The opinion of the court was delivered by: SWEET
The Defendants in this multidistrict litigation have moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure alleging that the complaint fails to allege with sufficient specificity a claim upon which relief can be granted. For the reasons discussed below, the motion is granted with leave for plaintiffs to amend the complaint.
The 33 named Defendants in this action are all market-makers on the Nasdaq exchange.
The complaint describes them as "leading Nasdaq market-makers." Nasdaq is a computerized quotations system operated by the National Association of Securities Dealers ("NASD"). In 1993, Nasdaq trading volume totaled more than 66.5 billion shares, with an average of 263 million shares traded each trading day. For that year, more than $ 1.35 trillion dollars in trades were executed through Nasdaq. 1994 Nasdaq Fact Book and Company Directory ("Fact Book "). In 1993, there were 492 Nasdaq market-makers, making markets in 5,393 stocks, of which approximately 3,250 are listed and traded on the Nasdaq National Market, and the remainder on the Nasdaq Small Cap Market. On average there are 11 market-makers for a Nasdaq stock; there are some stocks with more than 40.
The first class action complaint in what has become a multidistrict case was filed on May 27, 1994 following reports in the media on May 26 and 27, 1994 of a study by Professors William G. Christie and Paul H. Schultz
discussing the spreads on the Nasdaq exchange. Eventually more than two dozen complaints were filed around the country, alleging variations on the theme that the Nasdaq Market-makers had engaged in a conspiracy to avoid odd-eighth quotes in violation of the Sherman Act, 15 U.S.C. § 1. Approximately two dozen of the thirty-three moving defendants were defendants in at least one of these initial complaints.
Certain parties named in the initial complaints petitioned the Judicial Panel on Multidistrict Litigation (the "Panel") for consolidation of all related actions before this Court. On October 14, 1994, the Panel ordered that the already filed, as well as later-filed actions, be assigned to this Court.
A pretrial order was signed on November 16, 1994 which named plaintiffs' Co-Lead Counsel and directed defendants to chose liaison counsel, which they did and the court confirmed their choice on December 21, 1994.
A "Consolidated Amended Complaint" (the "Complaint") was filed on December 16, 1994. It is that Complaint which is the subject of this motion to dismiss.
This motion to dismiss was filed on February 2, 1995 and argument was scheduled for April 26, 1995. Argument was heard on April 25 and the motion was considered fully submitted at that time.
As of April 25, 1995, more than 30 actions had been consolidated in this Court as MDL 1023--In re NASDAQ Market-Makers Litigation.
In October 1994, the Antitrust Division of the Department of Justice ("DOJ") announced that it was commencing a broad review of a number of aspects of Nasdaq's market structure.
On November 14, 1994, the Securities and Exchange Commission (the "SEC") announced that it was undertaking a review of the operation of Nasdaq, including the "spreads" issue alleged in the Complaint, and broader issues concerning the structure of the market itself.
In addition, on November 20, 1994, the NASD announced the formation of a seven-member panel to undertake a "plenary review of the effectiveness of the operation and surveillance" of the NASD.
Beginning as early as 1989, defendants and their co-conspirators combined and conspired to raise, fix and maintain, and did raise, fix and maintain at supra-competitive levels the "spread"
paid by plaintiffs and Class members to trade in certain Nasdaq securities ("Class Securities"
...). Complaint P 101.
In furtherance of their combination and conspiracy, defendants and their co-conspirators raised, fixed and maintained Nasdaq spreads through the following means, among others: following the spread set by the dominant dealer (known as "the name") in a particular security; agreeing not to compete by offering a lower spread; threatening and pressuring any trader who attempts to compete by "breaking the spread"; trading around the trader who breaks a spread; or refusing to conduct business in other contexts with firms that break the spread. Complaint, P 108.
The Complaint further alleges that the spread is a major source of market-maker profits and that:
the large number of market makers competing for business on actively traded Nasdaq Class securities, and Nasdaq's high degree of automation, should result in a narrower spread than those on the exchanges. However, it has not. To the contrary, spreads on Nasdaq Class securities have been, on average, approximately twice as large as spreads for comparable securities traded on the stock exchanges. Complaint P 102.
(a) In a competitive market for most actively traded stocks (except for the very lowest and very highest priced stocks), the spread in the stock will typically be one eighth. (As an example, the bid will be 20 1/8 and the ask will be 20 1/4.)
(b) On the stock exchanges, including the New York and the American stock exchanges, spreads of one eighth are typical for most actively traded stocks.
(c) Absent defendants' combination and conspiracy, the frequency of one-eighth spreads on Class Securities would have been at least as great as the frequency of one-eighth spreads for comparable securities sold on the stock exchanges. Complaint P 104.
Defendants and their co-conspirators raised, fixed and maintained the spreads for Class Securities on Nasdaq to supra-competitive levels through, among others, the mechanism of collectively refusing to quote their bids and asks for Class Securities in so-called odd-eighths...; instead, widening spreads to even-eighths.
Accordingly, $ .25 per share became the minimum spread for Class Securities, whereas the typical spread for actively traded Class Securities otherwise would have been half that amount. Complaint P 105.
...enforcement for the combination and conspiracy has included telephone calls from purportedly competing market-makers in which the market-maker who has broken the conspiratorial spread is accused of "Chinese trading" (a pejorative term of art among defendants and their co-conspirators), or telephone calls communicating other conspiratorial reminders, warnings or verbal abuse. Complaint P 106.
Examples from the public record of such conspiratorial reminders, warnings and verbal abuse include:
(a) Novice traders learn quickly that if they want to keep their jobs on an o-t-c desk, they will do well not to beat the price of fellow market-makers. "Breaking the spread," as it is called, just isn't done. One veteran, who tried on one occasion to narrow an o-t-c spread, told FORBES: "I used to get phone calls from people; they'd scream, 'Don't break the spread! You're ruining it for everybody else!'"
Another trader who tired something similar said: "My phone lights up like a Christmas tree. 'Whaddya doing in the stock? You're closing the spread. We don't play ...