NASD head Frank Zarb in late February relinquished his title of president to Richard Ketchum, NASD COO. Although Ketchum, the NASD's No. 2 executive, says his responsibilities remain the same, the additional title is seen as a seal of approval from Zarb, and may settle remaining questions about Ketchum's future with the NASD--a career cast in doubt following the Nasdaq pricing collusion scandal and the resulting SEC investigation.

Ketchum went directly to the NASD in 1991 from the SEC, where he headed the division of market regulation, which at the time had oversight responsibility for the NASD and Nasdaq. As NASD executive vice president of legal, regulatory and market policy until February1993, Ketchum was closely involved with the Nasdaq market. He was promoted to COO, and he continued with an active role in developing--and defending--Nasdaq.

It's still unclear whether the NASD's No. 2 official was involved with, or knew about, the pricing collusion or other misdeeds that occurred under his watch.

In a 1996 SEC report on its investigation of the NASD, the NASD was criticized by the SEC for "inconsistent" statements regarding Nasdaq spreads and the effect the Small Order Execution System (SOES) had on spreads. Dealers don't like the automated system that exposes them to retail executions, and have long lobbied for the elimination of SOES, claiming that SOES caused wide spreads.

According to the SEC investigation, in December 1994 the NASD submitted to the SEC two studies that claimed a set of rules limiting dealer exposure to SOES had been successful in narrowing Nasdaq spreads. In one of the filings, the NASD claimed "spreads in Nasdaq securities experienced a decline in the immediate period following [January 1994] implementation" of the rules.

But the prior May, at a meeting of traders at Bear Stearns in New York, the SEC report said, "One NASD officer pointed out that spreads had not narrowed" since the SOES rules were implemented. The SEC report called the public filings made by the NASD "inconsistent" with what was said at the Bear Stearns meeting, which had been organized in anticipation of the release of the Christie-Schulz study that alleged dealer collusion.

An NASD spokesperson says Ketchum was not the officer who made those statements and doesn't know who it was.

But Ketchum, who was in attendance at the meeting, now says there was "absolutely nothing inconsistent said at that meeting versus the filings." The meeting was set up "to jawbone market makers to encourage them to reduce spreads." The NASD emphasized at that meeting that if pricing collusion were occurring, "it would be viewed as a serious violation and would be followed up on. ... We didn't know of any suggestion of coordination or collusion at that point," Ketchum says.

Yet the SEC investigation uncovered a June 1992 memo from a senior NASD executive that discussed both the convention of avoiding odd-eighth pricing and harassment by dealers of competitors who narrowed spreads and quoted in odd-eighths. The SEC said in its report that these issues were discussed at a meeting of "senior" NASD management in July 1992, and the memo's author repeated his observations about the pricing convention and dealer harassment. NASD management took no action to follow up, the SEC said.

"If there was a memo, I didn't see the memo. I don't know who wrote it," Ketchum now says.

Meanwhile, a 1993/1994 business plan produced by the NASD's Market Surveillance Department warned that an "excess spread" rule might result in collusion, the SEC found. In addition, a 1993 article in Forbes that reported on harassment by dealers who narrowed spreads was circulated to NASD executive management, and a 1993 NASD study of institutional investors' views of Nasdaq also reported concern about suspected collusion.

"Rightly or wrongly, we viewed the spread problem as a market structure problem," Ketchum says.

Aside from pricing collusion, the two-year SEC investigation uncovered widespread failure by market makers to report trades on time, honor quotes, and cited tapes of Nasdaq traders engaged in outright price manipulation. In addition, the SEC said the NASD failed to enforce muni bond "pay to play" rules, harassed SOES firms and violated its election rules.

Neither the SEC nor the NASD has taken any actions against firms for activities described in the investigation, although several recent press reports claim SEC action may be imminent.

Ketchum says it would be "a little unfair" to say the NASD was uninterested in pursuing the trading firms because "the SEC coordinated and clearly wanted to control the investigation of firms" in the matter. The NASD and the SEC also avoid pursuing redundant investigations, he adds.

The SEC declined comment on this story.