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Newton v. Merrill, Lynch, Pierce, Fenner & Smith

United States Court of Appeals for the Third Circuit

135 F.3d 266 (1998)

Facts

Kenneth E. Newton and other investors (the investors) (plaintiffs) traded securities on the NASDAQ market. Merrill, Lynch, Pierce, Fenner & Smith (Merrill Lynch) (defendants) were NASDAQ market makers. NASDAQ was an over-the-counter (OTC) market in which prices were set by market makers via an electronic quotation system operated by the National Association of Securities Dealers (NASD). Each market maker would input their bid and ask prices, and the system would compile the prices and compute the highest bid price and lowest ask price, which were referred to as the National Best Bid and Offer (NBBO). However, private online services often had prices that were more favorable to investors than the NBBO. Merrill Lynch executed orders on behalf of the investors using the NBBO, but Merrill Lynch executed trades on its own behalf at the more favorable prices available through the private online services. The investors filed suit, alleging that Merrill Lynch had violated § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by failing to execute the investors’ trades at the more favorable prices, which were reasonably available. The lower court granted summary judgment in favor of Merrill Lynch. The investors appealed.

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Holding and Reasoning (Stapleton, J.)

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