Charles Schwab Goes To Bat For Small Investors Brokerage Lobbies Nasdaq For Changes

After months of defending itself against attacks by government regulators, scholarly researchers and irate investors, the Nasdaq Stock Market is facing challenges from one of its richest and most powerful members - Charles Schwab Corp., the discount broker.

Schwab, which handles one out of every dozen Nasdaq trades, publicly broke with the market’s other firms last week by announcing a new trading system that, once in place, could end up forcing all stockbrokers to give up the lucrative but widely criticized payments they now collect from Nasdaq traders.

But Schwab’s dissatisfaction with the way Nasdaq works goes further than that. Executives of the nation’s biggest off-price brokerage also have given Securities and Exchange Commission Chairman Arthur Levitt Jr. a lengthy manifesto for Nasdaq market reform, advocating changes that go beyond what most other Wall Street firms have suggested and which many of them actively oppose.

Casting the company as the broker for small investors has made founder Charles Schwab one of Wall Street’s richest men over the years. By tackling trading issues that Nasdaq itself has been unable to resolve, Schwab is again counting on scoring points with the small investor, said brokerage industry analyst Perrin Long.

Schwab and is vice chairman, Ronald Readmond, went to Levitt last summer for a conversation about their concerns - as well as about the way Nasdaq executives are responding, SEC officials said.

In fact, Readmond warned in a follow-up letter to Levitt, the “commotion” of the various SEC and Justice Department investigations into Nasdaq “will inevitably undermine investor confidence in the U.S. equity markets, not just the Nasdaq market.”

Readmond’s letter ticked off a series of major changes he said the Nasdaq market needs: “a comprehensive restructuring,” a commitment to “enforcing certain minimal standards for trading practices” and a significant upgrade of its trading technology.

Despite Schwab’s forcefulness, both Readmond and Nasdaq spokesman Marc Beauchamp go out of their way to stress that there is no bad blood between them. Readmond talks regularly with NASD Chairman Joseph Hardiman and Schwab’s views are “no surprise,” Beauchamp said.

In an interview Thursday, Readmond said Schwab decided to create the new trading system announced this week to handle two problems that Nasdaq has struggled to deal with - getting better prices for customers on Nasdaq stocks and ending payments from traders to brokers for customer orders.

When an investor gives a retail broker an order to buy a stock traded on the Nasdaq market, the broker can fill that order by going to any one of several wholesale dealers who handle that particular stock. Many dealers give the broker a payment of 2 cents a share on every order directed their way. Critics contend the payments amount to legal kickbacks and stifle competition.

Nasdaq needs to write a formal standard to ensure that investors get the best possible price when they buy or sell stocks, Readmond added. Because there is no written standard, customers often pay a few cents more when they buy and get a few cents less when they sell.

And it needs to eliminate the opportunity for conflicts of interest by requiring Nasdaq firms to keep the orders they handle for clients completely separate from the trading they do for themselves, he said.