OCTOBER has tended to be an unhappy month for the United States stock market. It has been marked by several major market crashes, such as in 1929 and 1987. This October has been a very unhappy month for one stock market in particular: Nasdaq. And even more difficult days may loom ahead, with Washington regulators now turning their investigative spotlights on the exchange.
Nasdaq is the trading and stock quotation arm of the National Association of Securities Dealers (NASD). In terms of the number of shares traded daily, Nasdaq is the second-largest securities market in the US, behind the New York Stock Exchange. Some 5,000 companies are listed on NASDAQ, sometimes called the over-the-counter market.
Home to many computer firms, Nasdaq has been roiled by turbulence in high-tech stocks throughout much of this month. Worse, Nasdaq now is in the midst of a clash with federal-securities regulators that has come to a head in recent weeks.
"Everyone in the market has always assumed that the possibility exists for some questionable practices involving the spread" between buy and sell orders on Nasdaq trades, says one longtime Wall Street analyst. "The question we're all asking now, is whether there may be more than we've thought there might be. That's what Washington is going to want to determine in the weeks ahead."
On Oct. 23 the US Justice Department filed a motion in federal court here for an order forcing NASD to comply with prior departmental requests for information. Justice claims that NASD has refused to fulfill a request for documents made Jan. 20, 1995. Lawyers for Justice also argue that NASD has sought to hamper the sharing of information held by Justice with the US Securities and Exchange Commission (SEC). The SEC is the main federal agency regulating Nasdaq and other US securities markets.
NASD officials deny the allegations, noting they have already turned over thousands of documents.
The Nasdaq probe is particularly sensitive to both sides of the financial street - Washington regulators as well as securities dealers - because the potential cast of characters is so large and involves an entire trading market. More recent stock scandals, such as the junk-bond and insider-trading cases of the 1980s, involved a few individuals or just one or two brokerage houses.
The NASD, however, comprises almost all major firms in the US that deal in stocks and bonds. The NASD presence spills over into every Main Street in North America where securities are traded. Nasdaq dealers - who are called market makers - fill buy and sell orders for securities.
In recent months, perhaps because of the bad publicity, a number of major brokerage houses have cut back on the number of Nasdaq stocks in which they will be dealers. Some dealers are reportedly backing out because they are making less profit now that the SEC is pushing new rules for investor fairness - such as by reducing spreads on trades.
Regulatory agencies want to know if dealers are deliberately inflating the price differential between buy and sell orders to make a higher commission charge on individual transactions.
Still, despite its growing clout, Nasdaq seems somehow remote, and hidden on the sidelines for many Americans. "It's still far too early to tell how this all will come out [for Nasdaq], but I suspect that the impact won't be all that great on financial markets as a whole," including the New York Stock Exchange or the American Stock Exchange, says Arnold Kaufman, editor of The Outlook, a monthly financial review by Standard & Poor's Corp.
Companies trading on Nasdaq "seem not eager to move to another market," Mr. Kaufman says. "Many of the larger firms," such as Microsoft, "could make a listing elsewhere. So they must feel that Nasdaq is an efficient place to be listed."
"For a long time now, Nasdaq has been the place where younger and emerging companies in their early stages would go to be listed," he adds. "That is unlikely to change, no matter what the outcome" of the current inquiry.
"Nasdaq is a window, a way of watching what the broader [stock] market is doing, since it is made up of many unknown firms," says Gene Jay Seagle, president of Tactics & Technics Consultants, a financial-research firm in Weston, Conn. But in terms of the market as a whole, he says, Nasdaq, for all its growth, remains far less important than the Big Board.