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manner. Furthermore, Nasdaq market makers engaged in a variety of abusive practices to suppress competition and mislead investors. As the primary regulator of the Nasdaq market, the NASD failed to carry out is obligations to oversee the market and the conduct of its market makers. It was the age-old corruption question of who regulates the regulators? |
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This wholesale-retail differential, or spread, exists in all businesses and is acceptable when true price competition exists, because you can obtain different prices from competing dealers. The market makers crawled over that thin line toward ostensible criminal activity when all the wholesalers and the retailers conspired to maintain wide spreads and discouraged anyone else from trading at competitive prices. Price fixing is essentially a rejection of the free-market forces that drive business. Rather than allowing competition to set prices for products and services, price fixing creates a fictitious marketplace. As a result, consumers or investors pay what the conspirators misrepresent the market price to be, rather than the real market price. |
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Nasdaq market makers stood in virtual lockstep, marching to an anticompetitive pricing "convention" in which many securities were quoted only in even eights (i.e., $ ¼, $ ½, $ ¾, and 1). As a result, these securities were quoted with minimum inside spreads of $ ¼, thereby increasing the transaction costs paid by many investors when buying or selling those stocks. Nasdaq stocks were rarely traded at odd eighths (i.e., $ 1/8, $ 3/8, $ 5/8, and $ 7/8), while the same stocks were traded at odd eighths or better when market makers traded among themselves on Instinet and other private trading systems. In effect, there were prices quoted for the public and real prices disseminated only on private trading venues for professionals and not available to John Q. Public. As we have discussed throughout this book, Direct Access Electronic Trading puts the real prices in the hands of everyone so that you can participate on a level playing field. Needless to say, this is good for you and bad for market makers. The NASD allowed one of my companies, Domestic Securities, Inc., to be a market maker in 50 stocks. I decided to cross the line by quoting my prices in |
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