Kearney's Move

Art Kearney, the outgoing Security Traders Association chairman, has resigned as head of the equity capital markets unit at Minneapolis' John G. Kinnard & Co. Kearney said he has not accepted a position with another brokerage. He will take a temporary consulting job with the National Association of Securities Dealers as it explores opportunities in Hong Kong. Kearney spent 31 years with Kinnard, beginning his career in the mailroom. His departure followed within days the departure of his subordinate Charlie Westling, head of corporate finance. Both men are said to have clashed with Kinnard CEO Bill Farley.

Although its revenues are sharply down from 1996, Kinnard is seeing an improvement on the income statement this year. Commissions and trading revenues have picked up, although investment banking revenue is flat. Farley has tried to chart a banking course for the firm in an effort to revive its flagging fortunes. The results have been mixed. Kinnard is actively searching for a replacement for Kearney. "We believe strongly that there is a role for an investment bank like Kinnard and that our search will yield a leader who shares this vision," Farley said.

Demutualization

How far has the National Association of Securities Dealers come with its plan to transform Nasdaq into a for-profit organization? The NASD has already drafted a proposal to issue shares among its member firms and top publicly-listed companies, according to a well-informed source at a member firm. Under this plan, the NASD itself would retain a 25 percent ownership stake with 49 percent of the shares allocated to member firms. The remaining 26 percent would go to the top Nasdaq companies.

The source said the current plan would see Nasdaq conducting a private placement, instead of an initial public stock offering. That arrangement is consistent with recent comments by NASD Chairman Frank Zarb. The source said NASD's board is in favor of the draft proposal, which would require the approval of NASD members. A spokesman for the NASD said the board has made no decision on its demutualization plan.

Instinet COO Quits

Richard Schenkman, the chief operating officer of Reuters Group's Instinet, operator of the largest electronic communications network, is stepping down. He will take a new assignment outside the company. He said he could not disclose where he would be going or what he would be doing. Schenkman hinted that he would be involved in a computerized trading operation, however. "There is a huge demand for people with my experience," Schenkman said in a telephone interview from his office in London.

Reports of Schenkman's departure caused a stir on trading desks, coming as the giant electronic agency brokerage reinvents itself under a youthful chief executive, Doug Atkin. Traders Magazine first reported rumors that Instinet was eyeing an acquisition of Lynch, Jones & Ryan, an institutional discount brokerage based in New York. That rumored deal recently became a reality. Schenkman has said that financial institutions are scrambling to redefine their positions.

SelectNet Breakdowns

Market makers are suffering huge loses as a result of computer glitches with SelectNet, according to Lee Korins, president of the Security Traders Association. The STA president, in a letter to NASD President Richard Ketchum, said the continuing temporary interruptions on SelectNet "have cost dealers thousands of dollars in position losses due to their inability to monitor inventory positions and to effectively manage risk."

SelectNet is a sore point with Nasdaq as it embarks on an ambitious program to build relationships and customer accounts across the globe. Korins, in his letter, said the "SelectNet delays cause credibility problems for dealers and firms with customers and sales personnel as reports, when finally received, reflect prices of a time passed and may not be indicative of current market levels."

Korins and STA executive committee members said the concern would be expressed on a visit with Nasdaq staffers at its Trumbull, Conn., technology hub.

Nasdaq's proposed super montage, order-display facility is generating plenty of comment among traders as the Securities and Exchange Commission conducts its public review period.

"This is not a welcome development to us," said Bloomberg Tradebook chief executive Kevin Foley. The montage is designed to collect, aggregate and display pre-trade information from Nasdaq market makers and electronic communications networks. Officials at the National Association of Securities Dealers are confident the montage proposal will be acceptable to the SEC and the trading community.

Still, there is some uncertainty. "This has been portrayed as a done deal," cautioned Foley. "It is the furthest thing from a done deal."

"The super montage is the only way that the NASD will be able to reach a virtual limit order book," countered Harold Bradley, a portfolio manager and senior vice president at American Century Investments in Kansas City, Mo.

Yet the Nasdaq proposal leaves a lot to be desired, Bradley said. Directing all market information through Nasdaq computers "drives us to a single point of failure," he said, in which a power interruption could jeopardize millions of dollars in trades. "I never want a market where a squirrel could bring me crashing to my knees," Bradley said, referring to an embarrassing glitch at Nasdaq's computer hub in Trumbull, Conn. (A squirrel was cited as the cause some time ago of a computer malfunction.)

Centralization

Nasdaq's proposed new system, explained NASD chairman Frank G. Zarb in a statement, "allows us to build upon the foundation strengths of market makers and electronic communications networks, while providing the type of centralization called for by SEC Chairman Arthur Levitt [in his September Columbia University Law School speech.]"

NASD spokesman Scott Peterson said Nasdaq hopes to deploy its new system as early as next summer. Lee Korins, president of the Security Traders Association, said his trading affairs committee seemed favorably disposed to the super montage facility during a recent discussion of the new system.

The committee had some questions which are "mostly technical in nature," Korins said, "not what we would call deal breakers." The committee will meet a couple more times before submitting comments to the SEC.

Foley complained that the super montage window' strips ECNs and regional exchanges of their identities and control over stock trades. The window causes problems by displaying bids and asks as anonymous information, Foley said. "This is a moral hazard," Foley said.

Unscrupulous or unstable market makers could hide behind their anonymity to exploit market turmoil without fear of identification by alert traders.

Further, he said, participating ECNs would sacrifice not only access fees but also brand identity on a Nasdaq screen that displays prices only three levels deep. "In a sense, the NASD has used its monopoly as a disseminator of information to perfect their monopoly on order making and executions," Foley said.

Bradley noted that his firm was one of the earliest proponents of an integrated facility for stock markets, to address what he called huge price discrepancies across different markets at their opening bells.

Decentralized Market

American Century envisions markets and investors ultimately linked in a system much like the Internet- decentralized and thus resistant to collapse in the event of a central breakdown. Nasdaq's super montage window is designed more like a hub connected by many spokes, American Century's Bradley said, and is thus vulnerable to disruption from a single point.

Yet markets have made virtually no progress toward linkage in the last 25 years, Bradley said. "Whenever we've started down the path toward linkages, the markets have stood up and yelled fragmentation' and what about my brand?'," he said. "With $90 billion to trade, we don't care about brand. We care about best price."

American Century wants "trade-at" protection of its orders in any system, Bradley said, protecting displayed orders before they can be internalized and marked-up by market makers.

The NASD does not have a good track record when it comes to order execution proposals, Foley noted. "Do not assume that this is going to be adopted," he said. "It's hard for me to believe that the [SEC] is going to just rubber stamp this proposal."