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‘Market For Next 100 Years’ Now A Quarter-Century Old

February 5, 1996

WASHINGTON (AP) _ The Nasdaq Stock Market turns 25 this week, a milestone in a history as puzzling as its name.

The nation’s second-largest market has thrived on spectacular growth, yet its dealers have resisted change. It’s the market with a high-tech image that does lots of business over the low-tech telephone.

For years Nasdaq craved attention and standing of other big stock markets, particularly the New York Stock Exchange. Much to its surprise, Nasdaq got what it sought and wasn’t prepared for the ensuing explosion of growth.

The contradictions persist: Nasdaq and its dealers now are the subject of exhaustive price-fixing investigations by the Justice Department, Securities and Exchange Commission as well as major class action lawsuits.

Despite negative publicity, Nasdaq rolls forward _ more than 100 billion shares traded and 476 new companies selling stock for the first time in 1995.

The market continues to make millions of people rich because it is home to superstars of the information age, such as Microsoft Corp. and Intel Corp. ``These are the companies, indeed, that are driving the economy of the United States,″ said Fred M. Roberts, a former NASD chairman.

As an illustration, just look at what a $1,000 investment in MCI Communications Corp.’s 1976 Nasdaq stock offering would fetch today: $112,000.

Nasdaq started on Feb. 8, 1971 as a computerized system to display prices of stocks that didn’t trade on organized exchanges like the NYSE. At first it wasn’t too popular among brokerages.

Although Nasdaq provided much more accurate stock pricing to dealers, that information also served to narrow the ``spread,″ the gap between buying and selling prices. That eroded dealers’ profits, recalled broker Harvey Houkin, who surveyed Nasdaq dealers as part of his college masters’ thesis.

``The bulk of the market making community (Nasdaq dealers) would have liked to see it die right there,″ said Houkin of New Jersey-based All-Tech Investment Group and a fierce critic of Nasdaq’s management.

Joseph Hardiman, president and chief executive officer of Nasdaq’s parent, the National Association of Securities Dealers, agreed there’s been a ``natural resistance to change throughout the history of the Nasdaq Stock Market, including some resistance at the very outset.″

Throughout the 1970s and first part of the 1980s, Nasdaq began growing beyond a mere computer bulletin board service to something beginning to resemble a stock market _ with the SEC pushing and prodding at many significant steps. It added automated trading services and detailed trade and volume reporting.

By the late 1980s, Nasdaq had grown rapidly and was known as a community for technology companies.

Hardiman and others promoted it like a stock market by adopting a slogan, ``The Market for the Next 100 Years.″ Nasdaq advertised during NFL games and courted the news media. But beyond the public view a crisis was brewing.

The root of Nasdaq’s public relations nightmare was the October 1987 market crash, when Nasdaq market makers didn’t answer telephones from investors frantically trying to sell.

One reform that emerged was to have small customer orders trade through computer automatically and bypass the busy telephones. Nasdaq required all market makers to honor orders sent over the Small Order Execution System, or SOES.

Houkin and other professional traders, armed with sophisticated computer technology, began aggressively trading on the system and making large profits at the expense of large Nasdaq dealers.

A bitter legal and regulatory dispute ensued between the NASD and the SOES firms. SOES firms went public with allegations the NASD and large Nasdaq dealers conspired on prices and victimized customers.

The media began to report the allegations and in 1994, professors William Christie of Vanderbilt University and Paul Schultz of Ohio State University issued a study that suggested price collusion. A major class action lawsuit, citing the study, was filed against big Nasdaq dealers, with the Justice Department and SEC following with major investigations that year.

A second crisis came that summer. The boom in mutual funds and flood of money into technology stocks led to heavy trading of Nasdaq stocks, and the computers began choking on the volume.

On August 1, 1994, ``the market for the next 100 years″ was dead for 34 minutes after a squirrel chewed through a power line.

``I don’t think that we anticipated the growth as well as we should have,″ Hardiman said. Nasdaq has since upgraded its computers to handle nearly 1 billion shares daily and is undergoing a corporate restructuring.

Still ahead are major Nasdaq changes, again initiated by the SEC. It’s proposing a major overhaul of how customer orders are handled. These reforms and Nasdaq’s established reputation as a viable stock market bode well for the next 25 years, critics and supporters agree.

``There are going to be big changes and I think it will be good for the public,″ said Daniel G. Weaver, finance professor at Marquette University in Milwaukee.

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