If that wasn’t enough bad news to spoil the party, last week’s newspapers brought more. The Justice Department was preparing subpoenas against Nasdaq firms, said one report. Then came full-page ads by the American Stock Exchange, touting its advantages over Nasdaq. The tag line: Amex, the Smarter Place to Be. Competition among the stock markets is nothing new, and most experts doubt the government’s antitrust case will hold up. But for now, Nasdaq is forced to fight off its rivals as the bad press mounts.
At the root of Nasdaq’s woes is the ““spread,’’ or profit margin, its dealers charge on trades. Last spring two finance professors released studies suggesting Nasdaq firms gang up to keep spreads wide at the expense of investors. Investors’ attorneys and the Feds view the reports as evidence of price fixing. Nasdaq denies the price-fixing allegations and says there’s a reason its spreads are wider than rivals’: its dealers take bigger risks trading shares in smaller, more volatile stocks. Most observers agree the Feds will have trouble proving collusion, since there’s no evidence of overt price rigging. Nasdaq argues that its dealers’ prices fall in line naturally, just as McDonald’s will usually charge the same for a hamburger as the Burger King down the block.
That may be true. But it hasn’t stopped Nasdaq rivals from making the most of its black eye. Like country clubs, the exchanges make their money by charging fees from member companies – so more companies equals more money. The prestigious NYSE, which routinely courts Microsoft and Intel, Nasdaq’s crown jewels, insists it isn’t trying to capitalize on Nasdaq’s woes. ““Business as usual,’’ says one insider. Long-struggling Amex says it feels bad for Nasdaq, but admits it sees opportunities. ““We’re still planting the same seeds,’’ says Amex chairman Richard Syron. ““The ground is just a little more fertile now.’’ Marketing vice president Ron Corwin says he’s getting more calls from CEOs considering a jump, and is ““in discussions’’ with several of them.
For now, Nasdaq’s biggest companies are standing pat. ““We look for a fair marketplace,’’ says Microsoft treasurer Greg Maffei. ““Right now that’s Nasdaq.’’ Even another high-profile departure like Seagate wouldn’t be a disaster. Nasdaq trading remains at record levels and investors who favor smaller stocks have few other choices. To help quell the controversy, Nasdaq has named a high-profile panel headed by former senator Warren Rudman to investigate the charges. Barring some surprise finding by the Feds, the exchange that spent millions on TV ads touting its image as ““the stock market for the next 100 years’’ still has its best years in front of it. But that doesn’t mean it’s going to enjoy the swim through more bad ink that lies ahead.
