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Probe Launched Into Nasdaq Stock Trading


NEW YORK — The Justice Department has opened an antitrust investigation of the Nasdaq stock market, looking into allegations of price-fixing and other illegal practices by dealers in the nation's busiest stock marketplace.

"The antitrust division is looking at the possibility of anti-competitive practices in the over-the-counter stock market," said Justice Department spokeswoman Gina Talamona.

Talamona declined to answer questions about the probe, but sources who have been contacted by government lawyers said the investigation is examining the fundamental stock-trading practices of Nasdaq.

The sources said the investigation appears to be in a preliminary phase. If the antitrust division decides to go forward with the case, it could bring either criminal price-fixing charges or civil antitrust charges.

The electronically linked national market is home to the shares of such familiar companies as Microsoft Corp., Intel Corp. and Apple Computer Inc. In the first six months of 1994, its average daily trading volume surpassed the New York Stock Exchange for the first time.

Questions have been raised this year about whether Nasdaq trading may be rigged against small investors. The Justice Department inquiry follows the May release of a study by two business school professors who said they found evidence of at least tacit collusion to fix investors' trading costs among many of the 510 Nasdaq market makers.

Major market makers and the National Assn. of Securities Dealers, which owns and operates Nasdaq, have strongly denied the existence of collusion in the marketplace.

In a written statement, T. Grant Callery, general counsel of the Washington-based NASD, said: "Neither the NASD nor the Nasdaq stock market has been contacted by the Justice Department regarding any investigation. We will cooperate fully with any such investigation when and if we are contacted."

Market makers are the dealers who, committing their own capital, stand ready to buy or sell specific Nasdaq stocks at publicly quoted prices. They include such well-known Wall Street firms as Merrill Lynch & Co. Inc. and Morgan Stanley Group Inc. and lesser-known firms that do little besides trade Nasdaq stocks, such as Troster Singer Corp. and Herzog, Heine, Geduld Inc.

Unlike the New York Stock Exchange, where a single "specialist" firm is the sole market maker for each stock, each issue on Nasdaq (the name originally stood for National Assn. of Securities Dealers Automated Quotation system) has multiple market makers who are expected to post competing prices for buying and selling shares.

Since the business professors' study was made public, at least 24 class-action lawsuits have been filed against major market makers on behalf of investors, nearly all alleging violations of antitrust laws.

Leonard B. Simon, a lawyer in San Diego with the firm of Milberg, Weiss, Bershad, Specthrie & Lerach, which filed one of the cases, said a judicial panel consolidated most of them Monday, assigning the suits to U.S. District Judge Robert W. Sweet in Manhattan.

The sources said the Justice Department has formed a task force of staff lawyers and economists to scrutinize Nasdaq, with participation by at least one regional antitrust division office as well as the department's headquarters in Washington.

The lawyers have interviewed several market makers who are anxious to cooperate in the investigation. They also have spoken with officials of the federal Securities and Exchange Commission, the business school professors who wrote the critical report and several of the lawyers who filed class-action suits.

Members of the task force have also spent time sitting on Nasdaq trading desks in recent weeks, the sources said.

In their paper, to be published in December in the Journal of Finance, William G. Christie of Vanderbilt University and Paul H. Schulz of Ohio State University found that for many of the largest Nasdaq stocks, dealers seemed to always quote prices in a way that maintained at least a 1/4-point, or 25-cent "spread."

These spreads--essentially the market makers' profit margin--are the gap between the "bid" price (the price at which a market maker is willing to buy a stock) and the higher "asked" price (at which the firm is willing to sell).

On the New York Stock Exchange, by contrast, spreads for most stocks are 1/8 of a point, or 12.5 cents, an NYSE spokeswoman said.

The professors found that for 71 out of 100 of the largest Nasdaq stocks, market makers seemed never to quote prices in "odd eighths" of a point. In other words, bid or asked prices could be 20, 20 1/4, 20 1/2 or 20 3/4, but never 20 1/8, 20 3/8, 20 5/8 or 20 7/8--even though such quotes are common for other stocks.

The direct result was that spreads in these stocks were never less than 1/4 of a point. And the wider spreads end up costing investors, in the aggregate, millions of dollars every year.

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