Nasdaq Probers Look Into Alleged Intentional Late Trade Reporting


Two federal investigations of the Nasdaq stock market have begun to focus on suspected deliberate late reporting of trades by dealers, an illegal practice that often amounts to manipulation of stock prices, sources close to the inquiries said Thursday.

The separate, wide-ranging investigations of Nasdaq are being carried out by the Securities and Exchange Commission and the Justice Department's antitrust division.

Both agencies have also been looking into alleged collusion among dealers to fix the price "spreads" on Nasdaq stocks, essentially the dealers' profit margin for trading stocks with the public.

Separately, a draft report of a new academic study made available Thursday shows that, at least in 1990, far more big trades were reported late on Nasdaq--at prices substantially different from then-current market prices--than on all other U.S. stock markets combined.

Finance professors Daniel G. Weaver and David C. Porter of Marquette University in Milwaukee raised the possibility that Nasdaq dealers "paint the tape," Wall Street jargon for deliberately giving the investing public false information about stock prices.

The Times reported in October that late reporting of trades was a frequent occurrence on Nasdaq, the nation's busiest and fastest-growing stock market.

Trading records from 1994 indicate that each day, many big trades were reported hours late, often just after the market closed. But the National Assn. of Securities Dealers, Nasdaq's parent, almost never took disciplinary action for violations of the rule that requires trades to be reported within 90 seconds of execution.


Intentional late reporting can boost dealers' profits. For example, if a dealer is selling a big block of stock in several smaller chunks, keeping the trades secret until all the stock has been sold would enable the dealer to get a better price. That's because reports of sales tend to make a stock's price go down.

NASD spokesman James D. Spellman did not respond Thursday to a request for comment on the broadening SEC and Justice investigations.

But in a written statement in response to the Marquette study, the NASD said it "aggressively enforces" trade-reporting rules to ensure that investors have the best possible real-time information about market prices. It noted that the study's data is 4 years old and contended that the proportion of trades reported late on Nasdaq is less than 0.2%.

The NASD blamed late reporting on "technological limitations" at a few firms it did not identify.

Several leading mutual fund executives, including Harold S. Bradley, director of trading for the 20th Century Group, confirmed that they had been contacted recently by SEC investigators seeking help in documenting trade reporting violations on Nasdaq.

Managers at these funds, which buy and sell large blocks of Nasdaq stocks, complain that they are often the victims of inaccurate trade reporting by Nasdaq dealers.

Two of the executives interviewed, who asked not to be named, said the SEC is actively investigating a list of incidents turned over by at least six mutual fund managers. On these occasions, the funds say, they had ordered large trades, but the dealers waited up to several hours to report the trades on the public Nasdaq tape of stock prices.

Other sources said the Justice Department has begun looking at deliberate late reporting as part of a series of allegedly anti-competitive practices by Nasdaq dealers.

The investigation initially focused solely on reports that dealers, also known as market makers, colluded to keep spreads wide. (Spreads are the difference between the price dealers are willing to pay to buy a stock and the higher price at which they are willing to sell.)

But the Justice Department investigation has widened substantially.

Last month, the department issued civil investigative demands, similar to subpoenas, requiring brokerage firms to turn over huge amounts of data about their Nasdaq trading activities going back nearly 10 years.


Weaver, one of the Marquette professors, said in an interview that his study was prompted by The Times' series of articles in October; the professors focused on 1990 because they already had complete trading data for that year in hand.

Their study found that minute by minute in 1990, a bigger dollar volume of trades was reported late on Nasdaq than on the New York and American stock exchanges and the Boston, Chicago, Cincinnati, Philadelphia and Pacific exchanges combined. It also found that the dollar value of trades reported just after the close of trading on Nasdaq was 13 times bigger than at the other exchanges combined.

The professors noted that this occurred even though the total value of all trades executed on the other exchanges was four times that of Nasdaq's dollar volume.

In their draft report, Weaver and Porter wrote that Nasdaq's failure to enforce the rule requiring prompt reporting may allow some dealers to hide trades and inventory positions, thereby distorting stock prices and increasing the dealers' profits.

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