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Nasdaq helped in JPC probe into stock crash

BS Bureau

Nasdaq, the largest trading stock market in the US, has been assisting the joint parliamentary committee investigating the stock market meltdown in March of 2001 with details on trading systems and technology to prevent fraudulent trades.

JPC had initially sought some details on trading practices and ways to detect non-genuine trades. Thereafter, when the committee sought greater details, Nasdaq had forwarded a comprehensive report and documentation to JPC.

The Indian market regulator, Securities and Exchanges Board of India, had also sought out Nasdaq for a trading framework and regulatory structure that would provide adequate safeguards to small investors and traders and ensure genuine trades.

The system was required to have ease of operations, scalability in handling trading volumes and transparency. "A Sebi team has already visited Nasdaq and examined the system," said sources.

Nasdaq's structure has a three-tier monitoring system that checks volumes, prices and traders' profile through three filters to ensure that trades were not speculative and backed by resources. In addition, all phones calls made by marketmakers and brokers are taped and be retrieved in case any investigation or suspicion of irregularities. "These measures act as a strong deterrent on traders," said sources.

"The Nasdaq system was constantly upgraded with investments in the range of $300-400 million on technology and modernisation every year. The latest innovation was introduction of electronic auction trading combining the latest technology with NYSE's auction model," sources added.

"The only way to prevent recurrence of market frauds was to arm the regulator with teeth and provide penalties that do not allow room for manoeuvre, and this was beyond a single market," sources admitted. In the case of Nasdaq, the penalties range from fines running into several million dollars and in extreme cases, lifetime bans on trading on any exchange.

Nasdaq's focus on technology and foolproofing systems was in part caused by the stern position adopted by Securities Exchange Commission of the US three years ago, when it hauled up Nasdaq for have inadequate investment in systems despite rapid rise in trades and volumes. Since then, Nasdaq has always stayed ahead of regulatory requirements and if anything, overspent on technology.

The Nasdaq system is so trusted by investors that even on the New York Stock Exchange, the largest traded instrument today is 'QQQ', which is the Nasdaq 100 composite instrument comprising the top 100 non-financial companies. "The IPO market on Nasdaq has also started reviving, with three issues this week, including Bank of Bermuda", said sources.

As Nasdaq operates like the foreign exchange market through the open bidding system, it has to ensure complete transparency in trading and liquidity position of the buyer before any trade can take place. Such a system offers foolproof protection against defaulters. Nasdaq monitors 530 marketmakers.

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