Arthur Levitt has suggested he will propose eliminating multiple counting on each Nasdaq trade, to dramatically reduce the transaction fees paid by market makers.
The Securities and Exchange Commission chairman raised the issue at a Senate Appropriations Subcommittee, and said afterwards he will meet Nasdaq officials to discuss how trades are counted.
Levitt's action is controversial. The double and triple counting of each Nasdaq trade has long been cited as giving an inflated account of Nasdaq volume. Unlike trading on the New York Stock Exchange, a huge proportion of Nasdaq trading is principal business, requiring the passage of each trade among two or more trading desks.
Nasdaq, however, made no apologies before now, in part because its reported volume gives it marketing heft, experts say. But the intervention of Levitt, as well as market makers' frustration over a congressional decision to introduce 31(a) transaction fees on Nasdaq, may give Nasdaq second thoughts.
Fund U.S. Treasury
The transaction fees are now charged at a rate of 1/300th of one percent of the value of each Nasdaq sale, and are used to fund the U.S. Treasury, and ultimately to finance the SEC. Market makers complain they are paying an unfair proportion of the fees compared to traders at the Big Board.
Levitt's suggestion could bring them relief.
"There is some question whether Nasdaq double counts fees, which they do, and I think shortly we'll see some adjustment that will reduce the fees," Levitt told the Senate.
Whether Nasdaq would countenance a cut of up to 50 percent in its reported daily volume and the loss of prestige that would likely bring is not clear. But supporting the change could hasten the end of Nasdaq traders' efforts on Capitol Hill to get relief on 31(a) fees, market insiders say.
Publicly, Nasdaq says the current system might be best left untouched. A spokesman for Nasdaq noted that the current structure was approved by the SEC and does what other exchanges do: When capital is risked, volume is counted once.
The current structure "provides investors with maximum transparency, and less reporting may not be in the best interests of investors," NASD spokesman Reid Walker told a reporter.
Privately, however, some Nasdaq brass, caught offguard by Levitt's proposal, may be looking for wriggle room. Indeed, Walker said that the NASD was "always open to discussing the matter [of trade counting] further with the SEC."
At press time, the Security Traders Association, and a coalition that includes the Securities Industry Association, the Chicago Stock Exchange and the Big Board, continued their fight for a relaxation in how 31(a) fees are levied.
Sen. Judd Gregg (R-N.H.), chairman of the Senate Appropriations Subcommittee that has jurisdiction over the SEC's budget, said there is a proposal to reduce 31(a) fees on both listed and Nasdaq trades by $400 million over five years. But he cautioned that "if eliminated, we still need to find additional funds for the SEC and the other people in government who will pick up the fees."
A congressional source said an overall reduction of 30 percent to 50 percent is sought in the estimated fees to be collected.
"It has to be in a range of comfort for the SEC," said David Franasiak, an attorney representing the STA, in an interview earlier this year after an annual STA-sponsored legislative conference in Washington.
"Budget scoring will ultimately hang on the specific language of a final proposal," a congressional budget aide added.
Banking Committee
Sen. Phil Gramm (R-Texas), chairman of the securities subcommittee of the Senate Banking, Housing and Urban Affairs Committee, supports a reduction in the amounts levied.
"We are in preliminary discussions with the various committees and the SEC over how and under what circumstances we can reduce the 31(a) fees," Gramm's spokesman Larry Neal said.
"The jurisdiction is so diverse," Neal added. "Eight committees in the House and Senate would have to reach agreement. Talks are proceeding one by one to see if an accommodation can be reached. Plainly, we are some distance from producing legislation, but there is initial movement in that direction."
Sen. Alfonse D'Amato (R-N.Y.), chairman of the Senate Banking Committee, expressed his own concern about 31(a) fees in a letter dated March 3 to Sen. Pete Domenici (R-N.M.) and Sen. Frank Lautenberg (D-N.J.), the chairman and the ranking member of the Senate Budget Committee, respectively.
The coalition has targeted principal trading for a reduction in 31(a) fees, including riskless principal trades, or trades in which a broker dealer buys shares of stock that he does not trade (earning a commission by simultaneously selling the stock to a market maker).
Cooked the Books'
What particularly upsets market makers is the amount of money that 31(a) fees are generating. One Nasdaq trader griped that the SEC "cooked the books" when it sent revenue estimates to the Office of Management and Budget prior to congressional approval of the fees in 1996.
"The [excess budget amount over the cost of running the SEC] will be so huge it will be an embarrassment," Franasiak said.
Federal Expert
Traders have estimated an excess budget of $300 million. But according to a federal budget expert, who requested anonymity, the annual excess coming into government coffers from transaction, registration and other sources "is not even $100 million relative to total expenditures."
The budget expert estimates that 1999 fiscal-year administration budget includes $180 million from Nasdaq transaction fees. "This is somewhat more than expected," the expert said.
According to a government source, the money collected is designed in part to protect the SEC from engaging in bruising battles with Congress for operating funds.
At the STA Foundation earlier this year, Franasiak said a reduction in the amount levied in 31(a) fees could be achieved with legislative riders or an amendment to a fiscal year 1998 supplemental budget.
However, with Monica Lewinsky and Linda Tripp et. al the butt of cocktail banter on Capitol Hill these spring days, 31(a) fees hardly set the Beltway on fire. Eliminating 31(a), Franasiak said, "is not unlike going for the Super Bowl in the first year of a franchise's existence. It is an extremely, extremely difficult task."
Separately, the SIA has proposed that the National Association of Securities Dealers make other changes in how 31(a) fees are collected because the current arrangement has resulted in clearing firms and electronic communications networks being charged for transactions initiated by their own customers.
