comment Wednesday on the Bloomberg study.

The Justice Department investigation, first reported by The Times, initially focused on whether dealers colluded to keep spreads wide and has subsequently broadened to include other allegedly anti-competitive practices. After publication of a Times series documenting a range of practices that favor Nasdaq market makers over small investors, the Securities and Exchange Commission launched its own comprehensive investigation of Nasdaq.

On Nasdaq, multiple market making firms are supposed to compete with each other via computer, standing ready to buy and sell stocks at publicly quoted prices. On the New York Stock Exchange, by contrast, a single “specialist” firm makes a market for each stock.

Bloomberg studied the 50 Nasdaq stocks with the biggest trading volume in the first 11 months of 1994. For all but one, it found, spreads were significantly narrower in the last two months of 1994 than in the six months prior to last May 27, the day after The Times reported on a study by two business school professors suggesting that Nasdaq market makers colluded to fix spreads.

For the 50 stocks, the average spread narrowed to 20.41 cents from 28.55 cents, a 28.5% reduction. The one exception, Seagate Technology, moved its listing to the NYSE last month.

The study included such giants as Microsoft, Sun Microsystems and Oracle Systems. The narrowing of spreads on some of the individual stocks--such as Apple Computer, Amgen Inc., and Intel--had previously been reported by The Times.

For at least six of the stocks, the average spread narrowed only because a single maverick market maker, Domestic Securities Inc., posted a lower spread of one-eighth point, or 12.5 cents per share. These include Biogen, Lotus Development, Sybase, Applied Materials, BMC Software and Parametric Technology. All the other market makers in these stocks most of the time have continued to post spreads of one-fourth point.

Harvey Houtkin, principal of Domestic Securities and a vocal critic of larger Nasdaq dealers, has said he has been subjected to harassment and discrimination from competitors who are angry because he has narrowed spreads.

Under Nasdaq’s trading system, many investors end up getting Domestic Securities’ better price, even if they trade through other firms. But Houtkin says the fact that he is the only dealer posting better prices on Nasdaq’s computerized price list means that if he stopped doing so, spreads on these stocks immediately would bounce back up.

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Nasdaq Investigation

* The entire 6-part series, “Inside Nasdaq,” is available under special reports in the Business section on the TimesLink on-line service. Reprints of the series are also available from Times on Demand for $10.45 each. Call 808-8463, press *86307. Select option 1. Order Item No. 8525.

Details on Times electronic services, B4

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More Scrutiny, Tighter Spreads

As academic critics, news reports and a slew of federal investigations directed a spotlight at the wide profit margins, or spreads, earned by market makers in Nasdaq stocks, the dealers dramatically narrowed the spreads. The chart compares the spreads between bid and asked prices on the 20 most actively traded Nasdaq stocks for two periods: the six months before late May, when a Times report on an academic study raised questions about Nasdaq pricing, and the two months after Oct. 19, when The Times reported that the Justice Department was investigating possible price fixing.

Average Spread, in cents per share Company Post-investigation Pre-study Intel 14.36 26.60 Cisco Systems 13.56 30.28 Microsoft 14.13 31.50 Novell 13.83 15.90 MCI Communications 13.30 15.00 Oracle Systems 14.36 18.70 Apple Computer 14.10 27.18 Lotus Development 27.66 31.60 DSC Communications 15.43 24.00 3Com 18.88 21.32 Dell Computer 16.49 19.64 U.S. Healthcare 28.72 33.40 Bay Networks 14.36 37.60 Sun Microsystems 16.76 19.80 Amgen 15.96 31.55 Seagate Technology 17.57 17.70 IDB Communications 17.55 40.69 Electronic Arts 20.21 32.94 Sybase 32.71 38.20 Informix 17.55 33.10 Average, 20 Stocks 17.87 27.33

Notes: “Post investigation” period is Oct. 20-Dec. 23. “Pre-study” period is Nov. 29, 1993-May 27, 1994. Average spread for Seagate is calculated to Dec. 12, when the company moved to the New York Stock Exchange.

Source: Bloomberg Business News