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spread in Intel from a quarter to an eighth. NASD records confirm this sequence of events. |
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The Market Surveillance Department sent a form letter to the market maker in question, asking for its explanation for sending the "Pathetic" message. The market maker responded by letter on June 20, 1994, asserting that when its trader observed Domestic's tightening of the spread, he tried to trade with Domestic. The letter stated that when Domestic refused to enter into a trade, the trader transmitted the "Pathetic" message to Domestic. A review of the NASD's own equity audit trail revealed that Domestic, in fact, purchased 1000 shares of Intel from the market maker. The NASD closed the matter without further investigation. |
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It was only after the Los Angeles Times article was published that the NASD revived the investigation. According to the Los Angeles Times, market makers made the following comments to Domestic: |
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| "You guys break the spread for 1,000 shares?" | | 2. | "You're embarrassing and pathetic. You're breaking spreads for everybody," | | 3. | "This is ********. I have institutional customers who come to me and I have to match your price. It's ********, you guys going down an eighth for a thousand shares." |
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In November 1994, the staff of the Market Surveillance Department spoke to the three market makers involved in the incidents noted in the articles. All three market makers denied that any statements they made to Domestic were in retaliation for its breaking the spread. Instead, the traders attributed any disparaging remarks to Domestic's refusal to trade for more than 1000 shares. There was a widely observed but wholly illegal and anticompetitive industry custom of not initiating a new inside bid or offer unless the market maker was willing to trade in large size (at least 2000 to 5000 shares), even though the NASD firm quote rule only called for market makers to be willing to trade 1000 shares, at the most. |
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In the end, the Compliance Subcommittee recommended that a letter of warning, which was the lightest sanction available, |
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