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May 31, 2001

Nasdaq Bid-Rigging Problems Persist? Capitol Hill Lawmaker 'Troubled' by Nasdaq's Progress

By Gregory Bresiger

Nasdaq, which expects to become a public company in the next year, has yet to correct all the bid rigging problems of five years ago, a key federal lawmaker warns.

Nasdaq, along with its parent, the National Association of Securities Dealers, is not moving fast enough to clean up the price fixing mess, he says.

"Much still remains to be done," complained U.S. Representative John Dingell (D-MI). He wrote that in a recent letter to the Securities and Exchange Commission, which issued a 1996 order requiring changes after widespread allegations of collusion among market makers.

"That continuing important deficiencies remain five years later is quite troubling," Dingell wrote to Laura Unger, the acting chairwoman of the SEC.

OATS System

Dingell wants the SEC to review Nasdaq's short sale and holding period rules. He also asks for an assessment of data integrity from Nasdaq's Order Audit Trail System (OATS).

The SEC staff found some data in the audit system are still inadequate and that "there are gaps in the integrated audit trial."

The SEC order of five years ago called Nasdaq officials to "design and implement over the next 24 months (or as specified by the further order of the Commission) an audit trial sufficient to enable the NASD to reconstruct markets promptly," Dingell wrote.

According to Dingell, "this deficiency is perhaps the most significant and poses a potential threat to the integrity of the market and the protection of investors."

Finally, Dingell noted that a recent report indicates that Nasdaq's initial public offering of stock can only occur with the SEC approving Nasdaq's application to become a stock exchange with self-regulating powers.

"I have no quarrel with Nasdaq's plans," Dingell added. "However, is it the Commission's intention to approve this application without successful resolution of the outstanding deficiencies in the 1996 order undertakings? If so, how is this consistent with the public interest and the protection of investors?"

Unger, in replying to Dingell, said she believes the NASD has taken remedial actions to benefit investors since 1996.

However, she added that, "Although I have been satisfied with the NASD's progress to date, my staff continues to monitor its efforts."

A key federal lawmaker, Dingell's enmity or suspicion could be potential trouble for Nasdaq.

Dingell is the ranking minority member of the House Energy Commerce Committee. But the Congress is so narrowly held by Republicans that Democrats could easily take control of the House or the Senate in the next election.

With a change in Congressional leadership, Dingell presumably would become the chairman of House Commerce or the House Financial Services Committee.

The former now has jurisdiction over electronic communication networks, which account for about 30 percent of Nasdaq daily trading volume.

Dingell says the implications of Nasdaq going public are huge and could affect Congressional committee jurisdictions. A Nasdaq spokesman didn't immediately respond to requests for comment.