The National Assn. of Securities Dealers, facing strong criticism for lax enforcement of trading rules on the Nasdaq Stock Market, took its first public disciplinary action against a major dealer for allegedly failing to honor its quoted prices.
In a release dated Friday, the NASD, Nasdaq's parent, said it fined giant Wall Street investment bank Morgan Stanley & Co. $19,000 for a series of "backing away" violations in 1994. Under NASD rules, dealers are required to honor their publicly quoted prices, standing ready to buy or sell at least 100 shares. Backing away occurs when a dealer refuses to do so, leaving investors to pay a higher price than advertised or receive a lower price if selling stock.
Morgan Stanley agreed to the fine and a censure without admitting or denying the charges. The NASD also noted that Morgan Stanley had previously been cautioned and subjected to small fines for other alleged backing-away incidents.
Tracy Gordon, a Morgan Stanley spokeswoman, said the firm had no comment on the case.
Last year, The Times reported that such violations were rampant and that the NASD almost never took action despite receiving thousands of complaints. The NASD's action against Morgan Stanley was disclosed just before the expected release today of an independent committee's report that is said to be critical of the NASD's handling of rule violations.
In addition, the Securities and Exchange Commission, as reported, is expected to bring charges later this year against the NASD for failure to properly supervise the market.
Marc Beauchamp, an NASD spokesman, denied that the forthcoming report or SEC action had anything to do with the timing of the disciplinary action. He said he had no comment on why it had taken the NASD more than a year to act on several of the incidents cited in the allegations against Morgan Stanley.
Beauchamp said that in recent months the NASD had also taken about 30 non-public disciplinary actions related to backing away, ranging from informal warnings to small fines. He said several more public actions will be disclosed soon.
The NASD has said that most of the thousands of complaints were filed by a few small gadfly firms, referred to derisively by the NASD and big dealers as SOES Bandits. The NASD contends that these firms make unfair use of its Small Order Execution System, which is designed to handle small customer orders.
In interviews in 1994, the NASD had said the complaints by these firms were groundless. But the charges against Morgan Stanley amount to an at least partial vindication, as all of the NASD charges relate to complaints filed by two of them, All-Tech Investment Group and Datek Securities.
As reported, traders at big, mainstream dealer firms, options traders and institutional investors have also complained in interviews that backing away is commonplace on Nasdaq.
The Morgan Stanley action involves 12 incidents from April through October, 1994, in which the NASD said the firm failed to honor its prices when All-Tech and Datek attempted to buy or sell stock of such companies as Integrated Device Technology, Xircom and KLA Instruments.
In a separate development related to Nasdaq, the Financial Economists Roundtable on Monday released a statement saying that a majority of its members were skeptical that Nasdaq dealers could collude effectively to fix prices of Nasdaq stocks. But they also concluded that the average spreads on Nasdaq stocks are much wider than those on the New York Stock Exchange, and they found fault with Nasdaq's pricing mechanism.
The Justice Department's antitrust division has been investigating allegations that Nasdaq dealers colluded to keep spreads wide. Spreads, essentially dealers' profit margins, are the gap between the price at which dealers are willing to buy a stock and the higher price at which they offer to sell.
The Economists Roundtable is made up of distinguished economists who are at least 50 years old. Hans Stoll, a Vanderbilt University professor who helped draft the report, said the members debated the collusion allegation at their annual meeting in Santa Barbara in July, based mainly on academic papers that had already been made public.
* DEALING WITH RISK: NASD proposes suitability rules for broker sales of derivatives. D3