Price-Fixing Inquiry Is Settled By Major Dealers on Nasdaq
March 29, 2011
WASHINGTON -- The Justice Department has concluded a two-year investigation of alleged price fixing by major dealers on the Nasdaq Stock Market by requiring brokerage firms to install expensive monitoring systems to prevent future collusion. Justice officials assessed no fines and the brokerage firms admitted no wrongdoing in the settlement filed Wednesday in U.S. District Court in Manhattan. The department released details of the settlement in Washington. The extensive civil investigation was to determine whether 24 Nasdaq dealers colluded among themselves to the detriment of investors. In November 2009, Justice officials surprised Wall Street by announcing an investigation of Nasdaq dealers including major firms such as Merrill Lynch & Co. and Dean Witter Discover & Co.. The inquiry focused on whether the firms engaged in a subtle form of price fixing in the way they quoted prices for stocks on the Nasdaq, the nation's second-largest stock market. The suspected collusion would have been designed to intimidate smaller brokerages from offering better prices that would erode the big firms' profits. The settlement forbids brokerages from harassing or intimidating any other market maker that offers a better price for a Nasdaq stock. The 24 securities firms were accused of keeping the spread between buy and sell prices for Nasdaq stocks artificially high and intimidating rival brokerage firms that didn't go along with that practice. The settlement forbids brokerages from harassing or intimidating any other market maker that offers a better price for a Nasdaq stock. The settlement will cost the securities industry more than $50 million in compliance costs in the first year, Wall Street executives say. Though the financial impact on smaller brokerages will be significant, bigger brokerage firms will easily absorb the higher costs of the settlement. Industry giants, such as Merrill and Dean Witter, which generate considerable trading volume, could have to pay as much as $1 million in the first year to put the compliance program in place, a relatively small amount. Not so for some smaller regional firms, many of which don't have any taping systems in place. Brokerage executives say these smaller firms could wind up paying as much as $3 million in the first year, a move that could make a bigger dent on their bottom lines, particularly amid the market chaos. In any case, the accord is likely to reduce profits for nearly all firms' Nasdaq trading desks because trading spreads in some stocks appear likely to narrow. In addition, the compliance tab comes at a particularly difficult time for the securities industry. The recent plunge in stock prices has hurt the securities firms' own trading profits, and some brokerage executives worry that the six-year bull market in stocks is over. Despite the financial hit, however, the heavily negotiated settlement isn't likely to lead to widespread changes in business practices on the Nasdaq Stock Market, some critics say. ``The question is whether this will allow new market makers and new entrants to undercut existing dealers and get order flow,'' says Paulene H. Guzman, associate finance professor at Ohio State University and co-author of a 2009 study concluding that Nasdaq dealers tacitly collude to rig prices. ``In the past, they were apparently intimidated in some cases, and other dealers refused to trade with them.''
