Pros Say Many Nasdaq Trades Reported Late : Securities: The practice, a blatant violation of rules, can mean illegal market manipulation. NASD says it will not tolerate purposely inaccurate reporting.

By SCOT J. PALTROW

Oct. 24, 1994 12 AM PT

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TIMES STAFF WRITER

NEW YORK — Within minutes after the end of the trading day on Nasdaq, a peculiar thing happens.

Large trades--sometimes the biggest of the day for certain stocks--are suddenly reported on Nasdaq’s “tape,” the public running list of trades. They have an “s” next to them, indicating that they are being reported late.

Nasdaq rules strictly require that trades be reported within 90 seconds after they’ve been executed. The only permitted excuses for not doing so are if a trading ticket was accidentally lost or if a dealer had a computer glitch.

But several prominent traders for pension and mutual funds--speaking out on the topic for the first time--contend that Nasdaq market makers deliberately hold trades off the tape in what often amounts to illegal manipulation of the market.

Deliberate late or false reporting, known in Wall Street lingo as “painting the tape,” is one of the most blatant possible violations of Nasdaq rules. But these pension and mutual fund traders say Nasdaq is doing little to stop the practice. And some senior officials of the National Assn. of Securities Dealers, which owns and operates Nasdaq, concur.

Officially, the NASD says it will not tolerate purposely inaccurate reporting. “I have no interest in having games played on tape reporting on Nasdaq,” says Richard G. Ketchum, NASD chief operating officer. Nevertheless, the NASD says it has taken no disciplinary action for late reporting this year.

Harold S. Bradley, director of trading for the $27-billion Twentieth Century Group of mutual funds, said deliberate delays in reporting trades, especially large trades, occur “very frequently.”

At least 10 times in the past year, Bradley said, he has experienced market makers delaying the reporting of his trades on the public tape by as much as several hours.

“Any afternoon,” he added, “I can run through any 10 stocks (on Nasdaq) and they will have (late-reported) sales go up after the bell.”

Holly A. Stark, senior vice president in charge of trading at New York-based Dalton, Greiner, Hartman, Maher & Co., a firm that manages more than $3 billion for pension funds and foundations, also says the practice is pervasive. Stark said she was disturbed to see market makers delaying reports of trades she had ordered “close to a dozen times” this year.

At the heart of the problem is the fact that large trades, once reported, tend to make a stock’s price move. Report of a big purchase--or even a relatively small one in a thinly traded stock--can make the price jump, because other market makers and public investors may think there is a sudden demand for the shares. A big sale can drive the price down.

Dealers may have several motives for reporting a trade late.

If a dealer has just bought a large amount of stock, for example, he may not want competing dealers to know about the volume of shares he has added to his inventory; if they knew, he might not get as good a price for the stock when he goes to resell it.

Alternatively, a market maker seeking to buy 50,000 shares of a stock for a customer might make several separate purchases along the way to complete the order. Instead of reporting each purchase as it occurs, as Nasdaq rules require, the dealer might lump them all together and report them at the end of the day as a single 50,000-share trade.

By keeping the individual purchases secret, the market maker will have avoided driving up the price of the stock before completing the order. (Indeed, some traders say, institutional investors sometimes ask market makers to improperly delay reporting trades made on their behalf.)

For individual investors, the direct effect is that they end up paying too much to buy or receiving too little when they sell, says Junius W. Peake, a University of Northern Colorado finance professor who was once vice chairman of the NASD’s board of governors. An investor buying just after a big unreported sale, for example, may see the price of the shares drop when the trade is reported minutes or hours later.

Inaccurate reporting of this sort is extremely rare on the New York Stock Exchange, veteran traders say--in part because computers on the NYSE floor report trades automatically.

Some senior NASD officials acknowledge that deliberately late reporting of trades happens frequently on Nasdaq.

William R. Rothe, a member of the NASD board of governors, said he does not dispute that such improper activity “does occur”--although he says it is strictly forbidden at his firm, Baltimore-based Alex. Brown & Sons, where he is head of over-the-counter trading.

Rothe said there are often legitimate reasons for reporting a series of trades late early in the trading day, when a mass of orders that piled up just before the opening may make timely reporting impossible. But he said he knows of no legitimate reason why there would be clusters of big trades reported late just after the close at 4 p.m. Eastern time.

Rothe said the NASD has long been aware of complaints about late reporting. “Clearly the large trades that are reported after the close of the market as ‘sold’ (market jargon for trades reported late) is something that both the institutions and the other market participants are not happy with,” he said.

The NASD says it routinely looks for evidence of late reporting when it conducts its regular examinations of market makers. However, when asked why many big trades are reported just after the close, Ketchum declined through a spokesman to respond.

The pervasiveness of late reporting on Nasdaq is often most evident in the trading of smaller stocks. A random look at relatively thinly traded stocks on two recent trading days turned up these examples, among others:

* On Oct. 14, seven of the 17 trades during market hours in Medisense Inc., a Waltham, Mass., maker of home testing kits for diabetics, were reported late.

* Also that day, 18 trades, representing 19% of the trading volume in shares of New York-based Winstar Communications Inc.--some 152,700 shares--were reported late.

* On Oct. 10, just two minutes after the close, a 15,000-share trade was reported late in the stock of Molex Inc.--much larger than any of the 28 trades that had been reported during the regular trading day.

* The same day, a 30,000-share trade in the stock of Intergraph Corp. was reported late, just after the close. That one trade represented 13% of the day’s trading volume in Intergraph.

Spokesman James D. Spellman said the NASD would not respond to requests for information or comment about the incidents of late reporting. But he said the NASD plans to look into the incidents.

John Chiricotti, Medisense chief financial officer, said he knew of no reason why so many trades were reported late in his firm’s stock on Oct. 14. Nasdaq “doesn’t tell you anything about what’s going on in the trading,” he said.

Clusters of big late trades, especially ones reported just after the close, are quite common for big Nasdaq stocks as well.

Printouts of “time and sales” reports for one afternoon--Oct. 14--show nine trades reported late in the six minutes after the market’s close in shares of Microsoft Corp., the biggest company listed on Nasdaq. These included two very big trades, of 50,000 shares each; the others were from 1,000 to 7,000 shares.

Lotus Development had 13 trades reported late just after the close that day, including one for 25,000 shares; MCI Communications had six reported just after the close.

Apple Computer that day had only four late-reported trades, totaling 9,100 shares. But on Oct. 10, a very heavy trading day for the stock, Apple had 12 trades reported late just after the close, including one for 25,000 shares and another for 20,000.

Microsoft Treasurer Gregory B. Maffei said he was not aware of any irregularities in trade reporting in the company’s stock but said the firm would look into reports of delays in posting trades.

“Obviously, if there are improprieties, it’s a matter that concerns us,” Maffei said.

But Rebecca Seel, a spokeswoman for Lotus, said, “I think the point is that Nasdaq has its own surveillance systems, and the onus is really on them to track this kind of stuff.” Apple spokeswoman Betty Taylor declined comment.

Although the Securities and Exchange Commission says timely trade reporting is one of the most important elements of a fair, competitive securities market, it has done little to monitor reporting practices on Nasdaq.

Two years ago, the New York Stock Exchange, Nasdaq’s chief rival, formally urged the SEC to look into Nasdaq’s trade reporting practices. But Mark D. Fitterman, the SEC’s associate director of market regulation, confirmed that it never did so.

“We’ve never seen a systemic problem with respect to the timeliness or accurateness of trade reporting,” Fitterman said.

The NASD has the power to impose large fines and suspend market makers who break the trade reporting rules. Indeed, if it can be proved that the actions were part of a deliberate plan to affect a stock’s price, market manipulation can be prosecuted criminally.

However, James M. Cangiano, the NASD senior vice president for market surveillance, said the organization has taken no disciplinary action this year for late reporting.

Cangiano also said he could not provide figures on the percentage of Nasdaq volume reported late so far this year.

After receiving requests for the data from The Times two weeks ago, he said he had his staff instead calculate late reports for a period in mid-August. During that period, Cangiano said, less than 5% of the volume was reported late.

Twentieth Century’s Bradley said he has never gotten responses from the NASD when he has called to complain about late reporting of his own trades. “It’s very frustrating,” he said. “They’ve never gotten back to me.”

Cangiano responds that although the NASD may have owed Bradley “a courtesy call,” it is not obliged to disclose the results of its confidential investigations.

In any event, he said, such cases are difficult to investigate.

If the NASD calls a market maker who reported a large trade late “and he says, ‘Oh, well, I turned on my fan and my order ticket fell on the floor, and I only found it at 4:05,’ how do you prove that this was done willfully?” Cangiano said.

Series Reprints: A compilation of this six-part series on Nasdaq will be available from Times on Demand upon completion of the series’ publication next week. Price is $7.95, plus $2.50 for mail delivery. To order, call 808-8463 from the 213, 714, 818 or 909 area codes, then press *8630. Follow the voice instructions and select option 3. Order Item No. 8525. Allow two weeks for delivery.

A Pattern of Late Reporting

A computer record of Nasdaq trading in shares of Microsoft Inc. on Oct. 14 shows that market makers reported nine trades out of sequence--including two big ones for 50,000 shares each--after the close of trading at 4 p.m. EDT (16:00 on the computer’s big trades being reported just after the close suggests an attempt by market makers to manipulate the market.

Source: Bridge Information Systems