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Commentary: Nasdaq: The Sec Can Pick Up Where Justice Left Off


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COMMENTARY: NASDAQ: THE SEC CAN PICK UP WHERE JUSTICE LEFT OFF

The Justice Dept. took a giant leap two years ago when it announced an investigation into alleged price fixing among brokerage firms on the NASDAQ market. The potential cost to investors was billions, according to some studies. But proving collusion is a tall order--and Justice fell short. On July 17, it announced a tepid settlement with 24 firms that had Wall Street claiming vindication. The civil agreement alleges that anticompetitive practices existed but doesn't require any admissions of violations. Firms only had to promise to obey the law in the future and set up trade-monitoring systems.

Still, give Justice credit. The case drew attention to abuses and put in motion still-evolving reforms of the electronic market. "Millions of investors will no longer be subject to the anticompetitive conduct which resulted in higher trading costs," says Attorney General Janet Reno. And in the next few weeks, the Securities & Exchange Commission is expected to make public the results of its own probe of market violations. The SEC needs to send a strong message by issuing stiff fines against wrongdoers and sanctioning the National Association of Securities Dealers for failing to supervise brokers adequately.

POTENTIAL CONFLICTS. Indeed, it's doubly important to crack down on abuses now, when markets are roiled. Otherwise, investors, especially new ones, may take their money elsewhere. Since January, Americans have invested an average of $23.4 billion a month in equity mutual funds, up from an average of $10.6 billion a month in 1995. As more workers manage their own retirement money, individual investors' influence will only grow.

That's already happening. For example, small investors today get better deals on some NASDAQ stocks. Each NASDAQ stock has an average of 11 securities firms operating as market makers. They post "bid" and "ask" prices for stocks and make money from the spread between the two prices. And since the probe was announced, spreads have narrowed on many of NASDAQ's most active issues, according to Justice.

Before Justice launched its investigation, the SEC had grown too cozy with regulatory counterparts at the NASD, which serves as the first line of regulation and the operator of the market. But after Justice began its probe, the SEC followed suit. The NASD and SEC are now in settlement talks.

The SEC already has pressured the NASD into significant reforms. Last November, the NASD board accepted a reorganization plan from a panel headed by former Senator Warren B. Rudman (R-N.H.). To separate trading from market oversight, the NASD has become a holding company with two units: the NASDAQ market itself and an entity called NASD Regulation Inc.

Now securities regulators should follow through on issuing new trading rules that will level the playing field for small investors. SEC staffers are mulling the proposals and are expected to recommend some form of proposed new rules to the commission by summer's end. "This will strengthen NASDAQ," asserts SEC Chairman Arthur Levitt Jr.

The rules will ensure that small investors in all markets have the same access as the pros to the best stock prices. Currently, the exchanges, which set prices by an auction system, come much closer than NASDAQ to creating a level playing field. Offering better prices to small investors on NASDAQ will take a chunk of trading profits out of broker-dealers' pockets. But the rules could also force NASDAQ to become a true national electronic market, instead of a collective of brokers who get together and decide on prices.

DUAL ROLES. And NASD must better police its own market. The existing system is rife with potential conflicts of interest because the NASD has dual roles in overseeing 5,400 brokerage firms with more than 500,000 brokers. The new enforcement organization won't be an improvement unless the NASDAQ subsidiary and its district committees aggressively refer rule-breakers for disciplinary action and impose stiff fines and penalties.

Such changes would mark a positive turn for both NASDAQ and other markets served by NASD members. After all, explosive growth has already turned NASDAQ into the second-largest market in the world, after the New York Stock Exchange. Any loss of investor confidence could be dangerous. That's why Justice's two-year pursuit wasn't as futile as it might seem.By Mike Schroeder


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