2 New Steps Should Benefit Nasdaq Investors : Stocks: NASD reverses itself and grants wider role to maverick market maker. It also moves against late reporting of trades.
Under intense pressure from federal regulators, the National Assn. of Securities Dealers has taken two actions that should mean better prices for investors in Nasdaq stocks and more truthful public reporting of trades.
In a decision made late last week but not publicly announced, the NASD reversed its own earlier ruling and agreed to allow a small, maverick firm to greatly increase the number of stocks it deals in. The firm, Domestic Securities of Montvale, N.J., had been a leader in narrowing spreads--essentially a dealer’s profit margin--on several big Nasdaq stocks, including Intel, Lotus Development, Biogen and Sybase.
Domestic, which has incurred the wrath of many big, established brokerage firms for hurting their trading profits, said Monday it had laid off traders in recent months because its original request had been denied. But it said it is now moving quickly to expand its staff and plans within the next several months to narrow spreads on many more stocks.
“We definitely plan to compete on price and cut spreads” on more stocks, said Harvey Houtkin, principal owner of Domestic.
Under the ruling, the NASD will allow the firm to make markets in 500 Nasdaq stocks, up from 50. The NASD, parent of the Nasdaq stock market, acted after the Securities and Exchange Commission made clear it was unhappy with a February ruling in which the organization rejected Domestic’s request to expand its market-making activities.
Domestic had complained that the NASD had withheld the permission in retaliation for the firm narrowing spreads and cooperating with federal investigations of Nasdaq. The NASD denied the allegation.
In a separate action, the NASD said it will crack down on dealers who are late in publicly reporting trades in Nasdaq stocks. In its April Regulatory & Compliance Alert, just sent to member firms, the NASD warned dealers they could face fines of $100,000 or more, as well as possible suspension, for late reporting of trades.
The announcement came amid mounting evidence, first reported in The Times, that dealers have long deliberately flouted rules requiring that each purchase and sale of Nasdaq stock be reported publicly within 90 seconds.
A Times article had noted that the NASD rarely took disciplinary action for violations. It took no action for late trade reporting in 1994. A spokesman said Monday he could not immediately determine if any cases had been filed so far this year.
Both the SEC and the Justice Department’s antitrust division have been investigating Nasdaq, looking into allegations that dealers colluded to keep spreads wide. Nasdaq and the dealers deny any collusion. Spreads are the gap between bid price, at which dealers offer to buy a stock, and the higher asked price, at which dealers offer to sell. Spreads of big stocks on Nasdaq have, on average, been much wider than those of similar stocks listed on the New York Stock Exchange.
The SEC also has broadened its investigation to look into late trade reporting, and has obtained through subpoena thousands of pages of records related to late trades.
The Times found that, on a typical day, clusters of big trades were reported late, just after the market closed. Big investors and traders said dealers frequently delayed reporting large trades, fearing that public disclosure could cause the stock price to move unfavorably. Regulators say late reporting, known among traders as “painting the tape,” prevents investors from knowing the true current price of stocks.
The NASD declined to say why it announced a crackdown now. But in a written statement, spokesman James D. Spellman said, “We take late trade reporting very seriously.” He said the NASD so far has seen little evidence of deliberate violations, and said “very few have either a material or significant impact on Nasdaq’s pricing mechanism.”
The NASD declined comment Monday on why it reversed itself on allowing Domestic to make more stocks. The NASD originally had turned down Domestic’s request, contending it needed time to investigate allegations that Domestic may have violated a rule that is no longer in effect. The rule related to use of a Nasdaq computer system for executing small customer orders. The NASD had also said it was concerned that too much of Domestic’s trading was on behalf of a single firm that shares Domestic’s offices.
In a May 4 letter giving Domestic the go-ahead, the NASD said only that, while the original concerns should be investigated, they were not grave enough to prevent Domestic from dealing in more stocks.
NASD’s decision came after the SEC demanded records from the organization and said it would consider allowing Domestic to appeal the original denial directly to the SEC. The SEC in a letter also asked unusually pointed questions of the NASD, including whether the SEC would be justified in intervening if there was evidence of deliberate “dilatory tactics” by the NASD.
Nasdaq trading operates in such a way that when one dealer narrows the spread on a stock, other dealers in many circumstances are obliged to match the new price.
