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Report: Justice Department Launches Probe of Nasdaq Stock Market Precede LOS ANGELES

October 19, 1994

WASHINGTON (AP) _ The Justice Department is investigating allegations of price fixing and other anti-competitive behavior by brokers on the Nasdaq stock market, the nation’s second largest stock market, a brokerage firm said today.

″The Justice Department is trying to understand how anti-competitive practices get played out in the over-the-counter market,″ said Linda Lerner, general counsel for All-Tech Investment Group of Suffern, N.Y., a firm that trades on Nasdaq.

Justice Department spokeswoman Gina Talamona confirmed today that an investigation was under way, but declined to provide details.

″The antitrust division is looking at the possibility of anti-competitive practices in the over-the-counter stock market,″ she said. The Los Angeles Times first reported the Justice Department investigation in today’s editions.

A top official at the National Association of Securities Dealers, which owns and operates Nasdaq, denied any price-fixing and denied knowledge of the investigation.

″The Justice Department has not contacted us or discussed this with us in any way,″ Richard G. Ketchum, the NASD’s executive vice president, said today.

Ketchum added, however, that one firm active on the Nasdaq’s small order trading system informed Nasdaq ″that they have been talking to the Justice Department.″ He declined to identify the firm.

Ketchum said reports of the Justice Department’s activities weren’t unusual. He speculated that the department was engaged in a review of private class action lawsuits and an academic study that allege a conspiracy among large brokerage firms to thwart competition in the pricing of stocks on Nasdaq.

He described the study as ″biased and unfounded″ and said Nasdaq welcomed ″a sophisticated review from persons that understand competitive policy.″

About a dozen lawsuits filed in July allege some of Wall Street’s largest firms - Merrill Lynch & Co., Lehman Brothers, Alex Brown & Sons Inc. - have an unspoken agreement to charge excessively wide ″spreads″ in Nasdaq stocks to fatten their profits at the expense of individual investors.

The spread is the difference between the buying and selling price of a stock, and is essentially the profit that Nasdaq brokers receive for executing a trade.

The charges were supported by a study by two finance professors who tracked pricing of the 100 most actively traded Nasdaq stocks in 1991, including Apple Computer and Lotus Development.

The stocks had a spread of 25 cents, while comparable stocks on the New York Stock Exchange had a much narrower gap. The professors concluded that the only possible explanation for the spreads was ″tacit collusion″ among brokers.

Nasdaq disagreed vigorously, saying the spread represents the way dealers are paid for putting their firms’ own money at risk in the Nasdaq market. The electronic market, in which dealers are connected by telephone and computers, lacks a central trading floor and is structured in a fundamentally different way from auction markets such as the New York Stock Exchange.

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