A Spanking, but More Is Needed
Transcripts of taped telephone conversations between dealers trading on the Nasdaq stock market reveal they exchanged more than securities. They traded improper information, agreeing at times to raise prices or to give misleading information about trades, meaning that investors sometimes paid too much and got too little. One recording (many firms routinely tape conversations in case of disputes) captured a market surveillance supervisor of the National Assn. of Securities Dealers inappropriately instructing a trader to submit an inaccurate trade report.
On the basis of such abuses and other violations, the Securities and Exchange Commission censured the NASD, the parent company of the Nasdaq. After a 19-month investigation of the nation’s second-largest exchange, the SEC cited and strongly backed up findings made by Times staff writer Scot J. Paltrow in a 1994 investigative series on Nasdaq practices. After those articles were published, the NASD made some changes in response to recommendations from an independent committee headed by former Sen. Warren Rudman.
The SEC charged that the NASD had known since 1990 that dealers were improperly cooperating and acting to boost their profit margins but did nothing to stop it. It ignored hundreds of formal complaints about dealers failing to honor their quoted prices and to give accurate and prompt information about market demand. The SEC said the NASD used its own disciplinary procedures to harass dealers who tried to improve services for customers.
Without admitting or denying any wrongdoing, the NASD agreed to spend $100 million over five years to prevent abuses. It will establish a computer audit trail for the handling of each order and an independent audit staff. It will expressly forbid dealers to coordinate prices, trades and reports with each other.
The federal crackdown should provide better protections for investors. The SEC investigation is continuing, and dealer firms and individual traders are likely to face disciplinary action. But as harsh as it was, the SEC curiously held only the institution of the NASD accountable. It did not name any individual NASD executives, and many remain in their posts despite a major reorganization.
The NASD is now looking for a new chief executive officer. One of his or her first tasks should be some housecleaning.
