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stock market participated or acquiesced in illegal, immoral, and unethical activities, whether knowingly or not, including certain regulators whether conscientiously or not. There were no whistle-blowers except for one official, who tried to make a difference but was hushed up. |
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All the supposedly competing market makers found it easier to cooperate with each other and systemically create a very noncompetitive "competitive" market which set up the opportunity for them to extract excessively wide spreads from their customers. The old-time Teddy Roosevelt, Thomas E. Dewey, consumer-friendly, antibusiness, stiff regulatory attitude, with staunch trust-busting religion, had been swapped by the old regulators at the NASD for a policy of market-maker accommodation. As SEC Chairman Arthur Levitt regretfully commented about a defeated, discredited, and shamed NASD: |
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Nor has the SEC emerged unscathed. To the extent these practices took place on our watch, we should have acted sooner. We, as well as the NASD, need to be faster and more vigilant. To assure that the public interest is protected. |
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The nature of the shakedown reads like a financial caper novel. The principal plan was artificially to establish and then synthetically maintain superwide spreads between the quoted bid and ask price on Nasdaq. The exorbitant spread enabled the market makers to increase their profits on both the buy and the sell side of the transaction, with more than enough money left over to pay for order flow to compliant referring brokers. |
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Chairman Levitt best summarized the conspiracy, on August 8, 1996, when announcing the settlement of an SEC enforcement action against the NASD after an 18-month investigation: |
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I will state it simply and up front. We have found a widespread course of conduct among market makers to coordinate their quotes. Investors paid too much and received too little, when they bought and sold their stock on Nasdaq. New traders were, as a matter of course, trained in this fashion. Over time, this practice became the expected standard. In some instances, |
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