FINANCIAL MARKETS : Justice Dept. Calls for Change in Small-Order Rules at Nasdaq
The Justice Department, probing charges of collusion on the Nasdaq Stock Market, is proposing changes to the market’s small-order trading system that it says would improve competition.
The department’s detailed proposals offer the first public glimpse into an extensive antitrust investigation of price fixing and other alleged misconduct in the nation’s busiest stock market.
The price-fixing charges can partly be traced to an intense dispute over the operation of a Nasdaq trading system known as the Small Order Execution System, which Nasdaq wants to replace with a new system called N-Prove. It has asked the Securities and Exchange Commission for permission to do so.
Critics say Nasdaq’s N-Prove proposal would maintain many of the advantages Nasdaq dealers have over ordinary investors. And the Justice Department, in an unusual 19-page comment letter on the plan, agreed.
The National Assn. of Securities Dealers, which operates Nasdaq, says a key selling point for N-Prove is that it would allow certain customer orders to get better prices than they normally would.
But the Justice letter says those claims may be illusory because N-Prove doesn’t contain sufficient incentives for market makers to improve the prices of their quotes for extended periods.
Competition would improve by allowing automatic execution of quotes posted by Nasdaq market makers with public limit orders, which are customers’ orders specifying the price at which to buy or sell shares. Market makers form the backbone of Nasdaq by buying and selling stocks at prices they post, risking their firm’s own money in the process.
The department’s “principal concern” is a proposal to give market makers a 15-second delay before deciding whether or not to execute a customer’s limit order. During that period, firms could make the trade at a slightly better price or let it pass.