Series of suits alleges price-fixing by Nasdaq market-makers

Alex. Brown & Sons Inc., Legg Mason Wood Walker Inc. and nearly two dozen other Wall Street brokerage firms are accused in a series of federal lawsuits of conspiring to raise prices and lower profits for retail customers who trade securities on the Nasdaq system.

The suits charge the investment firms with a variety of actions intended to fix prices for securities on the Rockville-based computerized trading system, originally known as the National Association of Securities Dealers Automated Quotation system.


The cases, 13 in all, were filed in Maryland, New York, Chicago and Washington in late June and early July. The lawyers are trying to agree on a location for the consolidation of the cases; eight of the 13 suits were filed in Washington, the most likely place.

The plaintiffs have not specified how much money they believe was lost through the alleged pattern of collusion. They seek triple damages based on charges of antitrust behavior. And they are seeking to have the case declared a class action, with the plaintiffs defined as everyone who traded Nasdaq securities through any of the defendants during the last four years.


Several of the defendants have denied any wrongdoing. "There's healthy competition among [Nasdaq] market-makers, and the suggestion that at least 24 firms are getting together to collude is absurd," Rich Silverman, a spokesman for defendant Merrill Lynch & Co., told the Associated Press yesterday.

Gregg Kallmyer, an attorney with Legg Mason in Baltimore, said that "at first glance, there doesn't appear to be any wrongdoing. We will defend it, of course. We don't think there's any merit to the case."

Alex. Brown said its policy is not to comment on active litigation. Nasdaq, which is not named as a defendant, did not return calls seeking comment.

The defendants are among the largest securities firms in the nation. And some of the New York cases define the defendants as any of the nearly 500 companies that are "market-makers" in Nasdaq stocks. These are the firms that maintain buy and sell prices on certain stocks, standing ready to execute trades when orders come in from individuals or other companies.

In the last five years the volume of companies and shares traded on Nasdaq has grown tremendously, to the point where Nasdaq trading volume nearly equals that of the New York Stock Exchange. Nasdaq companies include some of the largest technology-related growth companies in the nation, such as Microsoft Corp., Intel Corp. and MCI Communications Corp.

The lawsuits concern the spread between the bid -- the price at which investors are willing to buy a stock -- and the ask -- the price at which stockholders say they are willing to sell. The suits contend the defendants have engaged in price-fixing that has artificially increased that spread, making it more expensive to buy Nasdaq stocks and less profitable to sell them, thereby inflating the market-makers' profits.

The cases arrived about a month after the publication of a study of Nasdaq pricing by professors at Vanderbilt University and Ohio State University. The study contends that market makers in a majority of the largest Nasdaq stocks have increased the spread by 12.5 cents for each share by refusing to post quotes of "odd eighths" -- prices ending in 1/8 , 3/8 , 5/8 or 7/8 . As a result, the study contends, the spread is kept at a minimum of 1/4 , or 25 cents.

The suit filed in Maryland echoes charges by Forbes magazine that Nasdaq spreads "are on average more than twice as large as the spreads on the New York and American stock exchanges."


The suit also says that "since May 1989 Nasdaq spreads have increased by over one-third on average, during which time spreads on the New York and American stock exchanges have held steady."