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Before late May 1994, the pricing convention was widely followed by Nasdaq market makers. According to testimony from Nasdaq traders, the convention was based on tradition and represented the "professional" way to trade in the Nasdaq market. Market makers expected other market makers to follow the convention. Several traders testified that senior traders at their respective firms trained them to follow the pricing convention. Still other traders admitted to following a practice of setting quote increments based on the size of the dealer spread, but stopped short of characterizing the practice as a "convention." In their testimony before the SEC, traders had also described the practice as an "ethic," a "custom,'' or a "tradition." |
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Under the pricing convention, stocks with a dealer spread of $ ¾ or more were to be quoted in even eighths (even-eighth stocks). More than 80 percent of all domestic Nasdaq national market stocks, of which there were more than 3200, followed the pricing convention. Nasdaq national market stocks (also referred to as "NMS stocks") were the top tier of Nasdaq stocks in terms of capitalization, number of shareholders, and activity. These companies comprised over 95 percent of the capitalization of all Nasdaq companies. |
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The SEC noted that natural economic forces did not explain the absence of odd-eighth quote combinations, but such an absence would be expected under the pricing convention. |
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Although adherence to the pricing convention acted to prevent market makers from displaying odd-eighth quotes for even-eighth stocks on Nasdaq, it did not keep them from entering odd-eighth bids and offers for those same stocks on alternative market systems such as Instinet and SelectNet. Instinet does not accept retail customers. Because Instinet expresses market makers' willingness to deal at stated prices, |
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