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August 31, 1998

Berkeley Expresses Fear About Narrower Spreads

By Staff reports

Have the order handling rules gone too far? Nasdaq President Alfred Berkeley thinks that's a question worth asking.

Berkeley raised the question in reaction to a study by two academics that shows spreads have narrowed substantially on Nasdaq since the order handling rules were implemented last year.

William Christie and Paul Shultz, whose 1994 study helped trigger the Nasdaq price-fixing investigations, report in a new study to be published early next year that spreads have narrowed by 30 percent since the rules went into effect.

The new study found that spreads narrowed the most among stocks that previously had the widest spreads. Among them, Nature's Sunshine Products has seen its average spread narrow 65 percent since the rules were triggered. The most dramatic narrowing was noted among smaller trades: 34 percent on trades of 1,000 shares or less, compared with 19 percent on trades of 10,000 shares or more.

Berkeley responded cautiously to the study, which independently confirms similar findings made last year by Nasdaq. He said the narrower spreads have reduced trading profits, causing traders to drop market making in less profitable issues.

"Have we swung the pendulum so far to the investor that the business may not be as attractive to traders in a downturn?," Berkeley was quoted in a story by Bloomberg. "That's the gut issue."