U.S. Seeks Changes in Nasdaq Price Access
In the first clear public sign that it has found evidence of unfair practices in the Nasdaq Stock Market, the Justice Department has called for far-reaching changes that would end dealers’ privileged access to the best stock prices.
In recommending rules that would put individual investors on a more equal footing with dealers in the nation’s second-largest stock market, the Justice Department’s antitrust division called for changes that in many ways are more radical than those proposed in September by the Securities and Exchange Commission.
The recommendations are contained in an 11-page comment letter filed by the department with the SEC on Friday and made public Monday.
The Justice Department, which launched its own civil price-fixing investigation of Nasdaq in late 1994, has been looking into allegations that dealers colluded to inflate their profits at the expense of investors. The Times reported in August that the department had privately informed dealers that investigators believed they had enough evidence to bring a case and had proposed settlement negotiations. But until now, the department had made no public statement about whether it believed Nasdaq needed to make major changes.
The department declined Monday to say when it would decide whether to sue the National Assn. of Securities Dealers, which owns and operates Nasdaq, and some of its members for anticompetitive practices.
In its letter to the SEC, the Justice Department said the changes it and the SEC recommended are likely “to undermine market [dealers’] willingness and ability to collude.”
Dealers are firms that stand ready to buy and sell stocks at publicly quoted prices. The NASD and dealers themselves have strongly denied any collusion.
The SEC, which also has been conducting a massive investigation of Nasdaq, published 96 pages of proposed rules changes in September and solicited public comment. Richard Lindsey, the SEC’s director of market regulation, said the SEC received about 100 comment letters, including the Justice Department’s. He declined to comment specifically on the department’s letter.
The department, although mostly lauding the SEC’s proposals, recommended even more sweeping changes to ensure that customers get more chance to trade directly with each other rather than having dealers act as intermediaries on virtually every trade.
A key issue is customer limit orders. These are orders to buy or sell at a price specified in advance. Many Nasdaq dealers refuse to fill customer limit orders unless the market price quoted by dealers reaches the limit order price. This means that a customer willing to buy a stock at $10 a share may not get the order filled, even though other customers at the same moment may be willing to sell the stock at $10.
The SEC proposed requiring dealers to display customer limit orders publicly on Nasdaq’s computers if the limit was better than that offered by the dealer.
The Justice Department suggested three stronger steps.
* That individual investors be allowed to bypass dealers completely when entering a limit order. Although the NASD itself has proposed allowing this on a very restricted basis, the Justice Department proposed eliminating restrictions, letting any customer put in an order of any size.
* That customer limit orders be given priority, meaning that dealers would have to fill first the first order they had received. Under current practice, Justice said, dealers use their discretion to fill their firms’ orders ahead of customer orders.
* That a different procedure be used at the start of each trading day to give overnight orders from customers a better chance to be matched up against each other. The opening price is now set by whichever dealer happens to make the day’s first trade.
John L. Watson III, president of the Securities Traders Assn., said he had not seen the Justice Department’s letter and could not comment on its specifics. But he warned against making major changes too fast, lest some dealers be put out of business.
Marc Beauchamp, the NASD’s spokesman, said he would have no comment beyond the NASD’s own letter filed with the SEC, which does not address several of the key issues raised by the Justice Department.