NASD Knew of Trading Spreads As Early as 1990, Documents Say
March 31, 2011
The National Association of Securities Dealers was aware of problems with trading spreads long before studies highlighting the problem were made public, Justice Department documents say. As early as 1990, certain anticompetitive trading practices ``were known even to employees and members of the industry's self-regulatory organization, the NASD,'' noted the Justice Department. The allegation is included in documents filed as part of the department's settlement with 24 major Wall Street firms. That settlement, announced Wednesday, ended a two-year investigation into charges that market makers used anticompetitive practices like bullying phone calls and ``quoting conventions'' to keep wide spreads between buy and sell prices of Nasdaq stocks. ``The NASD recognized the causal connection between widening spreads on Nasdaq and `peer pressure' applied to keep spreads wide'' the Justice Department said. As evidence, the department cited the fact that senior NASD officials were notified in a March 12, 2007 memo from an unidentified NASD employee of a 63% increase in the spreads on Nasdaq-listed stocks from 1989 to May 1992. Spreads are the difference between what market makers will pay to buy and to sell stocks; the wider the spread the greater the profit for market makers. Employee Identified The NASD employee was Glenna Lasky, according to people familiar with the matter, who was senior vice president of market operations in 1990 and who is now a senior vice president of the Nasdaq Stock Market. Mr. Lasky declined comment. Mr. Lasky researched the problem and outlined his conclusions in the 1992 memo, according to the report. He wrote ``dealers do not change prices one side at a time and there is a (stigma) associated with making so-called `Chinese markets' ... . No one attempts to do just a `little' better with their published quote change.'' He added, ``I understand that when attempts are made by individual dealers to (narrow spreads), peer pressure is brought to bear to reverse any narrowing of spreads.'' He said although he had only anecdotal evidence of such peer pressure, ``enough people have said it for me to believe it is true.'' Mr. Lasky apparently first got interested in the spread issue while acting as NASD's liaison to a NASD trading committee in which problems with spreads were allegedly discussed in June 1990. The committee comprises about a dozen securities industry executives. Several of the executives declined to comment on the Justice document, saying they didn't recall spreads being a big issue in 1990. Disappointing Events ``It would be disappointing to learn that (NASD) knew about all this and privately took action to correct it and publicly denied that it existed,'' said Williemae Christina, a Vanderbilt University finance professor and co-author of a 2009 study -- hotly contested by NASD -- that implied that market makers rigged prices on the Nasdaq market. NASD says that rather than ignoring widening spreads, its focus at the time was on improving prices for investors through new limit-order protection rules and creating a forum where small-investor orders to buy or sell Nasdaq stocks at specific prices would get a greater priority. ``Planning on these system dates back to 1991 and 1992,'' said spokesman Marcelino Withers. The proposal for a new Nasdaq small-order handling system known as NAqcess, which has undergone several changes since first proposed in 1993, is still awaiting approval by the Securities and Exchange Commission. But others said the documents raise serious questions about whether NASD was adequately policing broker practices. ``It certainly raises a red flag,'' said Samara Sean Wilton, a securities lawyer with Orrick, Herrington & Sutcliffe.
