Allegations Of Collusion Among Financial Institutions—Where We’ve Been, Where We Are, What We’ve Learned


Over the last 15 years, financial institutions have paid billions of dollars to settle claims that they colluded with each other. Below, we discuss four separate matters, beginning with the Nasdaq spread cases in the late 1990s and ending with the more recent Libor and Forex investigations and litigation. We express no view on the merits. Instead, we describe the cases, identify lessons that emerge, and suggest steps that firms, and in some cases regulators, may wish to consider to reduce risks going forward.


1. The “First Billion-Dollar Economics Article” -

In December 1994, William Christie and Paul Schultz published what the Economist later called the “first billion-dollar economics article.” The article, titled “Why do Nasdaq Market Makers Avoid Odd-Eighth Quotes?” was based on Christie’s and Schultz’s analysis of quotations for a sample of 100 Nasdaq stocks. At that time, Nasdaq was the second largest securities market in the United States with well over $2 trillion of trades a year.

Christie and Schultz found that market makers for 71 of 100 stocks reviewed almost never quoted bids or offers in odd-eighth increments. They concluded that this might have been due to implicit collusion by market makers to keep spreads artificially wide—i.e., if stocks were quoted only in even-eighth increments, the spread between the bid and the offer could not fall below 25 cents. After media reports about the article appeared, traders started using odd-eight quotes more frequently. Along with a third co-author, Christie and Schultz published another article that same year, which they called “Why Did Nasdaq Market Makers Stop Avoiding Odd-Eighth Quotes?” Within five years, the Department of Justice, the Securities and Exchange Commission, and class action plaintiffs alleged that all of the largest market makers had colluded to avoid odd-eighth quotes, and the market makers settled.

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