July 19, 1996

Stephen Shepard
Business Week

Dear Mr. Shepard:

In the recent article "NASDAQ: The SEC Can Pick Up Where Justice Left Off" (July, 29, 1996) the author says, "For example, small investors today get better deals on some NASDAQ stocks. Each NASDAQ stock has an average of 11 Securities firms operating as market makers. They post "bid" and "ask" prices for stocks and make money from the spread between the two prices. And since the probe was announced, spreads have narrowed on many of NASDAQ's most active issues, according to Justice."

The author states that, "Small investors today get better deals on some NASDAQ stocks." They always have gotten better deals on some NASDAQ stocks. The statement means nothing. "And since the probe was announced, spreads have narrowed on many of NASDAQ's most active issues." Now it's many, not some, but it's NASDAQ's most active. Again, NASDAQ's most active have always had narrow spreads. As a NASDAQ investors since 1985 I have never had a problem with spreads when I bought Microsoft or Intel, or ect. The statement means nothing.

It seems to me as a reader of Business Week that most of your journalists get their information from the so called experts (SEC, NASDAQ, NYSE, brokers, analysts, and the companies themselves) as you should. However, I would enjoy Business Week much more if the journalists would even out their sources. I am not saying that you don't occasionally have articles that quote the average investor, you do, but it would have been great if the author of the above article would have verified their statement about the narrowing of spreads on NASDAQ with some small experienced investors and not just the Justice Dept. I think the author would have found out that for the most part, spreads on NASDAQ have not changed much.

Sincerely,

ADDENDUM (April 9, 2000)

In the past two years, spreads have decreased, but it's only because the volume levels have increased so much. If a market makers trades 1 million shares at a half point or 5 million shares at one eighth point, they will make more under the latter. Market makers don't care how they make their money; off the spread or off the volume, they're now making it off the volume.

Here's some quotes from a note I got from Schwab yesterday:

"Charles Schwab is committed to providing the best execution for your trades. In determining where to route equities and listed options orders for execution, Schwab seeks to obtain for its customers the most favorable terms available among the markets and firms trading a security."

"Most orders for exchange-listed stocks in which we make markets are routed to our affiliated specialists on the regional stock exchanges. Most orders for OTC stocks are routed to our affiliated market maker, Schwab Capital Markets L.P. (Members SIPC/NASD) [I wonder what 'most' specifically means: 20%, half, or 99.9%]."

"'Payment for order flow' is a common and widespread industry practice [so that makes it okay] in which brokerage firms receive monetary and non-monetary [I wonder what non-monetary is referring to?] compensation when equities and options are routed to a particular specialist, exchange, market, or dealer [not necessarily the one who gets you the best price]. Schwab receives an inter-company transfer of funds in connection with orders routed to our affiliated market maker. Schwab also receives monetary compensation from, and participates in, the profits of certain affiliated and independent exchange specialists who execute our equities and options orders. In addition, Schwab receives compensation as part of reciprocal order routing arrangements with various exchange specialists and dealer firms, and receives rebates and credits against fees paid by Schwab to various exchanges."

You can decide for yourself after you read your broker's information about order routing policies. Do you still think you're getting the best price when you trade a stock. But who cares, as long as the market's going up?