In 1996 the Department of Justice unsettled Wall Street as it dismantled a hidden system of price fixing among stock traders on the NASDAQ. I was there. I worked at Goldman Sachs as a partner at a time when we realized this entire system was holding back consumers’ access to personal wealth and limiting the overall market’s success. The case remade the American public’s relationship with the stock market and allowed companies new levels of freedom to raise capital and innovate.
The DOJ investigation began with an academic article from two finance professors studying an odd convention within the NASDAQ pricing system: stocks were never priced at eighths. Instead of pricing at the more accurate $20.125, for example, a stock was priced at $20.25. As new traders learned the system, “professionalism” served as rationale for the “pricing agreement”. A dealer would be disparaged by peers or supervisors for the “unprofessional” appearance of a stock price at an eighth. Professionalism was all pretext — the practice slyly dramatically increased stock spreads and broker profits.
Read Full Article »
