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Justice Urges Overhaul of Nasdaq Exchange

January 30, 1996

WASHINGTON (AP) _ The Justice Department is urging major reform of the Nasdaq stock market to restrain dealers’ ``willingness and ability to collude.″

The Justice Department comments, in an 11-page letter to the Securities and Exchange Commission released Tuesday, come as the agency’s antitrust division continues an extensive investigation of Nasdaq, the nation’s second-largest stock market.

The Justice Department has said little about its 1 1/2-year investigation, but the letter to the SEC represents some of its most extensive public observations about competition on Nasdaq, a market without a trading floor that links dealers by a computer network.

One market critic, finance professor David Whitcomb of Rutgers University in New Jersey, said it was ``highly significant″ that the Justice Department mentioned dealer collusion in its letter.

But defense attorneys for major Wall Street firms targeted by the Justice investigation played down the letter’s significance.

``I would hesitate to read too much into what the Justice Department says″ in the SEC comment letter, said Catherine Ludden, a New York-based attorney involved in the brokerage firms’ defense.

Major Nasdaq dealers, known as market makers, are under investigation for possible price-fixing for the way they quote prices for Nasdaq stocks.

Specifically, academic studies show that the gap between the buy and sale price of Nasdaq-listed stocks is much wider than that of comparable stocks listed on the New York Stock Exchange.

That price gap, known as the ``spread,″ represents a major portion of the dealers’ profit. Critics argue dealers want to keep spreads wide in order to make more money on trades. The dealers and Nasdaq officials strongly deny the charges and defend the market as highly competitive.

In September, the SEC proposed reforms of how customers’ stock orders are handled on Nasdaq and other exchanges.

The Justice Department strongly backed a proposal to require customer limit orders to be included in the prices quoted on Nasdaq or other exchanges. A limit order is an investor’s request to buy or sell stocks at a specific price, not just the going market price. The SEC argues including limit orders within Nasdaq quotes could narrow the spread between the buy and sell prices of a stock.

``The increased competition between limit orders and market makers’ quotes is likely to reduce inside spreads and to undermine market makers’ willingness and ability to collude,″ the department’s letter said.

The Justice Department also backed a proposal to open up dealings on private computerized trading networks where many Nasdaq stocks are bought and sold. The agency said its support ``is based on an analysis of the dynamics of possible collusive agreements in the trading of Nasdaq securities.″

Nasdaq spokesman Marc Beauchamp declined comment, but Nasdaq’s parent company issued its own comment letter that generally urged the SEC to let market forces dictate the best trading system.