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Levitt on the Nasdaq Bid-Rigging Scandal:

Traders Magazine, October 2002

Gregory Bresiger

What we found was shameful and shocking. We were able to document that some Nasdaq market makers were secretly agreeing to keep spreads wide. They were fixing prices in violation of antitrust laws - to the detriment of investors. Market makers who tried to narrow the spread by quoting prices in between the acceptable even-eighths gap were verbally harassed or ostracized. Some market makers conspired with other dealers against their own customers. Or, if a customer's limit order - an order to buy or sell a stock at a specific price - would have narrowed the spread, market makers routinely withheld the order by not displaying it to the rest of the market. And market makers were failing to honor the prices they quoted - a practice that violates one of the basic rules of market making - as well as reporting completed trades after the fact, so as to mislead the rest of the market. When you add it all up, it was clear the Nasdaq pricing process had become corrupted. After two years of investigation, Justice [The U.S. Justice Department] in 1996 settled a civil antitrust case against 24 dealer firms. But that was just the opening salvo in what would turn into a three-year legal nightmare for Nasdaq, its parent group, two dozen firms, and about 50 individual dealers in those firms. First, plaintiffs' lawyers filed on behalf of investors in class action-lawsuits against the firms, including such powerhouses as Merrill Lynch, Salomon Smith Barney, Paine Webber, and J.P. Morgan. Those cases were settled in 1998 for $1 billion. At the SEC, we pursued a three-pronged remedy that included a censure of the NASD, civil cases against the firms and individuals involved, and new rules to make sure the abuses couldn't happen again.'

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