Nasdaq Releases Studies Aiming to Disprove Allegations of Collusion : Securities: Two reports claim that competition between dealers is strong and that price spreads are a ‘natural’ occurrence.
Nasdaq on Wednesday released summaries of two studies it commissioned that seek to disprove allegations that dealers have colluded to fix the prices of Nasdaq stocks.
One of the studies said it found that “the Nasdaq marketplace is highly competitive” and that trading statistics didn’t support allegations of collusion. The study found evidence that competition among Nasdaq dealers is strong.
The studies are due to be unveiled and debated today at a conference on financial markets reform at the Owen Graduate School of Management at Vanderbilt University in Nashville, Tenn.
Nasdaq has been under investigation since late last year by the Justice Department’s antitrust division and the Securities and Exchange Commission, which are looking into charges of price fixing and other allegations. Nasdaq dealers also face a massive federal class-action lawsuit brought by private investors, based on the same charges.
One of the studies Nasdaq commissioned is by Merton Miller, a Nobel Laureate economist at the University of Chicago, and Kenneth R. Cone, vice president of Lexecon Inc., a Chicago-based economic consulting firm. The other study is by Dean Furbush of Economists Inc., an economic consulting firm.
The findings of the Furbush and Miller-Cone studies are aimed at refuting a study made public last May by two business school professors, William G. Christie and Paul H. Schultz. Their study found that many Nasdaq stocks were never quoted in odd eighths--that is, prices might be 20 or 20 1/4 or 20 1/2, but never 20 1/8 or 20 3/8 or 20 7/8. They concluded that the only reasonable explanation was that Nasdaq dealers were colluding to keep spreads wide.
Spreads, essentially dealers’ profit margins, are the gap between the bid price, at which a dealer offers to buy a stock, and the (higher) asked price, at which a dealer offers to sell. Christie and Schultz said that by not quoting odd-eighth prices for many stocks, dealers ensured that spreads remained at least 1/4, or 25 cents.
But the summary of the Furbush study contended that “Nasdaq’s market structure makes Christie and Schultz’s ‘collusion’ conclusion inconceivable.”
Furbush, in an interview with Associated Press, sharply criticized the Christie-Schultz work as “bad economics” and said their “conclusion from their work doesn’t follow from their results.”
Christie defended his study as sound and welcomed the review “to try to figure out what is going on.”
Furbush told Associated Press that he used a Justice Department statistical tool to measure competitiveness on Nasdaq and found that “the Nasdaq market is clearly and highly competitive. And the Christie and Schultz conclusion is plainly ludicrous.”
Furbush said other studies “indicate an unconcentrated market, frequent entry and exit and high turnover among the top market makers.”
The Cone and Miller study analyzed other dealer markets, including the London Stock Exchange, the foreign exchange inter-bank market and the London gold market. It found quoted prices tended to “cluster” around round numbers, such as prices ending in zero and five, but not on increments in between. Cone said the price patterns found by Christie and Schultz aren’t evidence of collusion but are merely “a natural market phenomenon.”
Christie said a problem with that comparison is that the foreign exchange and metals markets quote prices in increments of pennies, whereas Nasdaq stocks are quoted in 12 1/2-cent increments.
Nasdaq made the economists available to selected media outlets in a conference call Wednesday to explain their studies, but excluded The Times. A Nasdaq spokesman cited bias by The Times. The Times was the first to raise the issue of collusion and other improprieties in a series that ran in October.
In a separate development, Nasdaq on Wednesday experienced another in a series of technical glitches that have dogged the computerized stock market since last summer. Trading via two main computer systems, including the one for handling small customer orders, was halted for 14 minutes beginning at 10:03 a.m. EDT because of a failure of a computer modem at Nasdaq’s main computer center in Connecticut, a spokesman said.
This is at least the fifth technical failure that led to a disruption of trading since mid-July, including a 40-minute trading halt Aug. 1 that was attributed to a squirrel gnawing through a power line.
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Associated Press contributed to this report.
