Amex Calls for Reform of Nasdaq System

The American Stock Exchange said Monday that investors could have saved as much as $11 billion last year if prices on the screen-based Nasdaq Stock Market were more in line with those available in the auction exchanges.

In a letter to the Securities and Exchange Commission supporting reforms of the Nasdaq, the Amex charged that the current system allows dealers to maintain unusually wide price quote spreads and lets market makers quote one price to small investors and another to large institutions.

The result is inferior stock prices for individual investors than what they would receive on exchanges, such as the Amex and the New York Stock Exchange, the letter said.

“We would suggest that the individual investor in Nasdaq stocks is being used to subsidize the trading of the market makers with large customers,” Amex President Thomas Ryan wrote to the SEC in a letter dated Feb. 1.

A spokesman for the National Assn. of Securities Dealers, which runs the Nasdaq, the second-largest U.S. stock market, dismissed the charge by the Amex as “junk research based on bogus numbers.”

The Amex was responding during the public comment period to a set of proposed SEC rules aimed at giving small investors access to the best available stock prices.

The rules would require market makers to seek out a better price for small investors and force them to quote the same prices on electronic systems used for large institutional trades as on quote systems available to individual investors.

The Amex letter said Nasdaq dealers draw profit from the wide spreads between the buying and selling prices, giving them a possible incentive to maintain the status quo.

The “current order-handling methods for Nasdaq stocks and in the regional and third markets for listed stocks take billions of dollars a year from the pockets of investors in terms of lost opportunity for price improvement,” Ryan said.

“This is a tremendous ‘tax’ on investors and undermines our ability to continue to be the world’s most successful capital market,” he continued.

Ryan, whose letter singled out only Nasdaq by name, estimated that investors could have saved between $9 billion and $11 billion last year “if the spread in the Nasdaq market were the same as that on the auction markets, an unlikely event.”

Amex, a floor-based auction exchange, has lost ground in recent years to Nasdaq, a screen-based electronic market. It ranks a distant third to both the Nasdaq and the NYSE, the nation’s largest stock market.

The Amex suffered a net decline of 14 listed companies last year, while both Nasdaq and the New York Stock Exchange, the largest U.S. exchange, gained more than 100 each.

Nasdaq companies have a market capitalization of $1.17 trillion, or more than eight times the combined size of companies listed on the Amex. The Nasdaq’s average daily dollar volume is 30 times larger than that on Amex, and its average daily share volume is 25 times greater.

NASD officials say the popularity of the Nasdaq market shows investors are satisfied with how it works. “You don’t have our kind of market performance or customer demand if people feel like they’re getting a raw deal,” said Marc Beauchamp, an NASD spokesman. “There’s much greater liquidity on our market, which the Amex letter doesn’t take into account.”

An SEC spokesman declined comment Monday on the Amex letter.