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SEC Launches Probe of Nasdaq Trading Activity

November 15, 1994|SCOT J. PALTROW | TIMES STAFF WRITER

NEW YORK — The Securities and Exchange Commission said Monday it is launching an extraordinary top-to-bottom review of the Nasdaq stock market, looking into allegations that its trading practices harm small investors and violate federal securities rules.

Separately, Nasdaq's parent, the Washington, D.C.-based National Assn. of Securities Dealers, announced that it will form its own "select committee" of respected securities industry figures to conduct a wide-ranging reassessment of Nasdaq's operations.

SEC officials said the federal agency's review is the first full-scale investigation of an entire major stock market's operation since an inquiry into the American Stock Exchange in the 1960s.

The steps follow disclosure last month of a Justice Department antitrust investigation of possible price fixing on Nasdaq and the publication of a series of stories in The Times that examined alleged unfair practices in the nation's busiest stock market.

In recent months, investors' lawyers also have filed numerous class-action lawsuits alleging improprieties by Nasdaq market makers, the 510 dealer-firms--linked together by a central computer system--that stand ready to buy or sell specified Nasdaq stocks at publicly quoted prices.

In a short written statement, the SEC said it "is undertaking a review of the operation of the Nasdaq stock market and whether existing trading practices are fully consistent with SEC and National Assn. of Securities Dealers Inc. rules."

The SEC usually does not publicly announce investigations, and the statement did not elaborate on the specific areas on which the inquiry will focus.

NASD President and Chief Executive Joseph R. Hardiman said in a statement of his own that the NASD is consulting with the SEC and will announce the members of its select committee after a meeting Friday of the organization's board of governors. The purpose of the committee is to "permit an independent review of the operation and regulatory oversight of Nasdaq," he said.

In interviews in recent months, Hardiman has strongly denied any deliberate wrongdoing by Nasdaq or the dealers. The NASD contends that Nasdaq's system of competing market makers offers all investors advantages over traditional stock exchanges, such as the New York Stock Exchange, where a single firm handles all trading-floor transactions in a particular stock.

"While we believe that observers often misunderstand the operation of competing dealer markets (such as Nasdaq) and the benefits they provide investors, all market places must continuously strive to improve," Hardiman's statement Monday said.

Sources said one item on the NASD committee's agenda will be considering whether to name representatives of the investing public to the NASD's board for the first time. Currently, the board is made up almost entirely of people from market-making firms and other areas of the securities industry.

Hardiman did not return calls seeking comment. But he told the Associated Press that the decision to appoint the committee followed more than a week of consultations between the NASD and the SEC. The appointment of the committee, he said, is intended to demonstrate to the SEC that "the NASD takes its regulatory responsibility seriously."

Jennifer Kimball, a spokeswoman for SEC Chairman Arthur Levitt Jr., declined to disclose any details of the SEC's review. But, she said, "recent (private) litigation as well as press reports and the growth of this market have led us to this point."

Nasdaq, home of such giant companies as Microsoft, Intel and MCI, as well as more than 4,800 other companies, this year for the first time surpassed the New York Stock Exchange in average daily trading volume.

The Times reported Oct. 19 that the Justice Department's antitrust division was looking into possible collusion among Nasdaq market makers to maintain wide "spreads" in Nasdaq stocks. Spreads, essentially the market makers' profit margin, are the gap between the price at which market makers are willing to buy a stock and the higher price at which they are willing to sell.

Beginning Oct. 20, The Times' series reported that Nasdaq market makers harassed fellow dealers who tried to cut the spreads. The stories also reported that Nasdaq operates as a two-tiered system in which public reporting of big trades is often delayed and market makers themselves and big institutional investors often are able to trade at better prices than small investors.

NASD officials deny the allegations of collusion and insist that the market is closely policed for fairness.

Nasdaq Investigation

* The entire 6-part series, "Inside Nasdaq," is available under special reports in the Business section on the TimesLink on-line service. Reprints of the series are also available from Times on Demand for $10.45 each. Call 808-8463, press *86307. Select option 1. Order Item No. 8525.

Details on Times electronic services, B4

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