Structure Problems: Fragmented Nasdaq May Become Vulnerable to Competition
The price rise of theglobe.com's stock on its first day of trading last Nov. 13 was the most spectacular ever for an initial public offering. But the trading session also was one of the messiest ever on the Nasdaq Stock Market.</br></br>Theglobe.com was priced the night before at $9 a share. The next morning, there was a crush of demand. At the opening, some investors bought it for $96 to $97 a share from Mayer & Schweitzer Inc., a unit of Charles Schwab Corp. At the same time, underwriter Bear Stearns Cos. was selling shares for $90, and someone sold it on Instinet Corp.'s screen-based trading system for $87. The apparent result: Some buyers overpaid or some sellers sold too low.</br></br>The controversial opening illustrates the structural problems plaguing Nasdaq. Though it once boasted of being "the stock market for the next hundred years," Nasdaq's inability so far to resolve these issues could make it vulnerable to competition from upstart electronic exchanges and, perhaps soon, from the New York Stock Exchange, too.</br></br>By all accounts, the 1997 reforms that followed an investigation into dealers' alleged fixing of stock prices made Nasdaq a fairer market. But those reforms, coupled with advances in electronic trading, are fragmenting Nasdaq into many submarkets, making it harder to ensure that buyers and sellers are getting the best price. "It's an absolute Frankenstein," Douglas Atkin, chief executive officer of Instinet, said at a conference in March.</br></br>The National Association of Securities Dealers, Nasdaq's parent, thought it had a solution last year to this problem: a "central limit order book" into which investors and dealers from around the country could funnel orders. Big brokerage firms and institutional investors backed it as an essential step. But some firms saw it as proof that NASD management was bent on competing with its own members. Seeing a threat to their livelihoods, those members fought and killed the proposal.