In the Matter of Certain Market Making Activities on Nasdaq

A group of broker-dealers (market makers) (defendants) were registered with the Securities and Exchange Commission (SEC) (plaintiff) under § 15A of the Securities Exchange Act of 1934 (Exchange Act) and acted as market makers in the Nasdaq stock market. In this role, the market makers agreed to purchase and sell securities at prices and quantities listed on Nasdaq’s quotation system, thereby creating liquidity in the market. The market makers were required to provide Nasdaq’s quotation system with the price at which they would buy a particular security, known as the bid price, as well as the price at which they would sell a particular security, known as the ask price. The difference between the highest bid price, known as the inside bid, and the lowest ask price, known as the inside ask, constituted what was known as the inside spread. An SEC investigative report uncovered substantial collusion among the market makers. In some instances, one market maker would ask another market maker to move the quoted bid and ask prices to artificially increase or decrease the price at which the requesting market maker would exchange securities with his customers, to the market maker’s benefit. Additionally, some market makers intentionally delayed reporting transactions to Nasdaq. By delaying the reporting of their trades, the market makers were able to avoid situations in which the prices of securities moved against them. This adversely impacted the effective functioning of the market and advanced the market makers’ pecuniary interests to the detriment of their customers. The SEC brought an administrative enforcement action against the market makers, and the market makers each submitted an offer of settlement.