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Wall Street Is Sold on Over-the-Counter Profits

INSIDE NASDAQ. Questions About America's Busiest Stock Market . First in a series

October 20, 1994|SCOT J. PALTROW

One reason for Nasdaq's explosive growth is that over-the-counter trading is extremely profitable for Wall Street firms.

The big spreads on stock trades bring in millions of dollars in trading profits; indeed, most big securities houses make more from Nasdaq trading than from New York Stock Exchange stocks.

And brokers benefit. At big, mainstream brokerage houses they typically get to keep about 40% of the commission on sales of Nasdaq stocks, versus about 30% on NYSE trades. (The rest goes to the brokerage firm.) In addition, on Nasdaq stocks, brokers also often get large, hidden commissions that don't show up on the confirmation slips sent to customers after each trade. These undisclosed payouts are called "sales credits."

Basically, the firm's trading desk shares profits with the brokers--either as an inducement for them to sell stock if the firm is holding a large, unwanted position in its inventory, or simply to promote activity in a stock.

Lawyers who represent small investors charge that this creates a major conflict of interest: Brokers whose firms offer them big, hidden sales credits to sell a particular stock have a strong motivation to tout these stocks to customers. The customers have no way of knowing that the broker's enthusiasm for the stock has nothing to do with a belief that its price will go up. (This can't happen with stocks listed on the NYSE and other exchanges because trading and reporting rules prevent it.)

The National Assn. of Securities Dealers, which owns and operates Nasdaq, defends the practice of not disclosing these sales credits to customers. It says they are not commissions, but a brokerage firm's decision on how to divide up trading profits internally.

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