You continually question whether any reasonable spread determination can be made. Well, this was argued very precisely in the complaint:
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I. SUMMARY OF ALLEGATIONS
1. Beginning as early as 1989, defendants and their co-conspirators combined and conspired to raise, fix and maintain, and did raise, fix and maintain at supra-competitive levels the "spread" paid by plaintiffs and Class members to trade in certain Nasdaq securities ("Class Securities", as further defined below).
2. (a) Nasdaq is a computerized quotations system operated by the National Association of Securities Dealers ("NASD"). Nasdaq is one of the world's largest securities markets.
(b) Defendants are leading Nasdaq market-makers.
(c) The "spread" is the difference between the "bid" (the price at which the market-maker is willing to buy a security) and the "ask" (the price at which the market-maker is willing to sell such security).
(d) The spread is a major source of market-maker profits; the wider the spreads, the greater the market-makers' individual and collective profit.
3. Nasdaq operates on a bid and asked system. In contrast to the stock exchanges, which employ an auction system (in which customer orders to buy or sell are matched against one another), Nasdaq employs a multiple market-maker system in which customers sell to and buy from market-makers. Each market-maker is purportedly independent, and purportedly competes against other market-makers in quoting bids and asks for customer trades.
4. Defendants and all other Nasdaq market-makers continuously communicate to one another each market-maker's bid and offer quotations through Nasdaq's "electronic billboard" computer system and computer screens in each market-maker's respective office. By virtue of such communication, defendants were and are continuously aware of the price changes and spreads of each market-maker for Class Securities, including but not limited to whether any market-maker is quoting a bid or ask in an odd-eighth (i.e., 1/8, 3/8, 5/8, and 7/8 of a dollar).
5. The large number of market-makers competing for business on actively traded Nasdaq Class Securities, and Nasdaq's high degree of automation, should result in narrower spreads than those on the exchanges. However, it has not. To the contrary, spreads on Nasdaq Class Securities are considerably greater than spreads on the stock exchanges for comparable securities.
6. In the absence of defendants' combination and conspiracy, spreads would have been smaller on Class Securities, to the benefit of plaintiffs and Class members.
7. Defendants and their co-conspirators raised, fixed and maintained the spreads for Class Securities at supra-competitive levels by, inter alia, refusing to quote their bids and asks for Class Securities in so-called odd-eighths; and instead widening spreads to even-eighths. This results in a minimum spread of at least $0.25 per share for Class Securities, whereas the typical spread for actively traded Class Securities otherwise would be half that amount or less.
8. The term "breaking the spread" is a term of art among defendants and their co-conspirators, and refers to those instances in which a market-maker quotes an odd-eighth or another better bid or ask which reduces defendants' inflated spread. Defendants and their co-conspirators by agreement and through enforcement activities, effectively prevented and deterred each other from "breaking the spread" on Class Securities.
9. Enforcement activities, on information and belief, have included telephone calls between purportedly competing market-makers in which the market-maker who has broken the conspiratorial spread is accused of "Chinese trading" (a pejorative term of art among defendants and their co-conspirators); or told for example, "Don't break the spread! You're ruining it for everybody else!"; or told for example, "We don't play ball that way. Go back where you belong."
10. In furtherance of their combination and conspiracy, defendants and their co-conspirators raised, fixed and maintained Nasdaq spreads through the following means, among others: following the spread set by the dominant dealer (known as "the name") in a particular security; agreeing not to compete by offering a lower spread; threatening and pressuring any trader who attempts to compete by "breaking the spread"; trading around the trader who breaks a spread; or refusing to conduct business in other contexts with firms that break the spread.
11. As a result of the combination and conspiracy, Nasdaq spreads have been on average twice as large as the spreads on the New York and American stock exchanges for comparable securities. Moreover, from May 1, 1989 to May, 1993, average spreads on the Nasdaq National Market increased by over 37%, during which time average spreads on the New York and American stock exchanges have held steady. A study concluded that spreads were reduced by more than 50% on average when securities moved from trading on Nasdaq to trading on an exchange.
12. As a result of defendants' combination and conspiracy, defendants and their co-conspirators quoted bids and asks for Class Securities in a manner that reflects a statistically unexplainable, almost complete absence of bids and asks in odd-eighths. In freely-traded securities, odd-eighth bid or ask quotes occur frequently and would be expected to occur almost as often as even-eighth bids or asks.
13. In an effort to deflect criticism, but instead reflecting the prior artificial inflation of spreads, defendants suddenly started using odd-eighth quotes and reduced the spreads for selected high-profile Class Securities shortly after (a) widespread news reports in late May 1994 about a study by Professor William G. Christie and Professor Paul H. Schultz indicating collusion in fixing of Nasdaq spreads; and again (b) in October 1994, after the United States Department of Justice publicly announced an investigation into whether defendants had conspired to fix Nasdaq spreads. Defendants reduced the spreads on certain high-profile Nasdaq securities by approximately 50% following publicity about defendants' price fixing, and a meeting in late May, 1994 attended by various defendants at the headquarters of defendant Bear, Stearns & Co.
14. On information and belief, each defendant's costs and risks of doing business as a market-maker did not diminish at the time of the news reports about price fixing in late May, 1994; nor at the time of the news reports about the Department of Justice investigation in October, 1994. Nor did any other significant changes simultaneously occur in the structure of the market that would have permitted a dramatic reduction in the levels of any spreads, if those spreads previously had been competitively priced. On the contrary, the sole reason for defendants' ability to cut spreads by approximately 50% for selected high-profile Class Securities, following widespread publicity about defendants' price fixing, is the fact that the spreads for those Class Securities previously had been raised, fixed and maintained at artificially inflated and supra-competitive levels. These 50% reductions, following news reports about price fixing or announcement of the Department of Justice investigation, are indicative of the significant extent to which spreads on these securities had been inflated previously by collusive price fixing. |
