[Federal Register Volume 61, Number 150 (Friday, August 2, 1996)]
[Notices]
[Pages 40433-40451]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19597]
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DEPARTMENT OF JUSTICE
Antitrust Division
United States v. Alex. Brown & Sons, Inc., et al.; Stipulation
and Order and Competitive Impact Statement
Notice is hereby given pursuant to the Antitrust Procedures and
Penalties Act, 15 U.S.C. 16(b)-(h), that a Stipulation and Order
(`'proposed order'') and a Competitive Impact Statement have been filed
in the United States District Court for the Southern District of New
York in United States v. Alex, Brown & Sons Inc., et. al, Civil No. 96-
5313 (filed July 17, 1996).
The Complaint alleges that the twenty-four market making firms
named in the Complaint and others, through the adherence to and
enforcement of a ``quoting convention,'' inflated the ``inside spread''
of certain stocks quoted on The Nasdaq Stock Market, Inc. (``Nasdaq'').
(The inside spread is the difference between the best price to buy
stock being quoted by any market maker and the best price to sell stock
being quoted by any market maker.) As a result, according to the
Complaint, investors have been required to pay more to buy and sell
such stocks that they would have in a competitive market.
Under the quoting convention, market makers are required to quote
prices at which they are willing to buy and sell stocks in even-eighth
amounts (25 cents)
[[Page 40434]]
rather than odd-eighth amounts (12.5 cents), whenever their individual
``dealer spreads'' are 75 cents or more per share. (A ``dealer spread''
is the difference between the price at which an individual market maker
offers to buy a stock and the price at which it offers to sell the same
stock, on a per share basis.) A narrower dealer spread increases the
financial risk of trading stock and, in some instances, the convention
operated to deter a trader from improving his or her quote by an eighth
of a point, when the trader would have been willing to do so, absent
the convention. The Complaint alleges that the quoting convention
constitutes an agreement to fix prices in violation of Section 1 of the
Sherman Act, as amended, 15 U.S.C. Sec. 1.
If entered by the Court, the proposed order will prohibit the
defendant securities firms from agreeing with each other or with other
market makers to adhere to the quoting convention, or to fix, raise,
lower or maintain the price of any Nasdaq security. In addition to
other prohibitions, the proposed order will also prohibit the defendant
firms from harassing or intimidating each other or other market makers
for narrowing their dealer spreads or for narrowing the inside spread
in any Nasdaq security.
If entered, the proposed order will require each defendant firm to
designate an antitrust compliance officer to instruct traders and
company officials about the requirements of the proposed order, and to
supervise the firm's review of audio tapes of trader conversations that
are to be created under the order, in order to detect possible
violations of the proposed order.
Public comments on the proposed order are invited within the
statutory 60-day comment period. Such comments and responses thereto
will be published in the Federal Register and filed with the Court.
Comments should be directed to John F. Greaney, Chief, Computers and
Finance Section, Antitrust Division, U.S. Department of Justice, 600 E
Street, N.W., Room 9500, Washington, D.C. 20530 (telephone: 202/307-
6200).
Rebecca P. Dick,
Deputy Director of Operations, Antitrust Division.
United States District Court for the Southern District of New York
United States of America,. Plaintiff, v. Alex. Brown & Sons
Inc.; Bear, Stearns & Co. Inc.; CS First Boston Corp.; Dean Witter
Reynolds Inc.; Donaldson, Lufkin & Jenrette Securities Corp.; Furman
Selz LLC; Goldman, Sachs & Co.; Hambrecht & Quist LLC; Herzog,
Heine, Geduld, Inc.; J.P. Morgan Securities, Inc.; Lehman Brothers,
Inc.; Mayer & Schweitzer, Inc.; Merrill Lynch, Pierce, Fenner &
Smith, Inc.; Morgan Stanley & Co., Inc.; Nash, Weiss & Co.; Olde
Discount Corp.; Painewebber Inc.; Piper Jaffray Inc.; Prudential
Securities Inc.; Salomon Brothers Inc.; Sherwood Securities Corp.;
Smith Barney Inc.; Spear Leeds & Kellogg, LP; and UBS Securities
LLC, Defendants; [Civil Action No. 96-5313]
Stipulation and Order
Wheareas, plaintiff, United States of America, having filed its
complaint on July 17, 1996, and plaintiff and defendants, by their
respective attorneys, having agreed to the entry of this stipulation
and order without trial or adjudication of any issue of fact or law
herein and without this stipulation and order constituting any evidence
against or an admission by any party with respect to any such issue;
Now, therefore, before the taking of any testimony and without
trial or adjudication of any issue of fact or law herein,
Plaintiff and defendants hereby agree as follows:
I
Jurisdiction and Venue
This Court has jurisdiction over the subject matter of and the
parties to this action. Venue is proper in the Southern District of New
York.
II
Definitions
As used in this stipulation and order:
A. ``Any'' means one or more.
B. ``Ask'' or ``offer'' means the price quoted on Nasdaq at which a
market maker offers to sell a specific quantity of a particular Nasdaq
security.
C. ``Bid'' means the price quoted on Nasdaq at which a market maker
offers to buy a specific quantity of a particular Nasdaq security.
D. ``Dealer spread'' means the difference between a market maker's
bid and ask on Nasdaq for a particular Nasdaq security at any given
time.
E. ``Defendant'' means a defendant that has executed this
stipulation and order.
F. ``Effective date'' means the date on which plaintiff and
defendants have indicated their agreement by executing this stipulation
and order.
G. ``Inside spread'' means the difference between the highest bid
and the lowest ask on Nasdaq of all market makers for a particular
Nasdaq security at any given time.
H. ``Market maker'' means a NASD member firm that qualifies as a
market maker under Section 3(a)(38) of the Securities Exchange Act of
1934, as amended.
I. ``NASD'' means the National Association of Securities Dealers,
Inc.
J. ``Nasdaq'' means the computerized stock quotation system
operated by the Nasdaq Stock Market, Inc. that displays the quotes of
market makers in Nasdaq securities.
K. ``Nasdaq security'' means any Nasdaq National Market System
stock or any Nasdaq Small Cap Security stock quoted on Nasdaq, or,
should these terms be changed or amended, any successor group of stock
quoted on Nasdaq.
L. ``Or'' means and/or.
M. ``OTC desk'' means any organizational element of a defendant
engaged in market making, or its successor, that accounted for ten
percent (10%) or more of such defendant's total market-making volume,
measured in shares, in Nasdaq securities in the immediately preceding
fiscal year.
N. ``Person'' means any individual, corporation, partnership,
company, sole proprietorship, firm, or other legal entity. ``Other
person'' means a person who is not an officer, director, partner,
employee, or agent of a defendant.
O. ``Price'' means the price at which a Nasdaq security is bought
or sold.
P. ``Quote increment'' means the difference between a market
maker's bid or ask on Nasdaq and that market maker's immediately
preceding or immediately subsequent bid or ask on Nasdaq for a
particular Nasdaq security.
Q. ``Quote'' means a bid or an ask on Nasdaq.
R. ``Quoting convention'' means any practice of quoting Nasdaq
securities whereby stocks with a three-quarter (\3/4\) point or greater
dealer spread are quoted on Nasdaq in even eighths and are updated in
quarter-point (even eighth) quote increments.
S. ``SEC'' means the United States Securities and Exchange
Commission.
T. ``Trader hours'' means the number derived by multiplying the
number of traders and assistant traders on the OTC desk and any other
persons actually engaged in making markets in Nasdaq securities on the
OTC desk of a defendant by the number of hours Nasdaq operates per day.
III
Applicability
This stipulation and order applies to each defendant; to each of
its executive officers, directors, partners, successors, and assigns,
during the respective periods that they serve as such; and to any
agents or employees assigned to defendant's OTC desk, including
supervisory employees, whose duties or
[[Page 40435]]
responsibilities include market making in any Nasdaq security, during
the respective periods that they serve as such; and applies to all
other persons in active concert or participation with any of them who
shall have received actual notice of this stipulation and order by
personal service or otherwise.
IV.
Prohibited Conduct
A. Unless permitted to engage in activities by Section IV. B. of
this stipulation and order, each defendant shall not, directly or
through any trade association, in connection with the activities of its
OTC desk in making markets in Nasdaq securities:
(1) Agree with any other market maker to fix, raise, lower, or
maintain quotes or prices for any Nasdaq security;
(2) Agree with any other market maker to fix, increase, decrease,
or maintain any dealer spread, inside spread, or the size of any quote
increment (or any relationship between or among dealer spread, inside
spread, or the size of any quote increment (or any relationship between
or among dealer spread, inside spread, or the size of any quote
increment), for any Nasdaq security;
(3) Agree with any other market maker to adhere to a quoting
convention;
(4) Agree with any other market maker to adhere to any
understanding or agreement (other than an agreement on one or a series
of related trades) requiring a market maker to trade at its quotes on
Nasdaq in quantities of shares greater than either (1) the minimum size
required by Nasdaq or NASD rules or (2) the size displayed or otherwise
communicated by that market maker, whichever is greater;
(5) Engage in any harassment or intimidation of any other market
maker, whether in the form of written, electronic, telephonic, or oral
communications, for decreasing its dealer spread or the inside spread
in any Nasdaq security;
(6) Engage in any harassment or intimidation of any other market
maker, whether in the form of written, electronic, telephonic, or oral
communications, for refusing to trade at its quoted prices in
quantities of shares greater than either (1) the minimum size required
by Nasdaq or NASD rules or (2) the size displayed or otherwise
communicated by that market maker;
(7) Engage in any harassment or intimidation of any other market
maker, whether in the form of written, electronic, telephonic, or oral
communications, for displaying a quantity of shares on Nasdaq in excess
of the minimum size required by Nasdaq or NASD rules; and
(8) Refuse, or threaten to refuse to trade, (or agree with or
encourage any other market maker to refuse to trade) with any market
maker at defendant's published Nasdaq quotes in amounts up to the
published quotation size because such market maker decreased its dealer
spread, decreased the inside spread in any Nasdaq security, or refused
to trade at its quoted prices in a quantity of shares greater than
either (1) the minimum size required by Nasdaq or NASD rules or (2) the
size displayed or otherwise communicated by that market maker.
B. Notwithstanding the provisions of Section IV.A (1)-(8), any
defendant shall be entitled to:
(1) Set unilaterally its own bid and ask in any Nasdaq security,
the prices at which it is willing to buy or sell any Nasdaq security,
and the quantity of shares of any Nasdaq security that it is willing to
buy or sell;
(2) Set unilaterally its own dealer spread, quote increment, or
quantity of shares for its quotations (or set any relationship between
or among its dealer spread, inside spread, or the size of any quote
increment) in any Nasdaq security;
(3) Communicate its own bid or ask, or the price at or the quantity
of shares in which it is willing to buy or sell any Nasdaq security to
any person, for the purpose of exploring the possibility of a purchase
or sale of that security, and to negotiate for or agree to such
purchase or sale;
(4) Communicate its own bid or ask, or the price at or the quantity
of shares in which it is willing to buy or sell any Nasdaq security, to
any person for the purpose of retaining such person as an agent or
subagent for defendant or for a customer of defendant (or for the
purpose of seeking to be retained as an agent or subagent), and to
negotiate for or agree to such purchase or sale;
(5) Engage in any conduct or activity authorized or required by the
federal securities laws, including but not limited to the rules,
regulations, or interpretations of the SEC, the NASD, or any other
self-regulatory organization, as defined in Section 3(a)(26) of the
Securities Exchange Act of 1934, as amended;
(6) Engage in any underwriting (or any syndicate for the
underwriting) of securities to the extent permitted by the federal
securities laws;
(7) Act as Qualified Block Positioners as defined in SEC Rule 3b-
8(c), promulgated under the Securities Exchange Act of 1934, as
amended, to the extent permitted by the federal securities laws;
(3) Except as provided in Sections IV.A.(5)--(8) of this
stipulation and order, take any unilateral action or make any
unilateral decision regarding the market makers with which it will
trade and the terms on which it will trade; and
(9) Engage in conduct protected under the Noerr-Pennington
doctrine.
No finding of any violation of this stipulation and other may be
made based solely on parallel conduct.
C. In order to ensure compliance with the provisions of Section
IV.A. of the stipulation and order, each defendant shall:
(1) Initiate and maintain an antitrust compliance program, which
shall include designating, within ninety (90) days of the effective
date hereof, an Antitrust Compliance Officer, who shall be responsible
for establishing and maintaining an antitrust compliance program
designed to provide reasonable assurance of compliance with this
stipulation and order and with the federal antitrust laws by the
defendant in its market making activities in Nasdaq securities on its
OTC desk. The Antitrust Compliance Officer shall personally or through
his designee:
(a) Distribute, within thirty (30) days from the effective date
hereof or from the date of designation of the Antitrust Compliance
Officer, whichever is later, a copy of this stipulation and order to:
(i) All members of the board of directors of the defendant (or if there
is no board of directors, to such persons as have substantially
equivalent responsibilities); and (ii) all employees and all officers
of the defendant whose duties or responsibilities include market making
in any Nasdaq security on Nasdaq;
(b) Distribute within thirty (30) days of appointment or assignment
a copy of this stipulation and order (i) to any person who becomes a
member of the board of directors of the defendant (or if there is no
board of directors, to such persons as have substantially equivalent
responsibilities) and (ii) any employee or officer of the defendant
whose duties or responsibilities include market making in any Nasdaq
security on Nasdaq;
(c) Brief semi-annually those persons designated in paragraphs
(a)(ii) and (b)(ii) of this subsection on the meaning and requirements
of the federal antitrust laws and this stipulation and order in
connection with defendant's market making activities on its OTC desk in
Nasdaq securities, and inform them that the Antitrust Compliance
Officer or a designee of the Antitrust Compliance
[[Page 40436]]
Officer is available to confer with them regarding compliance with such
laws and with this stipulation and order;
(d) Obtain from each person designated in paragraphs a (i) and b
(i) of this subsection a one time certification that he or she: (i) Has
read and agrees to abide by the terms of this stipulation and order;
and (ii) has been advised and understands that a violation of this
stipulation and order by such person may result in his or here being
found in civil or criminal contempt of court;
(e) Obtain from each person designated in paragraphs (a)(ii) and
(b)(ii) of this subsection an annual written certification that he or
she: (i) Has read and agrees to abide by the terms of this stipulation
and order; and (ii) has been advised and understands that a violation
of this stipulation and order by such person may result in his or her
being found in civil or criminal contempt of court; and
(f) Maintain a record of persons to whom this stipulation and order
has been distributed and from whom the certification required by
paragraphs (d) and (e) of this subsection has been obtained.
(2) Within forty-five (45) days of entry of this stipulation and
order by the Court, each defendant is required to install a system or
systems capable of monitoring and recording any conversation on the
telephones on its OTC desk used by such defendant to make markets in
Nasdaq securities.
(3) The Antitrust Compliance Officer of each defendant shall devise
a methodology for complying with paragraph 2, 3, and 4 of this Section.
No tape recorded segment shall be shorter than fifteen (15) minutes.
Within thirty (30) days of entry of this stipulation and order by the
Court, the methodology proposed to be employed shall be submitted to
the Antitrust Division for review and approval.
(4) The Antitrust Compliance Officer, with such trained staff as
necessary, shall record (and listen to) not less than three and one-
half percent (3.5%) of the total number of trader hours of such
defendant; provided, however, that in no case shall the total number of
hours required to be recorded (and listened to) exceed seventy (70)
hours per week. Persons whose conversations are subject to monitoring
as provided by this paragraph (4) shall be told of the existence of the
taping system but shall not be informed as to the times when their
conversations will or might be monitored or recorded.
(5) Upon discovery of a conversation which the Antitrust Compliance
Officer of a defendant believes may violate this stipulation and order,
the Antitrust Compliance Officer shall retain a tape of such
conversation, and, shall within ten (10) business days, furnish such
tape, and any explanation thereof to the Antitrust Division, in
standard audio cassette format, or such other format as may be
acceptable to the Antitrust Division.
(6) Tapes made pursuant to this stipulation and order shall be
retained by each defendant for at least thirty (30) days from the date
of recording, and may be recycled thereafter. Tapes made pursuant to
this stipulation and order shall not be subject to civil process except
for process issued by the Antitrust Division, the SEC, the NASD, or any
other self-regulatory organization, as defined in Section 3(a)(26) of
the Securities Exchange Act of 1934, as amended. Such tapes shall not
be admissible in evidence in civil proceedings, except in actions,
proceedings, investigations, or examinations commenced by the Antitrust
Division, the SEC, the NASD, or any other self-regulatory organization,
as defined in Section 3(a)(26) of the Securities Exchange Act of 1934,
as amended.
(7) The Antitrust Division may visit, during regular business
hours, any defendant's facilities unannounced, and may, while there,
from a location not observable by traders, monitor conversations
required to be monitored and recorded pursuant to paragraphs (2) and
(4) of this Section in real time in order to ensure compliance with
this stipulation and order.
(8) Upon request of the Antitrust Division, a defendant shall
immediately identify all tape recordings made pursuant to this
stipulation and order that are in its possession or control, shall
provide the Antitrust Division with the opportunity to listen to any
tape recording made pursuant to this stipulation and order, and shall
produce to the Antitrust Division such tapes as the Antitrust Division
may request.
(9) The Antitrust Division may receive complaints or referrals
concerning asserted possible violations of the stipulation and order
and may, based upon such complaints or referrals, or for the purpose of
monitoring or enforcing compliance with the stipulation and order,
require the Antitrust Compliance Officer (a) to use the system or
systems required by Section IV.C.(2) of this stipulation and order to
tape the conversations of a particular person or group of persons on
its OTC desk for any period of time and (b) not to give notice of such
recordation to such person(s). Such requests to tape shall be subject
to the time limitations set forth in paragraph (4) of this subsection.
(10) Each Antitrust Compliance Officer shall (in addition to making
reports of violations within ten (10) business days) report quarterly
to the Antitrust Division concerning activities undertaken to ensure
the defendant's compliance with the stipulation and order and,
specifically, the requirements of paragraphs (2)-(9) of this Section.
Such reports shall detail the precise times when conversations were
monitored by the Antitrust Compliance Officer pursuant to the
requirements of this stipulation and order and the name of each person
employed by the defendant whose conversations were recorded during such
times.
V
Certifications
Each defendant shall certify in the form attached hereto:
A. Within ninety (90) days from the effective date of this
stipulation and order, that the defendant has designated an Antitrust
Compliance Officer, specifying his or her name, business address, and
telephone number;
B. Within forty-five (45) days from the entry of the stipulation
and order by the Court, that the defendant has complied with the
requirements of Sections IV.C.(1) (a) and (b); and
C. For five (5) years after entry of this stipulation and order by
the Court, within thirty (30) days of the anniversary of its entry,
each defendant shall certify annually (i) whether defendant has
complied with the provisions of Sections IV.A. and IV.C. of this
stipulation and order; and (ii) whether defendant has made changes in
its organizational structure likely to have a significant effect on its
compliance with this stipulation and order.
VI
Plaintiff's Access
A. For the sole purpose of determining or securing compliance with
this stipulation and order, and subject to any legally recognized
privilege or work product protection, from time to time duly authorized
representatives of the Department of Justice shall, upon written
request of the Attorney General or of the Assistant Attorney General in
charge of the Antitrust Division, and on reasonable notice to any
defendant at its principal office, be permitted:
(1) Access during office hours of such defendant, which may have
counsel present, to inspect and copy (or to require defendants to
produce copies of)
[[Page 40437]]
all records and documents, excluding individual customer records, in
the possession or under the control of such defendant, and which relate
to compliance with this stipulation and order; and
(2) Subject to the reasonable convenience of such defendant and
without restraint or interference from the defendant, to interview
officers, employees, or agents of such defendant, each of whom may have
counsel present, regarding compliance with this stipulation and order.
B. Upon the written request of the Attorney General or the
Assistant Attorney General in charge of the Antitrust Division made to
any defendant, such defendant shall prepare and submit such written
reports, under oath if requested, relating to defendant's compliance
with this stipulation and order as may be requested.
C. No information, tape recordings, or documents obtained by the
means provided in Sections IV, V, and VI shall be divulged by any
representative of the Department of Justice to any person other than a
duly authorized representative of the Executive Branch of the United
States, or the SEC, except in the course of legal proceedings to which
the United States is a party, or for the purpose of securing compliance
with this stipulation and order, or as otherwise required by law.
D. If at the time information, tape recordings, or documents are
furnished by any defendant to plaintiff, such defendant represents and
identifies in writing the material in any such information or documents
to which a claim of protection may be asserted under Rule 26(c)(7) of
the Federal Rules of Civil Procedure and said defendant marks each page
of such material, ``Subject to Claim of Protection under Rule 26(c)(7)
of the Federal Rules of Civil Procedure,'' then ten (10) days notice
shall be given by plaintiff to such defendant at its Office of General
Counsel prior to divulging such material in any legal proceeding (other
than a grand jury proceeding) to which that defendant is not a party.
E. Defendants may claim (which claim plaintiff shall honor to the
extent legally permissible) protection from public disclosure, under
the Freedom of Information Act, 5 U.S.C. Sec. 552, or any other
applicable law or regulation, for any material submitted to the
Antitrust Division under this stipulation and order.
VII
Rescission by Plaintiff
The parties agree that the Court may enter this stipulation and
order, upon motion of any party or upon the Court's own motion, at any
time after compliance with the requirements of the Antitrust Procedures
and Penalties Act, 15 U.S.C. 16, and without further notice to any
party or other proceedings, provided that plaintiff has not notified
the parties and the Court that it wishes to rescind its agreement to
entry of the stipulation and order. Plaintiff may rescind its agreement
to entry of the stipulation and order at any time before entry of the
stipulation and order by the Court by serving notice thereof on the
defendants and by filing that notice with the Court. In the event
plaintiff rescinds its agreement to entry of the stipulation and order,
the stipulation and order shall be of no effect whatever, and the
agreement among the parties shall be without prejudice to any party in
this or any other proceeding.
VIII
Jurisdiction Retained
Jurisdiction shall be retained by the Court to enable any of the
parties to this stipulation and order to apply to the Court at any time
for such further orders and directions as may be necessary or
appropriate for the construction or implementation of this stipulation
and order, for the enforcement or modification of any of its
provisions, or for punishment by contempt.
IX
Expiration of Stipulation and Order
This stipulation and order shall expire ten (10) years from its
date of entry by the Court, except that (a) Section IV.C.(2)-(10) shall
expire five (5) years from the date of entry of this stipulation and
order by the Court, except that the Antitrust Division may, after two
(2) years, in its sole discretion, notify in writing any defendant that
it shall no longer be subject to Section IV.C.(2)-(10); and (b) Section
VI.C., D., and E. shall not expire.
For Plaintiff United States of America:
Anne K. Bingaman (AB-1463),
Assistant Attorney General.
Hays Gorey, Jr. (HG-1946),
John D. Worland Jr. (JW-1962),
George S. Baranko (GB-9336),
Jessica N. Cohen (JC-2089),
Birgitta C. Dickerson (BD-6839),
Scott A. Scheele (SS-0496),
Allen P. Grunes (AG-4775),
Weeun Wang (WW-8178),
Richard L. Irvine (RI-8783),
William J. Hughes, Jr. (WH-1924),
Attorneys, U.S. Department of Justice, Antitrust Division, 600 E
Street, N.W., Room 9500, Washington, D.C. 20530, 202/616-5119 phone,
202/616-8544 fax.
For Defendants: Piper & Marbury
By: Lewis A. Noonberg (LN-8864),
1200 19th Street NW., Washington, DC 20036-2430, Tel: (202) 861-
3900.
Attorneys for Alex. Brown & Sons Incorporated.
Kramer, Levin, Naftalls & Frankel
By: Robert M. Heller (RH-1297),
919 Third Avenue, New York, New York 10022, Tel: (212) 715-9100.
Attorneys for Bear, Sterns & Co., Inc.
Kirkland & Ellis
By: Frank M. Helozubiec (FH-0442),
Citicorp Center, 153 E. 53rd Street, 39th Floor, New York, New York
10022, Tel: (212) 446-4800.
Attorneys for Dean Witter Reynolds, Inc.
Rogers & Wells
By: Richard A. Cirillo (RC-7472),
200 Park Avenue, 53rd Floor, New York, New York 10166, Tel: (212)
878-8000.
Epstein Becker & Green, P.C.
By: Stuart M. Gerson (SG-3017),
1227 25th Street NW., Suite 750, Washington, DC 20037, Tel: (202)
861-0900.
Attorneys for CS First Boston Corp.
Davis Polk & Wardwell
By: Robert F. Wise, Jr. (RW-1508),
450 Lexington Avenue, New York, New York 10017, Tel: (212) 450-4000.
Attorneys for Donaldson, Lufkin & Jenrette Securities Corporation.
Sullivan & Cromwell
By: John L. Warden (JW-6918),
125 Broad Street, New York, New York 10004, Tel: (212) 558-4000.
Attorneys for Goldman, Sachs & Co.
Simpson Thacher & Bartlett
By: Charles E. Koob (CK-1601)
425 Lexington Avenue, New York, New York 10017, Tel: (212) 455-2000.
Attorneys for Hambrecht & Quist LLC.
Shearman & Sterling
By: James T. Halverson (JH-0732),
153 East 53rd Street, New York, New York 10022, Tel: (212) 848-4000.
Attorneys for Herzog, Heine, Geduld, Inc.
Davis Polk & Wardwell
By: Robert F. Wise, Jr., (RW-1508),
[[Page 40438]]
450 Lexington Avenue, New York, New York 10017, Tel: (212) 450-4000.
Attorneys for J.P. Morgan Securities Inc.
Cadwalader, Wickersham & Taft
By: Jeffrey Q. Smith (JS-7435),
100 Maiden Lane, New York, New York 10038, Tel: (212) 504-6000.
Attorneys for Lehman Brothers Inc.
Morgan, Lewis & Bockius
By: Catherine A. Ludden (CL-4326),
101 Park Avenue, New York, New York 10178, Tel: (212) 309-6133.
Attorneys for Mayer & Schweitzer, Inc.
Weil, Gotshal & Manges
By: Otto G. Obermaier (OO-4399),
767 Fifth Avenue, New York, New York 10153, Tel: (212) 310-8000.
Attorneys for Merrill Lynch, Pierce, Fenner & Smith.
Davis Polk & Wardwell
By: Robert F. Wise, Jr. (RW-1508),
450 Lexington Avenue, New York, New York 10017, Tel: (212) 450-4000.
Attorneys for Morgan Stanley & Co. Incorporated.
Donahue Brown Mathewson & Smyth
By: Norman J. Barry, Jr. (NB-6904),
20 North Clarke Street, Suite 900, Chicago, Illinois 60602, Tel:
(312) 422-0908.
Attorneys for OLDE Discount Corporation.
Wilmer, Cutler & Pickering
By: A. Douglas Melamed (AM-4601),
2445 M. Street NW., Washington, DC 20037-1420, Tel. (202) 663-6000.
Attorneys for PaineWebber Incorporated.
Shanley & Fisher, P.C.
By: Neil Cartusciello (NC-2460),
One World Trade Center, 89th Floor, New York, New York 10048, Tel:
(212) 321-1812.
Attorneys for Piper Jaffrey Inc.
Skadden, Arps, Slate, Meagher & Flom
By: William P. Frank (WF-7504),
919 Third Avenue, New York, New York 10022, Tel: (212) 735-3000.
Attorneys for Prudential Securities Incorporated.
Rosenman & Colin LLP
By: James J. Calder (JC-8095)
575 Madison Avenue, New York, New York 10022, Tel: (212) 940-8800.
Attorneys for Furman Selz LLC.
Salomon Brothers Inc.
By: Robert H. Mundheim (RM-3766), Managing Director.
Seven World Trade Center, New York, New York 10048, Tel: (212) 783-
7508.
Crummy, Del-Deo, Dolan Griffinger & Vecchione, P.C.
By: Brian J. McMahon (BM-2377),
One Riverfront Plaza, Newark, New Jersey, 07102, Tel: (201) 596-
4500.
Attorneys for Sherwood Securities Corp.
Cahill Gordon & Reindel
By: Charles A. Gilman (CG-3924),
80 Pine Street, New York, New York 10005, Tel: (212) 701-3000.
Attorneys for Smith Barney Inc.
Dickstein Shapiro Morin & Oshinsky, L.L.P.
By: Howard Schiffman (HS-7601),
2102 L Street NW., Washington, DC 20037, Tel: (202) 785-9700.
Attorneys for Spear, Leeds & Kellogg, LP (Troster Singer).
Sullivan & Cromwell
By: Philip L. Graham, Jr. (PG-5028),
125 Broad Street, New York, New York 10004, Tel: (212) 558-4000.
Attorneys for UBS Securities LLC.
Nash, Weiss & Co.
Paul B. Uhlenhop
Lawrence, Kamin, Saunders & Uhlenhop, 208 South LaSalle Street,
#1750, Chicago, Illinois 60604, Tel: 312/372-1947, Fax: 312/372-
2389.
The Court having reviewed the Complaint and other filings by the
United States, having found that this Court has jurisdiction over the
parties to this stipulation and order, having heard and considered the
respective positions of the United States and the defendants [at a
hearing on ____________, 1996,] and having concluded that entry of this
stipulation and order is in the public interest, it is hereby ORDERED:
THAT the parties comply with the terms of this stipulation and
order;
THAT the Complaint of the United States is dismissed with
prejudice;
THAT the Court retains jurisdiction to enable any of the parties to
this stipulation and order to apply to the Court at any time for such
further orders and directions as may be necessary or appropriate for
the construction or implementation of this stipulation and order, for
the enforcement or modification of any of its provisions, or for
punishment by contempt.
SO ORDERED this ____ day of ________, 1996.
----------------------------------------------------------------------
United States District Judge
Certification Form (Attachment to Stipulation and Order)
On behalf of [Name of Defendant], I [Name] hereby certify in
accordance with Section V of the Stipulation and Order, dated ________,
in [caption of case] that:
(Check All Applicable Certifications):
( ) [Name of Defendant] has designated an Antitrust Compliance
Officer, whose name, business address, and telephone numbers are:
Name:------------------------------------------------------------------
Address:---------------------------------------------------------------
----------------------------------------------------------------------
Telephone No.:---------------------------------------------------------
( ) [Name of Defendant], under the supervision of its Antitrust
Compliance Officer, has distributed copies of the Stipulation and Order
to all persons designated in Sections IV.C.(1) (a) and (b) of the
Stipulation and Order.
( ) [Name of Defendant], under the supervision of its Antitrust
Compliance Officer, has:
(a) Initiated and maintained an antitrust compliance program, as
provided for in Section IV.C.(1) of the Stipulation and Order;
(b) Briefed semi-annually those persons designated in Sections
IV.C.(1) (a)(ii) and b(ii) of the Stipulation and Order on the meaning
and requirements of the federal antitrust laws and the Stipulation and
Order in connection with its market making activities in Nasdaq
securities on Nasdaq;
(c) Obtained the certifications identified in Sections IV.C.(1) (d)
and (e) of the Stipulation and Order and maintained a record thereof;
(d) Established monitoring and recording system or systems (Section
IV.C.(2) of the Stipulation and Order), obtained the approval of the
Antitrust Division of the relevant methodology (Section IV.C.(3) of the
Stipulation and Order), and recorded (and listened to), in accordance
with the approved methodology, not less than the lesser of three and
one-half percent (3.5%) of the total number of trader hours of seventy
(70) hours per week (Sections IV.C.(2) and (4) of the Stipulation and
Order);
(e) Retained and provided to the Antitrust Division any tape called
for by Section IV.C.(5) of the Stipulation and Order;
(f) Complied with the requests, if any, of the Antitrust Division
pursuant to Sections IV.C.(8) and (9) of the Stipulation and Order; and
(g) Made quarterly reports to the Antitrust Division concerning
activities undertaken to ensure compliance with the Stipulation and
Order, as provided for by Section IV.C.(10).
Based upon the foregoing, the representations of market makers employed
on the OTC desk and their immediate supervisors, and such other
procedures as have been established to provide reasonable assurance of
compliance with Sections IV.A. and IV.C. of the Stipulation and Order,
I have no reasonable cause to believe that, during the year ended ____,
199__, [Name of Defendant] has failed to comply with Sections IV.A. and
IV.C. of the Stipulation and Order, [except to the extent previously
reported to the Antitrust Division in reports,
dated ____]. In addition, I am aware of no change in [Name of
Defendant's] organization structure likely to have a
[[Page 40439]]
significant effect on its compliance with this Stipulation and Order,
[except
for ________].
----------------------------------------------------------------------
Antitrust Compliance Officer [Name of Defendant]
[Date], 199__
Hays Gorey, Jr. (HG 1946)
United States Department of Justice
Antitrust Division
600 E Street, N.W., Room 9500
Washington, D.C. 20530
(202) 307-6200
Attorney for Plaintiff United States of America
Competitive Impact Statement
Pursuant to Section 2(b) of the Antitrust Procedures and Penalties
Act (``APPA'' or ``Tunney Act''), 15 U.S.C. 16(b)-(h), the United
States submits this Competitive Impact Statement relating to the
proposed Stipulation and Order submitted for entry with the consent of
defendants in this civil antitrust proceeding.
I
Nature and Purpose of the Proceeding
On July 17, 1996, the United States filed a Complaint alleging that
the defendants have engaged in price fixing in violation of Section 1
of the Sherman Act, 15 U.S.C. Sec. 1. On the same day, the United
States and the defendants filed a Stipulation and Order (``proposed
Order'') to resolve the allegations in the Complaint. Entry of the
proposed Order is subject to the APPA.
The defendants are all major ``market makers'' in over-the-counter
(``OTC'') stocks quoted for public trading on the computerized stock
quotation system known as Nasdaq.\1\ The United States alleges in its
Complaint that the defendants and others adhered to and enforced a
``quoting convention'' that was designed to and did deter price
competition among the defendants and other market makers in their
trading of Nasdaq stocks with the general public. The United States
believes that investors have incurred higher transaction costs for
buying and selling Nasdaq stocks than they would have incurred had the
defendants not restrained competition through their illegal agreement.
---------------------------------------------------------------------------
\1\ The term ``Nasdaq'' was originally an acronym for the
``National Association of Securities Dealers Automated Quotation
System.'' The automated quotation system is now operated by The
Nasdaq Stock Market, Inc.
---------------------------------------------------------------------------
The proposed Order will eliminate the anticompetitive conduct
identified in the Compliant and establish procedures that will ensure
that such conduct does not recur. Specifically, the proposed Order
prevents the defendants from agreeing with other market makes to adhere
to the quoting convention, or to fix, raise, lower, or maintain prices
or quotes for Nasdaq securities. The proposed Order also requires each
defendant to adopt an antitrust compliance program and designate an
antitrust compliance officer to ensure the firm's future compliance
with the antitrust laws. To this end, the proposed Order requires the
compliance officer to (1) randomly monitor and tape record telephone
conversations between stock traders and (2) report any violations of
the proposed Order within ten business days to the Antitrust Division
of the Department of Justice (``the Department'').
The proposed Order also requires that these tape recordings be made
available to the Department for its review. The proposed Order gives
the Department authority to receive complaints of possible violations,
to visit defendants' offices unannounced to monitor trader
conversations as they are ongoing, to direct taping of particular
suspected violators, and to request copies of tapes as they are made.
The Court may punish violations of its proposed Order with civil or
criminal contempt, including fines and incarceration for willful
flouting of the Court's order. See, e.g., United States v. Schine, 260
F.2d 552 (2d Cir. 1958), cert. denied, 358 U.S. 934 (1959), and 18
U.S.C. Sec. 401.
The United States and the defendants have agreed that the proposed
Order may be entered after compliance with the APPA, provided that the
United States has not withdrawn its consent to entry of the proposed
Order. The proposed Order provides (as is standard in the Department's
settlements) that its entry does not constitute any evidence against or
admission by any party with respect to any issue of fact or law. Entry
of the proposed Order will terminate this civil action as to the
defendants, except that the Court will retain jurisdiction for further
proceedings that may be required to enforce or modify the order
entered, or to punish violations of any of its provisions.
II
The Department's Investigation
The Complaint and proposed Order are the culmination of a major,
two-year investigation by the Department of the trading activities of
Nasdaq securities dealers. The Department's investigation began in the
summer of 1994, shortly after the public disclosure of an economic
study by Professors William Christie of Vanderbilt University and Paul
Schultz of Ohio State University (the ``Christie/Schultz study''). The
Christies/Schultz study suggested that securities dealers on Nasdaq may
have tacitly colluded to avoid odd-eighth price quotations on a
substantial number of Nasdaq stocks, including some of the best known
and most actively traded issues, such as Microsoft Corp., Amgen, Apple
Computers, Inc., Intel Corp., and Cisco Systems, Inc. After the
Christie/Schultz study had received wide-spread publicity, and shortly
before the Department opened its investigation, several class action
lawsuits alleging antitrust violations were filed against the
defendants and other Nasdaq market makers.\2\
---------------------------------------------------------------------------
\2\ All of the private cases have been consolidated and assigned
to Judge Robert W. Sweet in the Southern District of New York,
M.D.L. 1023.
---------------------------------------------------------------------------
During the course of its investigation, the Department has reviewed
thousands of pages of documents that were produced by the defendants
and other market participants in response to over 350 Civil
Investigative Demands (``CIDs'') issued by the Department. The
Department has reviewed hundreds of responses to interrogatories that
were submitted by the defendants (and others). The Department has taken
over 225 depositions of individuals with knowledge of the trading
practices of Nasdaq market makers, including current and former
officers and employees of the defendants and other Nasdaq market
makers, as well as officials and committee members of the National
Association of Securities Dealers, Inc. ``NASD''), the organization
responsible for oversight of the Nasdaq market.
The Department conducted numerous telephone and in-person
interviews of current and former Nasdaq stock traders, Nasdaq
investors, and others with relevant knowledge of the industry, and
listened to approximately 4500 hours of audio tapes of telephone calls
between stock traders employed by the defendants and other Nasdaq
market makers. These audio tapes had been recorded by certain of the
defendants (and other market makers) in the ordinary course of their
business and were produced to the Department in response to its CIDs.
The Department has reviewed and analyzed substantial quantities of
market data produced in computer--readable format by the NASD. These
data include data showing all market maker quote changes on Nasdaq
during a twenty-month period between December 1993 and July 1995, and
for selected months thereafter, including March 1996. The Department
also reviewed eighteen months of data on trades in Nasdaq stocks.
Finally, the
[[Page 40440]]
Department reviewed numerous transcripts of depositions taken by the
Securities and Exchange Commission (``SEC'') in a concurrent inquiry
into the operations and activities of the NASD and the Nasdaq market
since the fall of 1994.
Based on the evidence uncovered during this substantial
investigative effort, the Department concluded that the defendants and
others had been engaged for a number of years in anticompetitive
conduct in violation of the Sherman Act, as is now alleged in the
Complaint. The next section of this Statement will summarize the
evidence that the United States believes supports the specific
allegations in its Complaint.
III
Summary of Evidence in Support of Complaint
A. The Nasdaq Market
Nasdaq is a computerized public market in which investors buy and
sell OTC stocks. It is the second largest securities market in the
United States. Nasdaq is a ``dealer market.'' In a dealer market, a
number of securities dealers ``make markets'' in the same stock. To
``make a market,'' securities dealers--or market makers as they are
known--quote a price at which they are willing to buy a particular
stock, and simultaneously quote another higher price at which they are
willing to sell that same stock. The market makers on the Nasdaq
``dealer market'' are supposed to provide the investing public with
``immediacy'' or ``liquidity'' in competition with each other.\3\ Thus,
in principle, the orders of the investing public are supposed to be
able to find the best available prices to buy or sell from many
different market makers, who are supposed to be using their competing
prices to attract those orders. To the extent that these market makers
do not compete in this fashion, the investing public is
disadvantaged.\4\
---------------------------------------------------------------------------
\3\ Various other forms of public stock markets have arisen in
the United States and elsewhere to provide the service of bringing
together investor orders to buy and sell. The most commonly
recognized form of organized stock market in the United States is
the so-called ``auction market,'' such as the New York Stock
Exchange or the American Stock Exchange. The auction market systems
provide ``immediacy'' to the investing public by bringing all of the
buy and sell orders for the stocks together on the ``floor'' of the
exchange for execution. For each stock so traded on an exchange, the
exchange designates a ``specialist.'' The job of the specialist is
to match the public's buy and sell orders, and to the extent that
there is an imbalance in those orders, the specialist is supposed to
use his own capital to ensure that the market clears in an
``orderly'' fashion. The exchange specialist is by design a
monopolist, and his role is heavily required.
\4\ Not all market makers make markets in the same stocks. There
are currently over 4000 stocks in the Nasdaq National Market System
(``NMS''), and almost 2000 stocks in the Nasdaq Small Cap Market.
The defendants trade man of the larger Nasdaq issues in common with
one another.
---------------------------------------------------------------------------
1. Dealer Quotes and the Dealer Spread
Nasdaq market makers publicize the prices at which they are willing
to buy or sell a stock by entering those ``quotes'' for display on the
Nasdaq computerized quotation system. The price at which a market maker
is willing to buy a security is called its ``bid'' or ``bid price.''
The price at which a market maker is willing to sell a security is
called its ``ask'' or ``ask price'' (or its ``offer'' or ``offer
price''). Each market maker must simultaneously quote both a bid and an
offer price. The difference between an individual market maker's bid
price and its offer price in a specific security is known as its
``dealer spread.'' Thus, for example, if a market maker's bid price in
a stock (the price it is willing to pay to buy stock from a customer or
another market maker) is $20 and its offer price (the price at which it
is willing to sell stock to a customer or another market maker) is
$20\3/4\, the market maker has a dealer spread in that stock of \3/4\
point (75 cents per share).
2. Inside Quotes and the Inside Spread
In the case of each Nasdaq stock, there are at least two market
makers. On average, there are between ten and twelve market makers in
each Nasdaq NMS stock, although the number of market makers in specific
stocks varies widely. The Nasdaq computer screen collects and displays
the bid and offer prices of all the market makers in each stock. The
highest bid and the lowest offer from among the quotes of all the
market makers in a stock are called the ``inside bid'' and the ``inside
ask,'' or the ``inside quotes.'' The difference between the inside bid
and the inside ask in a stock is called the ``inside spread.'' Thus,
for example, it there are three market makers in a stock displaying the
following bid and ask prices--
------------------------------------------------------------------------
Bid Ask
------------------------------------------------------------------------
Market Maker No. 1:................................... 19\1/2\ 20\1/4\
Market Maker No. 2:................................... 19\3/4\ 20\1/2\
Market Maker No. 3:................................... 20 20\3/4\
------------------------------------------------------------------------
--the inside spread in the stock would be \1/4\ (25 cents), based upon
the difference between Market Maker No. 3's high bid of 20 and Market
Maker No. 1's low offer of 20\1/4\.
As a general rule, market makers at any given point in time have a
greater interest in buying than in selling a security, or vice versa.
Market makers may reflect that interest in the quotes they post on
Nasdaq. Market makers with a greater buying interest may, and often do,
display a higher bid; market makers with a greater selling interest
may, and often do, display a lower offer. It is extremely unusual to
see a single market maker on both sides of the inside spread.\5\
---------------------------------------------------------------------------
\5\ The inside spread in a stock is not always constant.
Instead, as market makers display different bid and ask quotes, it
may vary--possibly, for example, beginning at \1/8\, widening to \1/
4\, then to \3/8\, narrowing to \1/4\ again and then back to \1/8\.
---------------------------------------------------------------------------
3. The Importance of the Inside Spread
Market makers trade as principals with other market makers and also
fill customer orders. Customer orders can be from retail brokers who
route orders from investors seeking to buy (or sell) a small quantity
of Nasdaq stock--referred to as ``retail customers''--or from a large
institutional investor such as a mutual or pension fund seeking to buy
(or sell) many thousands of shares of Nasdaq stock. If a customer does
not limit or specify the price it will pay to buy (or accept to sell) a
stock, which is the case of most orders received from retail customers,
the order is called a ``market order.''
In executing a market order on behalf of a retail customer, market
makers historically bought from the customer at the inside bid, and
sold to the customer at the inside ask. This execution by the market
maker satisfied the retail broker's obligation of ``best execution''
for the retail customers. For retail customers, the inside Nasdaq quote
is the price at which most retail transactions with market makers in
fact occurred.
Market makers' compensation is in large part derived from the
spread--the difference between the price at which the market makers can
buy and, in turn, sell the stock in question. Thus, when the inside
spread is wider, the market maker receives more compensation, and the
retail customer pays a higher price, for the market maker's services.
The width of the inside spread also affects institutional trades.
While large institutional customers may be able to negotiate prices
that are better than the inside spread, the inside spread influences
many of the negotiations between the market maker and its institutional
customers.
Market makers thus have a significant interest in each others'
price quotes because those quotes can either set each others' actual
transaction prices or
[[Page 40441]]
significantly affect those prices. This creates an incentive for market
makers to discourage bid and ask price competition that may have the
effect of narrowing the inside spread. The evidence obtained during the
Division's investigation shows that the market makers have discouraged
competition, to great effect, through the adoption and enforcement of
the quoting convention, as is discussed below.
B. The Quoting Convention
The Department's investigation uncovered the existence of a long-
standing, essentially market-wide commitment among market makers to
adhere to a two-part ``quoting convention'' that dictates the price
increments a market maker can use to adjust or ``update'' bid and ask
price quotes on the Nasdaq system. Under the first part of the quoting
convention, if a market maker's dealer spread in a stock is \3/4\ point
(75 cents) or wider, the market maker is required to quote its bid and
ask prices in even-eighth increments (e.g., \1/4\ (25 cents), \1/2\ (50
cents), \3/4\ (75 cents) or \4/4\ ($1).\6\ This ensures that the inside
spread in those stocks is maintained at \1/4\ point (25 cents), or
greater.\7\
---------------------------------------------------------------------------
\6\ All Nasdaq stocks may be quoted in \1/8\ point increments.
\7\ That the use of only even-eighths will result in a minimum
inside spread of no less than \1/4\ point can be shown simply. If
market makers always move in quarter-point increments, and all
initiate their bid and ask quotes on even-eighths, all odd-eighth
quotes will have been eliminated from the number set. The set of
numbers remaining--whole numbers, \1/4\, \1/2\, and \3/4\--would be
the only numbers on which market maker quotes could fall. Hence, the
difference between those even numbers would also be an even number,
meaning the inside spread could not narrow to less than \1/4\ point.
---------------------------------------------------------------------------
Under the second part of the quoting convention, market makers can
quote bid and ask prices on Nasdaq in odd-eighth increments, e.g., \1/
8\ (12.5 cents), \3/8\ (37.5 cents), \5/8\ (62.5 cents) or \7/8\ (87.5
cents), only if they have a dealer spread of less than \3/4\ point.
This requirement has deterred market makers from quoting bid and ask
prices in odd-eighth increments because a narrower dealer spread is
likely to create a greater economic risk to the market maker in trading
that stock. When the difference between a market maker's bid and ask
quotes is \1/2\ rather than \3/4\, a market maker may be called upon to
buy (or sell) more stock than the trader wants, or buy stock when the
market maker wants to sell (or vice versa).
The fact that the quoting convention has existed for at least three
decades in the OTC and Nasdaq markets was well-known throughout the
industry, and fully described to the Department by a number of traders
at prominent firms during the Department's investigation. These traders
testified that they were taught to follow the convention, that they in
fact followed it, and that they understood and expected traders at
other firms to follow it as well. The following deposition excerpts are
examples of the testimony on this subject obtained by the Department
and the SEC during their investigations, from a variety of deponents.
As one trader testified:
Q. If--if the firm spread in a particular stock is three-quarter-
point or greater, the--when--when the firm moves its quote, it will
move in increments of at least a quarter; is that right?
A. That's correct; in quarters, plural. So either one--you either
move it up a quarter or up a half. You would not move it up three-
eighths or five-eighths or anything.
Q. Right. And that--that's one convention.
A. That's correct.
Q. And another convention is that if the stock--if the firm spread
in a stock is one half or less, the--the increment of movement of
quotes would be in increments of an eighth.
A. That's correct.
Q. * * * generally speaking, these conventions have been understood
and followed by market makers in the Nasdaq market; is that right?
A. Yes, to my knowledge.
Another trader described the convention as an ``historical
relationship'' between dealer spreads and the size of quote increments:
Q. Let's come back to that in a little while. Is there a
relationship between the width of the spread and the increment by which
quotes are made?
A. Yes, there is a historical relationship. The width of the spread
of a dealer and how quotes are made.
Q. What's the historical relationship that you're talking about?
A. That dealer spreads of a half a point historically trade in \1/
8\ of a point increment, and dealer spreads of \3/4\ of a point and
higher historically have traded for \1/4\ of a point increment.
Another trader confirmed the operation of the quoting convention
and its lengthy duration:
Q. And in terms of dealer spreads that were three-quarters, when
the dealer spread was three-quarters, market makers moved in quarter
point increments for a large number of years. Is that correct?
A. Traditionally, if your spread was three-quarters of a point or
more, uh, you moved your market in quarter point increments.
Q. And that was because it was unprofessional to move in eighths
without closing the dealer spread to a half; is that correct?
A. Yes, ma'am.
[A] And if the stock trades with a * * * you think you'll have to
trade with a three-quarter point spread. Then you should be moving your
quotation in quarter point increments. And it's one of those things I
can't tell you why. It's something that I think all of us have been
doing for a gazillion, G-A-Z-A-L-L-I-O-N years, certainly for 30 years,
and it has everything to do with the professional appearance of that,
that marketplace.
The evidence adduced by the Department does not disclose the origin
of the quoting convention. No deponent was found who could testify as
to how or precisely when the quoting convention began, although
numerous witnesses testified that the Nasdaq market had operated under
this ``tradition,'' or ``practice,'' or ``convention'' for many years.
There is no evidence that the quoting convention was the result of an
express agreement reached among all of the market makers in a smoke-
filled room. Nevertheless, there is substantial evidence that this
quoting convention--however it arose--distilled or hardened over time
into the very type of ``agreement'' condemned by the Sherman Act--a
``conscious commitment to a common scheme designed to achieve an
unlawful objective,'' which has restrained price competition among the
defendants and others in the Nasdaq market. See Monsanto Co. v. Spray-
Rite Serv. Corp. 465 U.S. 752, 764 (1984).
Additional evidence of agreement to adhere to the quoting
convention, alleged in the complaint and summarized briefly below,
includes: (1) market data demonstrating that defendants' price quoting
behavior was remarkably and unnaturally parallel, and in conformance
with the quoting convention; (2) evidence showing that the quoting
convention was vigorously enforced through industry-wide peer pressure,
and intimidating telephone calls to, and refusals to deal with, market
makers who did not quote bid and ask prices in conformance with the
convention; (3) evidence that it was not in the economic self-interest
of market makers to rigidly adhere to the quoting convention to the
degree they did, absent the understanding that all other market makers
would comply; (4) market data showing that market makers began to
change their price quoting practices when confronted by the adverse
publicity from the Christie/Schultz study and the increasing
[[Page 40442]]
pressures from the government investigations; and (5) market data
showing that market makers used an electronic trading system known as
Instinet on which to quote and trade, at odd-eighth prices, the same
Nasdaq stocks that they quoted only in even-eighths on the Nasdaq
system.
The evidence addressed in each of these points is of the type that
courts have found sufficient to establish an agreement in violation of
Section 1 of the Sherman Act, as is discussed briefly below.
C. Defendants' Adherence to the Convention is Confirmed by Market Data
Until confronted by the adverse publicity from the Christie/Schultz
study and the increasing pressure from government investigations, the
defendants routinely, and with rare exceptions, adhered to the quoting
convention. As a result, their price quoting behavior was remarkably
and unnaturally parallel. Despite the hundreds of thousands of bid and
ask prices that were quoted by the defendants (and other market makers)
on the Nasdaq system, very few odd-eighth prices were entered in stocks
in which defendants' dealer spreads were \3/4\ point or wider. When
defendants entered odd-eighth quotes in these stocks, those quotes were
largely mistaken entries--usually of short duration, and promptly
corrected.
The market data analyzed by the Department during its investigation
show this adherence to the quoting convention. The Department based its
analysis on the NASD's Market Maker Price Movement Reports
(``MMPMRs''), which contain detailed information regarding the price
quotes by market makers for all Nasdaq stocks, and the NASD's Equity
Audit Trail Report, showing all trades by all market makers in all
stocks. The Department received from the NASD monthly MMPMR data for
the period December 1993 through July 1995, plus September and December
1995 and March 1996. To create a manageable subset of these data, the
Department used the Equity Audit Trail to calculate the volume, in
dollar terms, for all Nasdaq stocks for the eighteen months from
February 1994 through July 1995. From these calculations, the
Department selected the 250 stocks with the largest dollar volume of
transactions for these eighteen months. Twenty-six stocks were excluded
from this sample,\8\ resulting in the final data set of 224 of the top-
dollar volume Nasdaq stocks during the defined time period.
---------------------------------------------------------------------------
\8\ The twenty-six excluded stocks were all priced at less than
$10, and, as a result, could be quoted in ``sixteenths'' (\1/16\
point increments) on Nasdaq.
---------------------------------------------------------------------------
An analysis of quotes in the 224 stock sample shows the dramatic
extent to which the defendants avoided odd-eighth quotes in Nasdaq
stocks. As shown in Exhibit A, in early 1994, fully 65-70% of the
sample, had virtually no odd-eighth bid and ask price quotes.\9\
Exhibit B illustrates that the defendants achieved this unexpected
result by systematically avoiding odd-eighth quotes in stocks with
dealer spreads of \3/4\ point or more. The remaining 30-35% of stocks
in the sample generally had dealer spreads less than \3/4\ and were
quoted in both even- and odd-eighths. Thus, the sample reflects almost
uniform adherence to the convention.
---------------------------------------------------------------------------
\9\ The Department's findings, although covering a different
time period and a different sample of stocks, were consistent with
the Christie/Schultz study, which found virtually no odd-eighth
price quotes in approximately 70% of the stocks in their sample.
---------------------------------------------------------------------------
By way of further illustration, Exhibit C demonstrates the
systematic avoidance of odd-eighth quotes in ten of the largest volume
stocks on Nasdaq. The fact that there are virtually no odd-eighth bid
and ask prices quoted in some of the most heavily traded stocks on
Nasdaq is remarkable, particularly when one considers that each market
maker is likely updating its price quotes in these stocks numerous
times each day. This unnatural price parallelism provides some--but not
conclusive--evidence of an antitrust agreement in violation of Section
1 of the Sherman Act. See e.g., Theatre Enters., Inc. v. Paramount Film
Distrib. Corp., 346 U.S. 537, 540 (1954), and Apex Oil Co. v. DiMauro,
822 F.2d 246, 258 (2d Cir. 1987).
D. The Evidence Shows That Defendants Enforced the Quoting Convention
Through Peer Pressure, Intimidation, and Refusals to Deal
The Department's investigation has uncovered substantial evidence
that Nasdaq market makers have enforced the quoting convention by
reminding, pressuring, harassing, and intimidating each other into
conformity.\10\ The quoting convention protocol was elevated to the
status of a ``professional'' or ``ethical'' rule. The industry even
coined a derisive term--``Chinese market''--as a shorthand to describe
a market in which a trader has entered a quote inconsistent with the
established patterns. And the evidence indicates that market makers
have attempted to punish economically those market makers who deviate
from the agreed-upon pricing norms. Under Ambook Enterprises v. Time,
Inc., 612 F.2d 604 (2d Cir. 1979), cert. dism'd, 448 U.S. 914 (1980),
United States v. Foley, 598 F.2d 1323 (4th Cir. 1979) cert. denied, 444
U.S. 1043 (1980); In re Nasdaq Market Makers Antitrust Litigation, 894
F. Supp. 703 (S.D.N.Y. 1995); and united States v. Paramount Pictures,
Inc., 334 U.S. 131, 161 (1948), the trier of fact may draw an inference
of an antitrust agreement, where coercion is proved in addition to
unnatural uniformity of pricing.
---------------------------------------------------------------------------
\10\ The structure of the Nasdaq market facilities detection of
deviations from the well-understood quoting convention. All Nasdaq
price quotes by all market makers are entered on the Nasdaq computer
system and are immediately known to those interested. Thus,
deviations are obvious, and can be responded to immediately.
---------------------------------------------------------------------------
1. Violating the Quoting Convention Was Considered to Be
``Unprofessional'' or ``Unethical''
The Nasdaq market is highly interdependent, making it easy to
enforce compliance with ``professional'' quoting standards. Market
makers rely on each other to provide order flow, information, and
cooperation to help them trade positions profitably. They actively work
to develop and maintain friendly relationships with traders from other
firms. Traders do not want other market makers to perceive them as
being uncooperative, ``unethical,'' or ``unprofessional'' because that
very perception may result in their loss of access to the trader
networks that provide order flow, information, and cooperative trading
opportunities. Retaliatory actions--even simply putting offenders
``last in line'' when buying or selling stock--serve to deter vigorous
competition and punish market makers who violate the unwritten
``ethical'' and ``professional'' requirements of the Nasdaq market.
Over the years, it has become well-known throughout the industry
that violating the convention--in the parlance of the traders,
``breaking the spread''--is considered to be ``unprofessional'' or
``unethical'' trading behavior. Market makers who deviate from the
convention are derisively said to be creating a ``Chinese market.''
Numerous witnesses testified to this fact. One trader defined a
``Chinese market'' as follows:
Q. Let me understand what you mean by a Chinese market. What's the
definition you're giving to the term--
A. That's when you have a \3/4\ point spread and you move in \1/
8\th of a point increments.
Another trader testified that market makers were trained not to put
in quotes
[[Page 40443]]
that created Chinese markets, because they were deemed
``unprofessional'':
[Q] And through the period December `93 through December of `94, do
you observe the market makers entered very-relatively few odd-eighths.
And by that, I mean with perhaps one or two exceptions, under 10
percent of their quotes were odd eighths in McCormick.
A. Yes, ma'am.
Q. And again, is that, in your professional opinion, because those
market makers had three-quarter point dealer spreads and did not want
to enter what were termed ``unprofessional markets''?
A. Yes, ma'am.
Q. How is it that all of the market makers knew that entering an
odd eighth quote could be unprofessional?
* * * * *
A. Young traders were trained over the years not to put in
unprofessional markets, ``Chinese markets.'' * * *
* * * * *
This was part of the--of the traditional and ethical on-the-job
training that all of us got, and it ecompasses not only that you don't
put in unprofessional-looking ``Chinese markets,'' it * * * grew out of
a self-imposed industry standard of ethics and conduct. So that's my
answer as to why everybody seems to be doing this, because most of the
people were trained the same way.
Another trader acknowledged that the term Chinese market referred
to what the industry considered ``unethical'' trading practices:
Q. Have you ever heard that people using the term--strike that.
Would somebody making a Chinese market cause another market maker to be
angered?
A. I believe that's possible.
Q. Under what circumstances?
A. I think that in--like I said before, in coming up, I think
Chinese markets, as they're called, were looked down upon so are
considered unethical. so by making a Chinese market, You're making
yourself unethical and, therefore, I guess upsetting other market
makers.
That it was deemed unethical to ``make a Chinese market'' was even
publicized in a newsletter published by the Security Traders
Association of New York (``STANY''), the largest regional affiliate of
the Security Traders Association (``STA''), the principal national
trade association for securities trading professionals. STANY'S
quarterly newsletter for the third quarter of 1989 reported on the
presentations at an ``Ethics Conference'' held in April 1989. The
article misreported that a speaker had said that ``making a Chinese
market'' was ``clearly ethical.'' To correct the incorrect report,
STANY published an ``update,'' at the top of which was printed, in
large type, the following ``Editor's Note'':
In the recently issued STANY NEWSLETTER, we are certain you will
realize that * * * was grossly misquoted when a portion of his speech
was extracted for publication. A corrected copy is featured below.
As * * * and you are all aware, it is clearly UNETHICAL to make a
Chinese Market or to run ahead of an order. (emphasis and Caps in
original of word ``unethical'')
The evidence shows that peer pressure was used by market makers to
ensure that so-called ``professional'' and ``ethical'' pricing
standards were maintained. Trader testimony also demonstrates that
``peer pressure'' was effective in keeping spreads wide.
2. Phone Calls Were Used To Obtain Compliance
Much of the business of Nasdaq traders is done on the telephone.
Thus, it is not surprising that phone calls were employed market-wide
to secure compliance with the quoting convention. At times, all that
was needed to correct a Nasdaq trader's nonconforming spread or quote
was a simple ``friendly'' inquiry, as illustrated by the following
evidence. As one trader testified:
Q. Did you ever see other firms, when you were watching trading on
the NASDAQ screen, make Chinese markets?
A. Uh-hum. Yes.
Q. What was your reaction when you would see that?
A. Didn't like it.
Q. What would you do?
A. I'd call them up and say, would you please close your spread? If
you're going to bid that price, close your spread.
Q. Meaning what?
A. If you're going to bid that--you know, that eighth, close your
spread to a half a point.
In response to the Department's interrogatories, another firm
stated:
[A trader] recalled that once, when she first started trading
(probably a year or two ago) she intended to update her market in
Chiron CP (CHIR) by moving from the offer to the bid after her offer
had been taken by another trader, but she mistakenly moved up \1/8\
instead of \1/4\. Subsequently, a [trader from another firm] called and
asked why she was quoting in \1/8\s. [The trader] checked her quotes,
realized she had not fully updated her market, and moved up an
additional \1/8\.
On other occasions, traders resorted to more intimidating telephone
calls to exact compliance with the quoting convention. Some of the more
dramatic examples of these were captured on the audio tapes that were
produced by the defendants, as the following example illustrates:
Trader 1: Who trades CMCAF in your place without yelling it out?
Trader 2: * * * Sammy
Trader 1: Sammy who?
Trader 2: It may be the foreign department * * *
Trader 1: What?
Trader 2: The foreign didn't realize they had to trade it.
Trader 1: Well, he's trading it in an eighth and he's embarrassing
* * *
Trader 2: * * * foreign department
Trader 1: He's trading it in eighths and he's embarrassing your
firm.
Trader 2: I understand.
Trader 1: You know. I would tell him to straighten up his
[expletive deleted] act and stop being a moron.
The record of the investigation is replete with proof that market
makers used the telephone to secure compliance with their
understandings about ``proper'' quoting protocols.\11\ Indeed, a NASD
employee responsible for interacting with the market making community
recognized that telephone calls, which he described on one occasion as
``price fixing calls,'' were frequently used to enforce compliance with
the quoting convention.
---------------------------------------------------------------------------
\11\ However, evidence of enforcement activity varies
significantly from firm to firm.
---------------------------------------------------------------------------
3. Refusals to Trade Were Used to Punish Maverick Market Makers
Firms that repeatedly enter quotations in violation of the quoting
convention were subject to other types of discipline, with a more
direct economic impact on their businesses. The most effective such
discipline was refusal to deal.
A refusal to deal in the context of the Nasdaq market has far
reaching consequences for a market maker. Market makers are competitors
to attract order flow, but they also frequently trade with one another.
When a market maker does not want to fill a retail or institutional
order from its own account, it must be able to find other market makers
willing to fill those orders; otherwise, its retail and institutional
clients will soon look elsewhere for trading services. Similarly, a
market maker must be able to go to other market makers to lay off risk
from long or short
[[Page 40444]]
positions.\12\ Consequently, the mere threat that other firms will not
trade with them was often sufficient to discourage market makers from
violating the convention.
---------------------------------------------------------------------------
\12\ A ``short'' position occurs when a trader sells stock that
he or she does not own. A ``long'' position occurs when a trader
owns stock that is not pledged for sale to a customer or another
market maker.
---------------------------------------------------------------------------
Maverick market makers that improved the best quote often would not
get an execution, even though other orders were being filled at the
maverick's quoted price. This refusal to trade is referred to in the
industry as ``trading around.'' The same maverick firm would also
frequently notice orders being filled at inferior prices to the prices
they had quoted on Nasdaq when their quotes were inconsistent with the
quoting convention. This practice is known as being ``traded through.''
The effect of being ``traded through'' or ``traded around'' taught
traders that there was no benefit to improving the market by an odd-
eighth in a stock with a \3/4\ point or wider dealer spread because
their orders would not be filled, or would be filled only when the
market reversed directions.
Maverick firms were also subject to ``backing away'' and being made
``last call'' by other firms. ``Backing away'' involves the failure of
one market maker to honor its posted quote to another market maker, as
required by SEC and NASD rules. Firms that violated the quoting
convention were more subject to ``backing away'' by other firms. Being
made ``last call'' involves only trading with the maverick market maker
when the market begins to turn against the maverick, or when a firm has
no other alternative but to trade with the maverick. Mavericks also
observed that they were made ``last call.''
4. Market Makers Fully Understood the Significance of the Quoting
Convention and Its Enforcement in Maintaining Wide Spreads on Nasdaq
The effect of the quoting convention in maintaining wide spreads on
Nasdaq was known even to employees and members of the industry's self-
regulatory organization, the NASD; moreover, the NASD recognized the
causal connection between widening spreads on Nasdaq and ``peer
pressure'' applied to keep spreads wide.
The Department discovered during its investigation that, in the
spring of 1990, the NASD's Trading Committee \13\ began to address
``the problem of spreads.'' The issue became a matter of concern
because the New York Stock Exchange (``NYSE'') had begun to use the
fact of wide spreads on Nasdaq to attract issuers to the NYSE. In a
meeting on June 27, 1990, Trading Committee members discussed the
widely understood effect of the quoting convention and the notion of
``Chinese markets'' as contributing to wider spreads. According to
notes of the meeting, a member of the committee--representing a small
market making firm--indicated that market makers got calls from big
firms when they ``broke spreads'' or made ``Chinese markets.'' In his
view, the problem was the ``arrogance of mandate'' exercised by the
larger firms.
---------------------------------------------------------------------------
\13\ The Trading Committee, which consisted largely of market
makers, was one of the most powerful of the NASD's ``self-
regulatory'' committees. It was the principal committee responsible
for recommending changes to the NASD Board of Governors in the
trading rules governing Nasdaq.
---------------------------------------------------------------------------
In his testimony before the Department, this senior Trading
Committee member confirmed that traders from competing firms discussed
the quoting convention and Chinese markets at this meeting. In
addition, he testified:
A. I think the establishment of this acceptance of spreads [sic].
And I think it went way back. My opinion and what I was trying to get
across, and maybe didn't do, was that this was a historical thing. This
is something that had evolved from trading in the '50s and the '60s and
the '70s and so forth. And that everyone accepted this protocol, that a
spread is a spread is a spread. And it's not your place to change it.
The spread is a result of almost a God given natural phenomenon.
That it is not some up-stark [sic] traders place to change that. That
was the accepted protocol for years and years and years, to my
knowledge.
And so I was trying to get across that that's where we have been.
And to try to break that protocol and change it would have gotten a
call from some old--somebody that had been around for a long time
saying, hey, don't break the spread. That shouldn't be anymore.
My lesson, that I was trying to bring, is that can't--we can't be
doing that in the 90's. No one can be, no matter how arrogant they may
think of themselves, no matter who it is, whether it is the biggest
money firm on Wall Street or the person with the biggest money
commitment. No matter who they are, they should not be allowed to
intimidate you. If you want to break a spread that is your prerogative.
Q. And is it your best interpretation of this problem with
arrogance and mandate, the fact that there was certain arrogance in the
industry about spreads and that if you try and alter spreads, you get
telephone calls. Is that the general gist of that?
A. I think that the word arrogance would have to do with a
trader's--either his impression of himself or his firm, that he was big
enough to influence someone not to narrow spreads. But that is the only
way I can conceptualize how to use the word arrogance, which was used.
Subsequent to this meeting, the Quality of Markets Subcommittee of
the Trading Committee was formed to examine two issues, one of which
was the ``spreads problem.'' The Quality of Markets Subcommittee was
composed exclusively of representatives of leading market-making firms;
however, certain NASD staff attended these meetings as well. At one
such meeting, on March 24, 1992, a NASD staff member took notes. These
notes indicate that the participants at the March 24 meeting discussed
the quoting convention, Chinese markets, and the fact that market
makers who tightened spreads were subjected to ``intimidation'' from
others. This meeting apparently led to the NASD's hiring of an industry
consultant to help explain ``Why does the `Chinese market' syndrome has
[sic] such impact on NASDAQ while listed markets seem to continuously
quote in combinations of \1/8\'s, \1/4\'s.''
On June 30, 1992, having completed his research into the ``spreads
problem,'' an NASD employee wrote a memorandum entitled simply
``Spreads,'' and sent it to the NASD senior management group. The
memorandum stated, in pertinent part:
Spreads increased absolutely from the 1st Quarter of 1989 to May
1992 from .226 to .369. The % increase was 63%. Our method of
calculating spreads i.e. volume weighted, actually portrays the
situation better than it actually is. A stock by stock comparison would
be worse.
3. Unlike auction markets, dealers do not change prices one side at
a time and there is a stigmatism [sic] associated with making so called
``Chinese'' markets * * * [n]o one attempts to do just a ``little''
better with their published quote change * * *
* * * I understand that when attempts are made by individual
dealers to [narrow spreads], peer pressure is brought to bear to
reverse any narrowing of spreads. I have no hard evidence of this and
the information is only anecdotal and this was not described as
happening in every case. However, enough people have said it for me to
believe it to be true.
Spreads became a more troubling topic for the NASD, as well as the
[[Page 40445]]
market-making community in general, following the publication in August
1993 of a Forbes magazine article entitled ``Fun and Games on Nasdaq.''
The article alleged, among other things, that market makers who
narrowed spreads were harassed:
[N]ovice traders learn quickly that if they want to keep their jobs
on an OTC desk, they will do well not to beat the price of fellow
market makers. Breaking the spread, as it is called, just isn't done.
One veteran who tried on occasion to narrow an OTC spread told Forbes,
``I used to get phone calls from people. They'd scream, `Don't break
the spread. You're ruining it for everybody else.' ''
Asked to give his input about these charges, a NASD employee
detailed, point by point, the merits of the claims. With respect to the
allegations of harassment, he wrote: ``I believe this to be true.''
E. Adherence to the Convention Was Often Inconsistent With the Market
Makers' Economic Self-Interest
Under the law, if the behavior dictated by a hypothesized antitrust
conspiracy is economically ``irrational,'' or makes no sense, or is
contrary to independent self-interest unless the conspiracy posited
actually exists, a court may find an agreement in violation of the
antitrust laws. In other words, actions against economic self-interest
are a ``plus factor'' which would support a judgment in favor of the
United States in the case filed:
``Plus factors'' identified by courts, which, in combination with
parallel pricing, may support an inference of conspiracy, include a
common motive to conspire, actions which were against their own
individual business interest absent an illicit agreement, and evidence
of coercion.
In re Nasdaq Market-Makers Antitrust Litigation, 894 F.Supp. at
713. See also Modern Home Ins. v. Hartford Acc. & Indem. Co., 513 F.2d
102, 111 (2d Cir. 1975), Beech Cinema Inc. v. Twentieth Century-Fox
Film Corp., 622 F.2d 1106 (2d Cir. 1980), and Ambook Enterprises v.
Time Inc., supra.
The terms of the quoting convention contain a self-enforcing
mechanism designed to foster, support, and maintain wide inside
spreads. As noted, under the quoting convention, market makers who wish
to quote an even-eighth stock in odd-eighth increments (thereby
creating a powerful tendency toward a narrower, \1/8\ inside spread)
must first narrow their dealer spreads. Narrowing one's dealer spread
imposes a ``penalty'' or cost on the use of odd-eighth increments
because a narrower dealer spread can increase the financial risk to the
market maker in trading that stock, as was recognized by one trader in
deposition testimony:
Q. What would be the advantage to a market-maker to have a greater
dealer spread in a stock?
A. Less apt to be hit or taken, therefore putting in an unwanted
position.
Q. That would be in response to a market move they had not
anticipated?
A. That is correct.
Q. Is there sort of a monitoring cost of the stock that is reduced
if you have a wider dealer spread?
A. I guess you could say that. It would be easier to stay out of
the way.
Q. You can characterize it as either a greater risk of being hit
when you don't want to be hit or a greater burden of avoiding that
result?
A. Having a tighter spread?
Q. Right.
A. Correct.
Another trader also succinctly explained the risk imposed by a
narrower dealer spread:
[A] ``What are the ramifications [of a narrower dealer spread]?
Yes, I may have been able to buy stock at an eighth. But on the other
hand * * * if you shrink your dealer spread you are subject to more
risk in terms of being SOES'ed and everything else, there was a penalty
for me to increase my price [by an eighth] and decrease my spread.''
Because of this increased risk, it is often against a market
maker's economic self-interest to narrow its dealer spread simply to
quote in an odd-eighth increment. The requirement that a market maker
reduce its dealer spread when quoting in eighths had the effect of
discouraging use of odd-eighth increments; thus the quoting convention
kept spreads wider for longer than they would have been in competitive
market.
There were and are numerous instances in which one would have
expected to see odd-eighth quotes in order to, for example, seek to
transact at a more favorable price than would be generated by a
quarter-point increase in a bid price or a quarter point decrease in
the ask price. Yet adherence to the quoting convention kept market
makers from acting in their economic self-interest by entering odd-
eighth quotes in such circumstances. Traders acknowledged as much in
their deposition testimony, as noted by the following examples:
[Q] * * * This is what's giving me trouble. If you can buy
something at an eighth by only going up an eighth, why bother to go up
a quarter? I guess that's what confusing me.
A. Well, that, I think, speaks to the professional appearance
concept and the tradition, if you will, concept, that even if I'm not
dealing for a client, I may be short the stock. I am going to move that
market at a quarter-point increment; even though I would much rather
buy it at an eighth, I am not going to put a bad market or an
unprofessional-looking market in the screen.
Another trader testified:
Q. In the absence of the convention, would there have been
circumstances that [you] wanted to quote in odd eighth?
A. Yes, probably.
Market makers understood they were giving up the opportunity to
quote stocks in odd-eighths in exchange for increased profits for the
market-making community as a whole, provided all market makers adhered
to the convention. This trade-off was acknowledged in a tape-recorded
telephone conversation in which one trade's assistant noted: ``[A]t the
same time * * * you always wanted to wish you could always to offer it
at \7/8\ths,'' and the other trader's assistant replied, ``True,''
``but you'd give that wish up in a second to keep the spread * * * keep
that P&L nice and lofty.''
F. Market Makers Began To Change Their Price Quoting Behavior When
Confronted with Charges of Collusion and the Government Investigations
Under established law, evidence of a significant change in behavior
of alleged conspirators is admissible to provide the existence of a
conspiracy. See United States v. Koppers Co., 652 F.2d 290 (2d Cir.
1981); Ohio Valley Elec. Corp. v. General Elec. Co., 244 F.Supp. 914
(S.D.N.Y. 1965). The fact that market makers for years used the quoting
convention to maintain wide inside spreads is further evidenced by the
change in their price quoting behavior once their anticompetitive
conduct began to come to light.
On May 24, 1994, the NASD, STA, and STANY convened a meeting at the
headquarters of Bear Stearns & Co. in New York that was attended by
over 100 market maker representatives. The principal item on the agenda
for that meeting was the issue of wide spreads on Nasdaq. Three days
later, after public disclosure of the Christie/Schultz study by the Los
Angeles Times and the Wall Street Journal, dealer spreads of a number
of major Nasdaq stocks began to narrow. Within one week, the prevailing
dealer spreads of four of the most prominent Nasdaq stocks--Microsoft,
Apple, Amgen, and Cisco--had narrowed from \3/4\ to \1/2\ point, and
market makers accordingly began
[[Page 40446]]
entering odd-eighth quotes in those stocks.\14\
---------------------------------------------------------------------------
\14\ Attached as Exhibit D are charts that show the dramatic
changes in the quoting on these major stocks, going from virtually
no odd-eighth quotes to a substantial number almost overnight.
---------------------------------------------------------------------------
Other events occurred throughout the remainder of 1994 that
effected changes in the market makers' quoting and pricing behavior.
These included the filing of several class-action lawsuits immediately
after disclosure of the Christie/Schultz study; the opening of the
Department's investigation in the summer of 1994; the Los Angeles Times
six-part series in October 1994 concerning allegations of collusion on
Nasdaq; and the public announcement of the SEC's inquiry in November.
The Department's analysis of market data, as discussed below, shows
that these events have caused changes in the Nasdaq market: the
percentage of stocks that previously avoided odd-eighth quotes has
fallen dramatically; average dealer spreads and inside spreads have
decreased; and the percentage of stocks that have been quoted in
violation of the convention--i.e., using an odd-eighth price with a
dealer spread of \3/4\ point or greater--has risen substantially. These
changes indicate that there was no satisfactory economic reason for the
extent of the wide spreads that had prevailed so persistently in the
previous years.
1. The Decline in the Avoidance of Odd-Eight Price Quotes
Attached as Exhibit A is a chart that demonstrates graphically the
extent to which market makers have begun to use odd-eight price quotes
in stocks where such quotes were previously avoided. This chart is
based on the Department's data set previously discussed--224 of the
top-dollar volume Nasdaq stocks. As the chart demonstrates, prior to
disclosure of the Christie/Schultz study, nearly 70% of the stocks from
the sample avoided odd-eight price quotes at least 99% of the time; in
March of 1996, only approximately 15% of the sample avoided odd-eights
to this extreme degree.
2. The Decline in the Average Inside Spread
The striking decline in the avoidance of odd-eights and dealer
spreads runs almost exactly parallel to a decline in the average inside
spread in Nasdaq stocks. The Department examined the average quoted
inside spread by month for the 224 stocks in its sample. See Exhibit E.
The peak month was December 1993, when the average inside spread
reached 44 cents (although April 1994 was nearly as high).
Subsequently, from May 1994 through March 1996, the average inside
spread continued to fall steadily. By March 1996, it had fallen to 32
cents, a decline of almost 28% in approximately two years.
The Department has also calculated the average percentage value of
the inside spread as a proportion of a stock's price for the same
stocks in the same period. See Exhibit F. This analysis reveals an even
sharper decline, with this value declining from as high as 1.6% to less
than 1% in September of 1995, increasing slightly to 1.04% in march
1996.\15\
---------------------------------------------------------------------------
\15\ In the twelve months since public disclosure of the
Christie/Schultz study, the average inside spread for Nasdaq
National Market System stocks fell 15.6 percent from 34.6 cents to
29.2 cents. (These data were obtained from the NASD's internal,
monthly, ``Stat Book,'' for December, 1994 and May, 1995, obtained
by the Department in discovery in this investigation.) For the
Department's sample of 224 stocks, the average inside spread fell
27.3 percent from 44 cents to 32 cents. Not all investors pay the
quoted spreads, but many--especially small, retail investors--do.
Institutional investors also are affected by the quoted inside
spread on Nasdaq. The effect of the quoting convention on
institutional customers is demonstrated by the change in effective
spreads of transactions by firms that specialize in institutional
trading. The Department calculated the decline in effective spreads
for Apple Computers, Inc., from May to June 1994, for eight such
firms. The average effective spread fell from 18.8 cents to 11.4
cents when the inside spread on Apple dropped from \1/4\ to \1/8\ in
those months. The term ``effective spread,'' as used here, measures
spread costs based on the difference between actual transaction
prices and the mid-point of the inside spread. The effective spread
in a security is an accepted measure in financial economics to
determine the spreads actually paid by customers.
---------------------------------------------------------------------------
3. The Decline in Adherence to the Quoting Convention
The Department has also examined whether market makers, in fact,
adhered to, and whether they have continued to adhere to, the quoting
convention that prohibits the use of odd-eights when the dealer spread
is \3/4\ point or greater.
The Department determined the percentage of the 224 stocks that
violated the quoting convention at least 1% of the time in each month.
See Exhibit G. In December 1993, only 5% of the 224 stocks traded had
violations of the convention by the 1% standard. By June 1994,
following the Christie/Schultz disclosure, this proportion jumped to
10%. The proportion of stocks that violate the quoting convention has
continued to increase until March 1996, when fully 45% of all stocks
from the sample violated the convention at least 1% of the time. These
results are even more dramatic when it is recognized that use of dealer
spreads of \3/4\ point or more has fallen significantly during the same
period, thereby reducing the number of situations in which market
makers could violate the convention by quoting odd-eights.
J. The Market Makers' Pricing Behavior Was Different in a Comparable
Market
Evidence of a conspiracy may be inferred from the difference in
competitive performance between two comparable markets. Professor
Areeda describes this type of evidence, and its value, in his treatise:
If two markets are identical in every respect (other than the
possibility of conspiracy), then substantially less competitive
performance or behavior in one of them must be attributable to a
conspiracy. The logic is unassailable * * *.
Even without exact identity in every respect, conditions preventing
tacit price coordination in one market should have the same effect in a
substantially similar market. Accordingly, if a given set of rivals
maintains relatively competitive prices in one of those markets but not
in the other, then an extra factor--such as an explicit agreement--must
explain the significantly less competitive prices in the other market.
Areeda, Antitrust Law, para. 1421, 132 (1986) (emphasis added). See
also, Petruzzi's IGA Supermarkets v. Darling-Delaware Co., Inc., 998
F.2d 1224 (3d Cir. 1993).
Although the quoting convention prevented market makers from
quoting even-eight stocks in odd-eights on Nasdaq, it did not constrain
them from entering odd-eight quotes for the same stocks on Instinet.
Instinet is an electronic market that permits broker dealers and
institutions to enter orders anonymously to buy and sell and execute
against those orders. In many ways, it is comparable to the Nasdaq
market. The same stocks are traded by the same market makers at the
same time. The size of the trades and quotes on the two systems are
very similar as well.
Quotes on Instinet, however, are quite different. They are much
more likely to be at an odd-eighth, and are usually inside the inside
spread on Nasdaq. The Department examined the ten largest trading
volume stocks for which odd-eighth quotes rarely appeared on the Nasdaq
screen during the first 20 days of May, 1994. See Exhibit C. On
Instinet, however, the defendants used odd-eighth prices routinely,
some 40% to 50% of the time. See Exhibit H.
The substantial use of Instinet to quote and transact at odd-
eighths relates to the fact that (1) it is anonymous, which allowed
market makers to quote
[[Page 40447]]
and transact at odd-eighths without provoking a reaction from other
market makers, and (2) quotes entered on Instinet have historically
been viewed as not affecting their best execution obligation. A quote
on Instinet, then, would not require other marker makers to transact at
that price for other trades. In addition, Instinet is unavailable to
retail customers,\16\ which allowed market markers to transact with
other market makers and institutions at better prices than those on the
Nasdaq screen at which retail customer trades were executed.
---------------------------------------------------------------------------
\16\ Instinet is available to brokers, market makers, and
institutional investors.
---------------------------------------------------------------------------
IV
Explanation of the Proposed Order
Prohibited conduct. The proposed Order will deter the recurrence of
conduct discovered by the Department in its investigation that violates
Section 1 of the Sherman Act and that is plainly anticompetitive.
Specifically, the proposed Order bars each of the defendants, unless
otherwise specifically permitted, in connection with its market making
activities in OTC stocks, from agreeing with any other market maker:
(1) To fix, raise, lower, or maintain quotes or prices for any
Nasdaq security;
(2) To fix, increase, decrease, or maintain any dealer spread,
inside spread, or the size of any quote increment (or any relationship
between or among dealer spreads, inside spreads, or the size of any
quote increment), for any Nasdaq security;
(3) To adhere to a quoting convention whereby Nasdaq securities
with a three-quarter (\3/4\) point or greater dealer spread are quoted
on Nasdaq in even-eighths and are updated in quarter-point (even-
eighth) quote increments; and
(4) To adhere to any understanding or agreement (other than an
agreement on one or a series of related trades) requiring a market
maker to trade at its quotes on Nasdaq in quantities of shares greater
than either the Nasdaq minimum or the size actually displayed or
otherwise communicated by that market; \17\
---------------------------------------------------------------------------
\17\ The reference to agreements ``other than an agreement on
one or a series of related trades'' is intended to make clear that a
market maker is not prohibited from agreeing to buy or sell a
specific quantity of stock, and that agreeing to buy or sell a
quantity of shares greater than the amount initially specified in a
series of related trades also does not violate the proposed Order.
---------------------------------------------------------------------------
In addition, the proposed Order bars each of the defendants from
engaging in any harassment or intimidation of any other market maker
because such market maker:
(1) decreased its dealer spread or the inside spread in any Nasdaq
security;
(2) refused to trade at its quoted prices in quantities of shares
greater than either the Nasdaq minimum or the size actually displayed
or otherwise communicated by that market maker; or
(3) displayed a quantity of shares on Nasdaq greater than either
the Nasdaq minimum or the size actually displayed or otherwise
communicated by that market maker.
Finally, paragraph (8) Section IV of the proposed Order bars the
defendants from refusing, or threatening to refuse to trade (or
agreeing with or encouraging any other market maker to refuse to trade)
with any market maker at defendant's published Nasdaq quotes in amounts
up to the published quotation size because such market maker decreased
its dealer spread, decreased the inside spread in any Nasdaq security,
or refused to trade at its quoted prices in a quantity of shares
greater than either the Nasdaq minimum or the size actually displayed
or otherwise communicated by that market maker.
Required Conduct. The proposed Order contains numerous provisions
designed to ensure compliance with its terms and with the federal
antitrust laws. Significantly, it requires that each defendant initiate
and maintain an antitrust compliance program. Under the compliance
program, an Antitrust Compliance Officer, to be appointed by each
defendant, is required to distribute copies of the proposed Order to
certain personnel, including members of the defendant's board of
directors and its Nasdaq traders; to brief traders semi-annually on the
meaning and requirements of both the federal antitrust laws and the
proposed Order; and to obtain from specified persons, including
traders, certifications that they have read and agree to abide by the
terms of the proposed Order, and that they have been advised and
understand that a violation of the proposed Order by them may result in
their being found in civil or criminal contempt of court.
The proposed Order also requires each defendant to undertake a
significant program of monitoring and recording trader conversations so
as to discourage conduct violative of the proposed Order and the
federal antitrust laws generally. Under the proposed Order, each
defendant will install taping systems capable of monitoring and
recording any conversation on the telephones on its OTC desk that are
used in market making. Not less than 3.5% of all trader conversations
will be monitored and recorded, unless such percentage would exceed 70
hours per week. Thus, 70 hours per week is the maximum amount of taping
required of any defendant. Between 35-40,000 hours of tape will be
required to be recorded annually to meet these requirements of the
proposed Order. The methodology proposed to be employed by each
defendant to conduct this monitoring and recording is subject to
Department approval. If the Antitrust Compliance Officer discovers a
conversation he/she believes may violate the proposed Order, he/she is
required to retain a recording of the conversation, and, within ten
business days, to furnish the tape, along with any explanation of the
conversation the defendant may care to offer, to the Department. The
Department estimates that defendants will have to employ approximately
thirty (30) persons full time to fulfill the monitoring requirement of
the proposed Order.
Tapes made pursuant to the proposed Order are required to be
retained by each defendant for at least 30 days from the date of
recording. The tapes made pursuant to the proposed Order are not
subject to civil process except for process issued by the Antitrust
Division, the SEC, the NASD, or any other self-regulatory organization.
The proposed Order directs that such tapes not be admissible in
evidence in civil proceedings, except in actions, proceedings,
investigations, or examinations commenced by the Antitrust Division,
the SEC, the NASD, or any other self-regulatory organization. The tapes
will be subject to process and use in criminal proceedings under the
terms of the proposed Order.
Section IV.C.(6) of the proposed Order, regarding permissible uses
of tape recordings made pursuant to the proposed Order, does not affect
the ability of a grand jury to obtain such tapes. Nor does the
provision affect the susceptibility of such tapes to criminal process
or their admissibility in evidence in criminal proceedings.
The proposed Order grants the Department the right to visit any
defendant's place of business unannounced and to monitor trader
conversations as they are occurring. Upon request of the Department, a
defendant must identify all tape recordings made pursuant to the
proposed Order that are in its possession or control, provide the
Department with the opportunity to listen to any tape recording made
pursuant to the proposed Order, and produce to the Department such
tapes as the Department may request. The Department may receive
complaints or referrals concerning asserted possible violations of the
proposed Order and
[[Page 40448]]
may, based upon such complaints or referrals, or for the purpose of
monitoring or enforcing compliance with the proposed Order, require the
Antitrust Compliance Officer to tape the conversations of particular
traders, up to the limits previously specified.
Additional Relief. Each Antitrust Compliance Officer is required by
the proposed Order to report quarterly to the Antitrust Division
concerning activities undertaken to ensure the defendant's compliance
with the proposed Order. Such reports must detail the precise times
when conversations were monitored by the Antitrust Compliance Officer
pursuant to the requirements of the proposed Order and the name of each
person employed by the defendant whose conversations were recorded
during such times. The proposed Order also requires that each defendant
certify the designation of an Antitrust Compliance Officer and that the
defendant has complied with certain specified requirements of the
proposed Order.
The proposed Order gives the Department certain ``visitation''
rights, including the right to demand copies of documents, excluding
individual customer records, which relate to compliance with the
proposed Order; and to interview officers, employees, or agents of each
defendant regarding compliance with the proposed Order. In addition,
upon written request of the Attorney General or the Assistant Attorney
General in charge of the Antitrust Division, a defendant may be
required to prepare and submit written reports, under oath, relating to
defendant's compliance with the proposed Order.
V
Remedies Available to Private Litigants
Section 4 of the Clayton Act, 15 U.S.C. 15, provides that any
person who has been injured as a result of conduct prohibited by the
antitrust laws may bring suit in federal court to recover three times
the damages suffered, as well as costs and reasonable attorneys' fees.
Entry of the proposed Order will neither impair nor assist the bringing
of such actions. Under the provisions of Section 5(a) of the Clayton
Act, 15 U.S.C. 16(a), the proposed Order has no prima facie effect in
any subsequent lawsuits that may be brought against the defendants in
this case.
VI
Procedures Available for Modification of the Proposed Order
As provided by the APPA, any person believing that the proposed
Order should be modified may submit written comments to John F.
Greaney, Chief, Computers and Finance Section, U.S. Department of
Justice, Antitrust Division, 600 E Street, N.W., Room 9300, Washington,
D.C. 20530, within the 60-day period provided by the Act. These
comments, and the Department's responses, will be filed with the Court
and published in the Federal Register. All comments will be given due
consideration by the Department, which remains free to rescind its
agreement to entry of the proposed Order at any time prior to actual
entry by the Court. The proposed Order provides that the Court retains
jurisdiction over this action, and the parties may apply to the Court
for any order necessary or appropriate for modification,
interpretation, or enforcement of the Order.
VII
Other Anticompetitive Conduct Remedied by the Proposed Order
In addition to the quoting convention, the Department's
investigation uncovered four types of other unlawful conduct involving
market makers which are not alleged in the Complaint, but are fully
remedied by the prohibitions in the proposed Order. First, the
investigation uncovered numerous examples of what are often referred to
as ``moves on request.'' A ``move on request'' occurs when trader A
calls trader B and asks him to change the price he is quoting for the
purpose of affecting the market in that stock.\18\ When B complies, his
move will generate a misimpression that there is an additional buying
or selling interest in the stock, from which A will possibly profit.
Trader B benefits because A will return the favor when B wants to
influence the market in a stock.
---------------------------------------------------------------------------
\18\ Not all of the firms named in the Complaint engaged in such
conduct, and no inference of participation in this conduct should be
drawn from the fact that a firm has been charged as a defendant
herein.
---------------------------------------------------------------------------
Second, the investigation uncovered instances of market maker
agreements on dealer spreads. Such agreements were intended to widen or
preserve the width of the inside spread and to reduce the risk of
unwanted executions. The purpose and effect of these types of
agreements is to increase trader profits or reduce participants' risk
of loss from their trading activities.\19\
---------------------------------------------------------------------------
\19\ A limited number of market-making firms were discovered to
have engaged in this conduct. There is no evidence that the majority
of firms engaged in this conduct.
---------------------------------------------------------------------------
Third, the Department also investigated an apparent ``size''
convention that may limit competition among Nasdaq market makers by
deterring them from improving the inside spread in a stock (with a new
bid or ask quote) on Nasdaq, unless they are prepared to trade in
quantities greater than their posted quote, typically 1,000 shares.
With every posted bid and ask quote, a trader must also quote a number
of shares that he or she is willing to trade at that price. Many
traders admitted that this ``good for size'' requirement was honored by
most market makers, and admitted that they would complain to other
market makers who cut spreads, only to then engage in the NASD minimum
size trade.
Fourth, the Department also discovered evidence that some maverick
firms that tried to attract larger orders by displaying greater size
than the NASD minimum received the same sort of enforcement threats
against this behavior that they had received when they narrowed the
inside spread.
Together, these latter two practices adversely affected smaller
market makers. Such firms could not take large positions in a stock and
then ``advertise'' their willingness to trade in that size by posting a
public quote for a larger than minimum sized transaction. Nor could
they compete on price unless they were ``implicitly'' willing to be
``good for size'' at any improved price.
The Department has elected not to pursue a civil case that includes
instances of any of the above-described conduct against the defendants
for the reason that the proposed Order affords the Department and the
public all the relief that could be obtained if the Department charged
them as violations and prevailed at trial. Further, while unlawful and
harmful to consumers, the total impact on the amount of commerce
affected by these alleged violations is a fraction of that affected by
the quoting convention.
VIII
Alternatives to the Proposed Order
As an alternative to the proposed Order, the Department considered
litigation on the merits. The Department rejected that alternative for
two reasons. First, the Department is satisfied that the various
compliance procedures to which defendants have agreed will ensure that
the anticompetitive practices alleged in the Complaint are unlikely to
recur and if they do recur will be punishable by civil or criminal
contempt, as appropriate. Second, a trial would involve substantial
cost both to the United States and to the defendants, and is not
warranted since the proposed Order provides all the relief the
[[Page 40449]]
Government would likely obtain following a successful trial.
IX
Alternative Forms of Relief Considered
In addition to the relief obtained in the Order, the Department
considered, as a condition of settlement, a term in the proposed Order
requiring the defendants to tape record and preserve for up to six
months all of the conversations of their traders engaged in market
making in Nasdaq stocks. At the time consideration was given to such a
requirement, the proposed relief did not contain a term requiring that
each defendant appoint an Antitrust Compliance Officer to record and
listen to trader conversations.
Ultimately, instead of requiring defendants to tape and preserve
all trader conversations, without any oversight or compliance efforts
by defendants, the Department determined that the identical remedial
purpose could be served more efficiently by requiring defendants to
monitor and record a relatively small percentage of such conversations,
without informing traders when their conversations would be recorded,
and also by requiring that such conversations as are recorded actually
be reviewed promptly for violations. Thus, traders at the twenty-four
defendant firms (and those who trade with them in the industry) will
know that some portion of their calls are being taped, but will have no
way of knowing which ones.
Further, under the proposed Order, the Department is given the
right to receive complaints of possible violations and to direct future
taping of possible violators without informing traders that this
particular taping is ongoing. This feature of the proposed Order is of
vital importance, for it allows ongoing monitoring, if believed
necessary, of traders about whom complaints have been made. The
Department believes that these requirements to monitor and record, and
to direct the monitoring and recording, of trader conversations will
provide substantial opportunities for detection of violations of the
proposed Order as well as substantial incentives for the defendant
firms and individual traders to comply with the terms of the proposed
Order, and the antitrust laws.
The Department has calculated that, given the number of defendants
and the number of traders employed by these defendants, the number of
hours of trader conversations actually to be monitored and recorded per
year pursuant to the proposed Order is likely to range between 35,000
and 40,000 hours.\20\ Further, while the absolute number of hours of
trader conversations required to be monitored and recorded at any
individual firm (in relation to the number of traders and the number of
hours the market is operating) may be few, traders who might be
inclined to violate the proposed Order, in addition to being subject to
prosecution for criminal or civil contempt (and under the antitrust
laws), must also be concerned that their conversations are being
monitored and recorded by another of the twenty-four firms subject to
the proposed Order.
---------------------------------------------------------------------------
\20\ The Department has calculated that, if the proposed Order
is entered by the Court, the defendants will be required to engage
approximately thirty (30) full-time employees to monitor compliance
with the requirements of the proposed Order for up to five years.
---------------------------------------------------------------------------
To the best of the Department's knowledge, these provisions are
unprecedented in any court order resolving an antitrust complaint filed
by the United States. There is some precedent in the securities field
for directing taping as a remedial measure. In two SEC cases involving
firms alleged to have engaged in serious and repeated violations of the
securities laws, the firms were required to tape their brokers. S.E.C.
v. Stratton Oakmont Inc., 878 F. Supp. 250 (D.D.C. 1995) (taping
required by independent consultant); In the Matter of A.R. Baron & Co.,
Inc., SEC News Digest 96-101, File No. 3-9010 (May 30, 1996). There is
also precedent for taping in the National Futures Association's
imposition of taping for certain telemarketing activities. National
Futures Association Manual para. 9021 (Interpretive Notice,
``Compliance Rule 2-9; Supervision of Telemarketing Activity'' (Jan.
19, 1993)). Perhaps most importantly, the taping provision finds
precedent in the industry's own practice of taping to resolve disputes.
The Department's investigation depended heavily on the
conversations discovered on tapes produced pursuant to process.
Fourteen firms making markets on Nasdaq, including some of the largest,
regularly taped all of their traders, all of the time. The Department
believes that the tapes made pursuant to the proposed Order will both
serve an important deterrent effect to ensure compliance with the
proposed Order, as well as provide the best means of detecting,
proving, and punishing violations of the proposed Order, should they
occur.
Second, the Department considered requiring, as a condition of
settlement, the appointment of a special master to monitor compliance
with the terms of the proposed Order. Under this possible form of
relief, the defendants would have been required to fund the activities
of the special master. The special master and his staff would have
undertaken the responsibilities that, under the proposed Order, will be
assumed by the Department. These responsibilities include, for example,
approving the taping systems the defendants will be required to
install, receiving the reports required to be submitted by the
defendants, receiving complaints and directing the monitoring of the
conversations of particular traders.
Ultimately, because of difficulties in determining how the costs of
funding the special master would be shared equitably among the
defendants, and because of the concern of many of the defendants that a
special master would become yet a fourth agency (in addition to the
SEC, the NASD and the Antitrust Division) with jurisdiction to monitor
their activities, the Department determined that it would not require
the appointment of a special master and that it could fulfill the
responsibilities to monitor imposed by the proposed Order.
To implement its responsibilities under this portion of the
proposed Order, the Department has assigned an attorney in its New York
Field Office, Geoffrey Swaebe, Jr., to provide initial oversight of the
implementation of Sections IV.C.(2)-(10), V, and VI of the proposed
Order. Mr. Swaebe's address is Antitrust Division, New York Field
Office, 26 Federal Plaza #3630, New York, NY 10278-0140. Mr. Swaebe's
telephone number is (212) 264-0652. The general number for the New York
Field Office is (212) 264-0390.
The Department has also established a new telephone ``hotline'' for
traders, retail brokers, or members of the public to report violations
of the proposed Order or the federal antitrust laws generally, in the
securities or any other industry. Anyone with information concerning
such possible violations may call the toll-free hotline, 1-888-7DOJATR
(1-888-736-5287).
Third, the Department considered but ultimately did not require as
a condition of settlement, that the defendants implement certain
quoting rules recently proposed by the SEC to improve the handling and
execution of customer orders (File No. S7-30-95). The Department
considered having the defendants implement two of these proposed rules
immediately. These two proposed rules, which are still under
consideration by the SEC, include a ``Limit Order'' proposal requiring
specialists and OTC market makers to display customer limit orders
priced better than the specialist's or OTC market maker's quote; and an
[[Page 40450]]
``Electronic Communications Networks'' proposal that would require
exchange specialists and OTC market makers to quote to the public any
better prices that they privately quote through certain electronic
communications networks, such as Instinet.
The Department submitted formal comments to the SEC strongly
supporting the adoption of the Limit Order proposal and supporting the
Electronic Communications Networks proposal on January 26, 1996. In
those comments, we noted that, ``[i]n effect the Limit Order proposal
will allow customer limit order to compete more effectively with market
makers' quotes, injecting additional competition into the Nasdaq
market.'' We identified the ``primary beneficiaries of this added
competition * * * [as] the investing public, in the form of narrower
bid/ask spreads and thus a reduced cost of trading.'' As to the
Electronic Communications Networks proposal, we stated that it ``may
reduce the possibility of collusion and may also serve some of the
Commission's other goals, such as promoting transparency and reducing
market fragmentation.''
The Department did not negotiate to include either the Limit Order
the Electronic Communications Networks proposals are part of the relief
because of the complexity involved in requiring less than all industry
participations to implement the rules, because of fairness concerns,
and because of the pendency of the rules before the SEC.
X
Legal Standard Governing the Court's Public Interest Determination
In accordance with the APPA, this Court must determine whether
entry of the proposed Order ``is in the public interest.'' 15 U.S.C.
16(e). In undertaking this assessment, the D.C. Circuit recently
explained, ``the court's function is not to determine whether the
resulting array of rights and liabilities is the one that will best
serve society, but only to confirm that the resulting settlement is
within the reaches of the public interest.'' United States v. Microsoft
Corp., 56 F.3d 1448, 1460 (D.C. Cir. 1995) (emphasis in original)
(internal quotations omitted).\21\
---------------------------------------------------------------------------
\21\ Accord United States v. Bechtel Corp., 648 F.2d 660, 666
(9th Cir.), cert. denied, 454 U.S. 1083 (1981); United States v.
Gillette Co., 406 F. Supp. 713, 716 (D. Mass. 1975).
---------------------------------------------------------------------------
The Court's role in passing on a proposed order is limited because
a stipulation and order embodies a settlement, see United States v.
Armour & Co., 402 U.S. 673 681 (1971), one reflecting both the
Department's predictive judgment concerning the efficacy of the
proposed relief and the Departments exercise of prosecutorial
discretion.\22\ For a court to engage in ``an unrestricted evaluation
of what relief would be serve the public'' might threaten these
benefits of ``antitrust enforcement by consent decree,'' United States
v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir.), cert. denied, 454 U.S.
1083 (1981), and thereby frustrate Congress's intent to ``retain the
consent judgment as a substantial antitrust enforcement tool,'' S. Rep.
No. 298, 93d Cong., 1st Sess. & (1973); H.R. Rep. No. 1463, 93 Cong.,
2d Sess. 6 (1974), reprinted in 1974 U.S.C.C.A.N. 6535, 6538-39.
---------------------------------------------------------------------------
\22\ As the Ninth Circuit explained, ``[t]he balance of the
competing social and political interests affected by a proposed
antitrust consent decree must be left, in the first instance, to the
discretion of the Attorney General.'' Bechtel, 648 F.2d at 666.
---------------------------------------------------------------------------
The Tunney Act authorizes a court to consider:
(1) the competitive impact of such judgment, including termination
of alleged violations, provisions for enforcement and modification,
duration or relief sought, anticipated effects of alternative remedies
actually considered, and any other considerations bearing upon the
adequacy of such judgment;
(2) the impact of entry of such judgment upon the public generally
and individuals alleging specific injury from the violations set forth
in the complaint including consideration of the public benefit, if any,
to be derived from a determination of the issues at trail.
Id. In applying these criteria, appropriate concern for preservation of
a stipulation and order as an effective enforcement tool requires the
Court to focus its inquiry narrowly. See also United States v. American
Cyanamid Co., 719 F.2d 558, 565 (2d Cir. 1983) (explaining that the
``public interests'' standard should be ``based on more than a broad
and undefined criteria''), cert. denied, 465 U.S. 1101 (1984). A Tunney
Act court properly may consider whether a proposed order is ambiguous
or contains inadequate compliance mechanisms, for these shortcomings
may hinder the decree's successful implementation. See Microsoft, 56
F.3d at 1461-62. The Court may also ask if the proposed order
potentially works ``unexpected harm'' to third parties, id. at 1459, or
impairs important public policies other than competition policy, see
United States v. BNS Inc., 858 F.2d 456, 462-62 (9th Cir. 1988). The
Court, however, may not reject the proposed order merely because it
fails to secure for a third party benefits it seeks. See Microsoft, 56
F.3d at 1461 n.9.
The Court may also ask whether the relief embodied in the proposed
decree is ``so inconsonant with the allegations charged as to fall
outside of the reaches of the public interest.'' Id. at 1461. The
Department's allegations cabin this inquiry; the Court may not look
beyond the Complaint ``to evaluate claims that the government did not
make and to inquire as to why they were not made.'' Id. (emphasis in
original). And, in evaluating the proposed order as a remedy for the
particular violations alleged, the Court must afford the Department
even greater deference than when the Court considers an uncontested
decree modification--a context in which a court may reject the proposal
only if ``it has exceptional confidence that adverse antitrust
consequences will result--perhaps akin to the confidence that would
justify a court in overturning the predictive judgments of an
administrative agency.''' Id. at 1460 (quoting United States v. Western
Elec. Co., 993 F.2d 1572 (D.C. Cir.), cert. denied, 114 S. Ct. 487
(1993)).
Finally, the Court properly may make its public interest
determination on the basis of the Competitive Impact Statement and
Response to Comment filed pursuant to the APPA. The APPA authorizes the
use of additional procedures, see 15 U.S.C. Sec. 16(f), but their
employment is discretionary. If the Department's filings adequately
ventilate the issues before the Court, additional proceedings may deter
settlements, and thus improperly impair the consent judgment as a
frequently used and congressionally approved antitrust enforcement
tool. See H.R. Rep. No. 1463, supra, at 8, reprinted in 1974
U.S.C.C.A.N. 6535, 6538-39.; S. Rep. No. 298, supra, at 6-7.
XI
Determinative Materials/Documents
No materials or documents of the type described in Section 2(b) of
the APPA, 15 U.S.C. 16(b), were considered in formulating the proposed
Order.
Dated: July 17, 1996.
Respectfully submitted,
Hays Gorey, Jr.,
Attorney, U.S. Department of Justice, Antitrust Division, 600 E Street,
N.W., Suite 9500, Washington, D.C. 20530, Tel: 202/307-6200, Fax: 202/
16-8544.
Charts appended to the Competitive Impact Statement have not
been reprinted here, however they may be inspected in Room 3229,
Department of Justice, Washington, D.C. and at the Office of the
Clerk of the
[[Page 40451]]
United States District Court for the Southern District of New York.
Certificate of Service
On July 17, 1996, I caused a copy of the Government's Competitive
Impact Statement to be served by first-class mail upon:
ALEX. BROWN & SONS INCORPORATED
Lewis Noonberg, Piper & Marbury, 1200 19th Street, N.W.,
Washington, D.C. 20036-2430
BEAR, STEARNS & CO. INC.
Robert Heller, Kramer, Levin, Naftalis & Frankel, 919 Third Avenue,
New York, New York 10022
CS FIRST BOSTON CORPORATION
Richard A. Cirillo, Roger & Wells, 200 Park Ave., 53rd Floor, New
York, New York 10166
Stuart Gerson, Epstein Becker & Green, 1227 25th Street, NW., #750,
Washington, DC 20037
DEAN WITTER REYNOLDS INC.
Francis M. Holozubiec, Kirkland & Ellis, Citicorp Center, 153 East
53rd Street, New York, New York 10022-4675
DONALDSON, LUFKIN & JENRETTE, SECURITIES CORPORATION; J.P. MORGAN
SECURITIES, INC.; MORGAN STANLEY & CO., INCORPORATED
Robert F. Wise, Jr., Davis Polk & Wardwell, 450 Lexington Avenue,
New York, New York 10017
FURMAN SELZ LLC
James Calder, Rosenman & Colin LLP, 575 Madison Avenue, New York,
New York 10022
GOLDMAN, SACHS & CO.
John L. Warden, Sullivan & Cromwell, 125 Broad Street, New York,
New York 10004
HAMBRECHT & QUIST LLC
Charles Koob, Simpson Thacher & Bartlett, 425 Lexington Avenue, New
York, New York 10017-3954
HERZOG, HEINE, GEDULD, INCORPORATED
James T. Halverson, Shearman & Sterling, 153 East 53rd Street, New
York, New York 10022-4676
LEHMAN BROTHERS, INC.
Jeffrey Q. Smith, Cadwalader, Wickersham & Taft, 100 Maiden Lane,
New York, New York 10038
MAYER & SCHWEITZER, INC.
Catherine Ludden, Morgan, Lewis & Bockius, 101 Park Avenue, New
York, New York 10178
MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED
Otto G. Obermaier, Weil, Gotshal & Manges, 767 Fifth Avenue, New
York, New York 10153
NASH, WEISS & CO.
Paul B. Uhlenhop, Lawrence, Kamin, Saunders & Uhlenhop, 208 South
La Salle Street, #1750, Chicago, Illinois 60604
OLDE DISCOUNT CORPORATION
Norman J. Barry, Jr., Donahue Brown Matthewson & Smyth, 20 N. Clark
Street, Suite 900, Chicago, Illinois 60602
PAINEWEBBER INCORPORATED
A. Douglas Melamed, Wilmer, Cutler & Pickering, 2445 M Street,
N.W., Washington, D.C. 20037-1420
PIPER JAFFRAY INC.
Neil S. Cartusciello, Shanley & Fisher, One World Trade Center,
89th Floor, New York, New York 10048
PRUDENTIAL SECURITIES INCORPORATED
William P. Frank, Skadden, Arps, Slate, Meagher & Flom, 919 Third
Avenue, New York, New York 10022
SALOMON BROTHERS INC.
Robert H. Mundheim, Salomon Brothers Inc., Seven World Trade
Center, New York, New York 10048
SHERWOOD SECURITIES CORP.
Brian J. McMahon, Crummy, Del Deo, Dolan, Griffinger & Vecchione,
P.C., One Riverfront Plaza, Newark, New Jersey 07102
SMITH BARNEY INC.
Charles A. Gilman, Cahill Gordon & Reindel, 80 Pine Street, New
York, New York 10005
SPEAR, LEEDS & KELLOGG (TROSTER SINGER)
Howard Shiffman, Dickstein, Shapiro & Morin, L.L.P., 2102 L Street,
N.W., Washington, D.C. 10037
UBS SECURITIES LLC
Philip L. Graham, Jr., Sullivan & Cromwell, 125 Broad Street, New
York, New York 10004
John D. Worland, Jr.
[FR Doc. 96-19597 Filed 8-1-96; 8:45 am]
BILLING CODE 4410-01-M