In trailing 12-month rankings, five firms alternatively took the top spot for 1997 in the aftermarket performance of initial public offerings.

But the king of the hill was Baltimore-based BT Alex. Brown, which planted its banner at the top the last four months of the year, posting a 42.41 percent average annual return as of Dec. 31.

The other sterling contenders, with the number of months each finished first inside brackets, were powerhouse Morgan Stanley Dean Witter (4), New York's CIBC Oppenheimer (2), Arlington Va.-based Friedman, Billings, Ramsey & Co. (1) and New York's Bear Stearns (1).

The rankings were conducted by The IPO Aftermarket, a sister publication of Traders Magazine.

Indomitable

Despite BT Alex. Brown's indomitable position as one of Wall Street's leading underwriters of new equity offerings, the firm's deals were still among the most affordable, according to data provided by Securities Data Co.

After pricing an average 2.2 percent above the mid-point of their filing range, the firm's deals closed 16.4 percent, 18.4 percent and 15.9 percent above offering at the close of first-day, one-week and four-week trading, respectively.

For institutions, and for individual investors often excluded from a deal's initial allocation, that means just one thing more bang for the long-term buck.

For purposes of comparison, the 42 IPOs headed by Morgan Stanley-led syndicates, which priced an average of 11.4 percent above the mid-point of their filing ranges, gained 26.2 percent in first-day trading. But they closed the year an average of just 33.3 percent above offering.

"Aftermarket performance is extremely important," noted Michael Ott, managing director of equity syndication at BT Alex. Brown. "You want to show investors and prospective companies that you not only can successfully underwrite an offering, but also build long-term shareholder value."

Investment in all of the firm's 23 lead-managed offerings would have yielded an average gain of 42.41 percent above offering, supplanting Morgan Stanley, the 1996 champion and four-time leader in The IPO Aftermarket's monthly rankings in 1997.

Diversification

The top five performing IPOs in the BT Alex. Brown stable in 1997 would suggest a heavy slant toward technology outfits. Still, diversification may be at the root of its underwriting success in today's sometimes unpredictable broader markets.

BT Alex. Brown's top five IPOs were Daou Systems (Nasdaq:DAOU), a third-party manager of computer networks, whose stock closed the year at $31.25, or 247.2 percent above its February offering at $9; Radiant Systems (Nasdaq:RADS), a provider of enterprise-wide technology solutions, closed at $28.50, or 200 percent above the $9.50 offering; AHL Services (Nasdaq: AHLS), a staffing and management outsource company, closed at $24.63, or 146.3 percent above the $10 offering; Galileo Technology (Nasdaq: GALTF), an Israeli-based developer of semiconductors, closed at $28.88, or 68.9 percent above the $17 offering; and Yurie Systems (Nasdaq: YURI), a developer of asynchronous transfer-mode products, closed at $20.19, or 68.23 percent above the $12 offering.

Overall, BT Alex. Brown underwrote IPOs from six industry sectors, with the number of IPOs included inside brackets: technology (6), healthcare (3), basic industries (4), consumer (6), real estate (1) and transportation (3). Ott noted that the Sept. 1, 1997 merger of New York-based Bankers Trust and Alex. Brown added three additional sectors to the combined entities' fold: basic industries, energy/power and financial sponsors.

Meanwhile, the aftermarket returns of all underwriters across almost every industry group collapsed amid a fourth-quarter flight to quality. From an average return of 41.1 percent for all IPOs at the end of the third quarter, the high-water mark for the year, trailing 12-month issuance (excluding unit offerings), fell 8.1 percent to 583 deals, while returns on those offerings plummeted to 21.9 percent by year's end.

Gains Pared

Leading the list of underwriters that saw their aftermarket gains pared were San Francisco-based Nationsbanc Montgomery Securities, whose 12-month returns fell to 23.7 percent as of Dec. 31, from 68.5 percent at the end of September; New York-based Prudential Securities, where returns fell to 17.1 percent from 57.1 percent; and BancAmerica Robertson Stephens in San Francisco, whose 18 lead-managed efforts saw aftermarket gains of 13.7 percent, down from 52.8 percent.

"If you look at pricings in December in the new-issue marketplace, it seems pretty rough," Ott said. "But we believe that a lot of that was seasonal and related to a high level of supply in the marketplace, making it a buyer's market."

Attrition and a strong level of issuance last November (86 companies raising $8.18 billion, the heaviest monthly volume of IPOs in the market's history) has largely alleviated the market's glut. The backlog of IPOs and follow-on offerings in registrations peaked at $27 billion as of the week ending Oct. 31. At a current level of about $14 billion, the supply and demand outlook is much more evenly balanced, Ott said.

Stephen Lacey is associate editor of The IPO Aftermarket, a sister publication of Traders Magazine.

Aftermaraket Manager Rankings

Avg. % Chg. Avg. % Chg.

# of Filing IPO to

Book Issues Midpoint 1st-Day

Manager Priced To IPO Close

BT Alex. Brown 23 2.20 16.39

Goldman, Sachs 39 8.88 18.32

Hambrecht & Quist 16 -7.13 18.35

Morgan Stanley Dean Witter 42 11.36 26.23

Bear Stearns 10 -6.90 8.02

Merrill Lynch 38 11.93 12.87

DLJ 24 -2.84 10.34

CS First Boston 19 17.68 8.75

NationsBanc Montgomery

Securities 32 -2.4 7.4

All IPOs* 583 -0.76 13.64

Friedman, Billings,

Ramsey & Co. 11 -6.07 8.30

Prudential 12 -7.89 5.89

BancAmerica Robertson

Stephens 18 7.79 14.11

Salomon Smith Barney 31 0.26 13.76

Lehman Brothers 22 -3.96 6.59

cont'd

Aftermaraket Manager Rankings

Avg. % Chg. Avg. % Chg. Avg. % Chg.

IPO to IPO to IPO to

Close After Close After Close on

1 Week 4 Weeks 12/31/97

18.37 15.97 42.41

16.91 21.64 36.17

12.81 14.41 35.17

23.29 24.93 33.25

8.38 15.72 31.1

9.17 8.52 30.10

7.75 8.26 28.98

7.15 5.37 25.07

20.83 19.26 23.7

13.39 14.05 21.96

8.99 7.55 19.63

8.82 12.77 17.10

14.09 15.27 13.73

14.40 12.53 9.08

4.13 6.28 3.71

Source: Securities Data Co.

*Aftermarket data do not include unit deals

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Traders are busy people, swamped in market data. So how do they find time to use this data effectively? Try market-data systems that are open, interactive and easily welded to other systems and information sources.

Speed and flexibility are the big kahuna.

In what may be a backlash against proprietary hardware, the market-data industry is undergoing a paradigm shift, moving like the rest of Wall Street from terminals and boxes to systems that are open, fast and more malleable.

Utilize Information

Technological change has swept market-data vendors off their feet, forcing them to de-emphasize hardware and to sell systems that utilize information more efficiently.

Perhaps nowhere is this more evident than in the latest avatar of Bridge Information Systems' Bridge WorkStation, which runs on a 32-bit Windows NT platform. Bridge and many of its competitors are now striving towards making their systems more interactive.

That should please Richard Holway, head of trading at Investment Advisors, a $17 billion money manger based in Minneapolis. "I want interactive technology, to allow me to track my portfolio easily," Holway said.

Holway wants an electronic blotter on his computer, where the market-data feed can be programmed to track his investments to the last fraction. "I want to look at my portfolio from every angle," he added.

Like many of his peers on Wall Street, Holway is looking to his system for information he can use. For example, he follows news alerts on the equities he holds in his portfolio, the put-and-call action, price movement, a market-maker activity list, earnings estimates and any useful information that can have an impact on his portfolio.

That's a far cry from the early days of the ticker, when rumors formed the cornerstone of investing and the tape was an unending roll of paper.

Dawn of 20th Century

At the dawn of the 20th century, in his famous and hugely popular book, "Where the Money Grows," journalist and author Garet Garrett noted that there are those on Wall Street who spent hours reading the ticker-tape, finding trading clues as the machine spewed reams of paper.

As this century draws to a close, much of the paperwork has been reduced by technological gizmos, as professional investors and traders, Nasdaq market makers included, sit hunched in front of their computer screens, looking for information as the numbers fly across the cathode-ray tube.

This is the brave new world, where market data flies across fiber-optic cables, faster than the speed of light, helping the money men and women make or lose small fortunes. With more than half-a-dozen options available, it is no surprise that a trader's desktop computer is more cluttered than the New Jersey turnpike at the height of evening rush hour.

Holway says that in the future, the industry will see a merging of trading and quote systems. His own desk uses Reuters Research & Analytics, which is bundled with another Reuters-owned product, Instinet, a system he frequently uses in trading.

Spending

The importance of technology is underscored by the increasing amount of money securities firms are spending to upgrade their infrastructure. The financial-services industry has historically been very aggressive about adapting information technology, from the use of electromechanical devices in the 1930s, to Internet technology in the 1990s.

According to the Tower Group, a Boston-based research firm, large securities firms are the most substantial investors in information technology. A recent Tower study notes that large firms are using information technology to find trading opportunities that could not otherwise be found.

The study says that firms that invest heavily in applications technology perceive themselves to have better technology than their competitors. The study adds that firms spend more than 15 percent of their total technology budgets on market-data services and trading technologies.

That is good news, of course, for the more than a dozen market-data vendors, including top dogs like Bloomberg, Dow Jones Markets, Reuters' Quotron, Bridge, S&P Comstock and BMI, duking it out for the more than $5 billion-a-year market.

Traders Choose

How do traders choose their market-data providers? And what are the most popular systems?

Tom Norby, head of Nasdaq trading at Portland-based Black & Co., notes that when he is selecting a market-data system, his top priority is the unique information the service provides. That's a view shared by T. Erik Conley, a head equity trader at Chicago-based buy-side firm The Northern Trust Company.

"The ability to get the very latest news, charts and other market data is one of the clinchers," Conley said.

While most pros discount cost, none are willing to compromise accuracy and reliability. In addition, most look for ease of use.

Bridge is the favored vendor on Conley's desk, because, he said, "we need a flexible system accessible from various offices around the country." Bridge has more than 70,000 users worldwide.

Still, Conley has a Bloomberg terminal humming on his desk. Why? "Because Bloomberg never goes down," Conley said. He points out that he decided to use Bloomberg as an option after his Bridge system went down on several occasions.

Conley has company. Most traders tend to use several systems. "I would not feel as comfortable with Bloomberg if it was the only choice," another trader said. Nevertheless, the terminal's ease of use has helped Bloomberg to sell 75,000 of its squat, plain boxes around the world.

Download Data

A major feature Conley wants is the ability to download data to run spreadsheets. That's available in Bridge, which recently purchased Knight Ridder Financial News (thus adding more muscle to its fledgling service).

Bridge, for example, gives professionals an option to retrieve real-time equity, fixed-income, foreign-exchange and commodity prices on the same workstation screen using multiple windows.

However, if the user just wants the data feed, Bridge has an option to integrate feeds from rivals like Dow Jones and Reuters, via new technology called Data Gateway.

Bridge is taking another step. By using cross-platform Java language, the company wants to open its system further, and integrate it even more tightly with Internet and Intranet technologies.

The appetite for open systems, which use technologies like the Internet and Windows NT platforms, has prompted even the likes of Bloomberg to use open standards.

The company recently introduced The Open Bloomberg, a system which allows customers to access its services through their own PC or workstation by interfacing with Bloomberg hardware and software, using a common keyboard that is color coded for Bloomberg applications.

Aggressive

Bloomberg's aggressive moves to take over the desktop world has forced established players like Dow Jones Telerate, now renamed Dow Jones Markets, to be more defensive. Even Reuters' Quotron real-time financial-information system has started distributing information via the Internet.

Some experts, however, feel that this recent trend towards openness is due to fast-declining prices of financial information. That makes it imperative for market-data vendors to give their customers more functionality and to keep them firmly in their fold.

The economic boom ushered in by the industrial revolution of the late 19th century sped the modernization of North American cities, and the laying of railroads connecting major centers of commerce in the U.S. and Canada.

At the dawn of the 21st century, technological advances and a surge in stock-market investing among U.S. residents have opened the Canadian markets as never before, propelled not by rail links, but an electronic pipeline, transporting an increasing volume of business.

A network of order-routing and execution systems is carrying Wall Street stock orders for execution on Canada's exchanges.

For Canadian dealers, tapping accessible U.S. equity order flow has become a popular trading strategy, helping broker dealers to reap record profits in recent years.

"Cross-border trading [with the U.S.] is increasingly important," said Paul Bowes, vice president of equity markets at the Toronto Stock Exchange (TSE), Canada's largest exchange. "We [Canadian stock markets] are just beginning to tap our potential."

Surge in Trading

According to the Securities Industry Association, U.S. investors made U.S. $20.42 billion in gross transactions in Canadian equities in the third quarter of 1997, up 9.5 percent from the previous quarter.

Only U.S. equity activity in the U.K. and Japan exceeded the third-quarter gross transactions or purchases plus sales of Canadian stocks.

The New York-based trade group noted U.S.-investor acquisitions of foreign securities in the third quarter of 1997 totaled nearly U.S. $38.6 billion, representing almost half of the U.S. $77.5 billion acquired through the first three quarters of the year. These acquisitions helped push U.S. holdings of foreign stocks and bonds to a record U.S. $1.5 trillion.

"The U.S. interest in Canadian stocks is probably consistent with prevailing implications of global investing by Americans," said Andrew Karolyi, a professor at the Richard Ivey School of Business at the University of Western Ontario. He added that the widespread diversification of global trading has risen with the demand among investors to diversify their portfolios.

With global investing on the rise, Canadian firms are benefiting greatly. The Investment Dealers Association of Canada estimates brokerage revenues accounted for one-half of the financial-industry's revenue in 1997. The Toronto-based trade group reported that brokerage revenues partly through the surge in U.S. business have expanded at an average rate of 18 percent annually since 1993.

"We are dealing with a large number of American firms following the global trend of international investing," said Paul Chalmers, director of international trading at Vancouver-based Canaccord Capital.

Indeed, more than half of Canaccord's 35 equity traders in Vancouver work with U.S. retail and institutional order flow, according to Chalmers. "The population of the U.S., about 270 million people, is almost ten times that of Canada," he added. "Americans are twice as likely to buy stocks as Canadians. Americans are spreading their investments across all markets, and we are benefiting." Chalmers estimates his firm works with 500 broker dealers in the U.S. each year.

In fact, according to Lawrence Booth, a professor of finance at the University of Toronto's Rotman School of Business, a large number of Canadian stocks have as much U.S. ownership as Canadian.

"Americans buying Canadian stocks has become a normal course of business," Booth said. He added that with natural-resource stocks floundering recently, U.S. investors have been surging into the Canadian banking and financial-services industries. "I wouldn't be surprised to hear news of a major Canadian bank merger with all of the activity," Booth said.

"Americans are definitely more interested than ever before in buying in Canada," said Mary Ann Camilleri-Power, international equity trader at Toronto-based Nesbitt Burns. "Our dollar has dropped, so the price of Canadian stock is more attractive."

The Canadian dollar has plummeted so severely, on Jan. 21 it reached its lowest level against the U.S. dollar since 1858 the year it replaced pounds, shillings and pence as a unit of exchange. On Jan. 21, the U.S. dollar was at Canadian $1.45. Financial experts blame the drop on low interest rates in Canada and the recent slide in the price of commodities that are an important part of the Canadian economy.

Consequently, with the U.S. dollar stronger in Canada, Canadian stocks are a more attractive investment for American investors.

At Nesbitt, Camilleri-Power and five other traders in Toronto deal exclusively with U.S. firms. The institutional house also has three international traders in New York.

At Yorkton Securities in Vancouver, international trader Ken Coe estimates 50 percent of order flow across Canadian exchanges comes from the U.S. "I think the advent of new technology will continue to feed this Canadian boom among firms," he said.

Traditionally, business from U.S. dealers was conducted over the telephone. Even today, most dealer-to-dealer interaction is done over the telephone. But several electronic systems are speeding the flow of orders and creating a seamless trading pipeline.

"Electronic systems will create faster, quicker, more efficient vehicles to access liquidity," Karolyi said. "It is the surge in American business that has helped speed their arrival."

Camillieri-Power concurred. "We are trying to improve our systems for a seamless electronic network," she said. "That is clearly the way business is going. We have to make these improvements to keep our clients American and Canadian happy."

Cross-Border Trading

A Canadian dealer, like Chalmers at Canaccord, quotes a market in a stock. U.S. dealers see the quote on their own market-data systems. They call Chalmers to send him their order, and his desk calculates the exchange rate, charges a commission and sends the order to the exchange system for execution. Chalmers then writes and posts the trade in net U.S. funds for the U.S. dealer.

Coe at Yorkton explained that when a U.S. dealer does not have access to his or another Canadian-trader's quote, the initial telephone call from the U.S. is to check his quote. The American dealer will then check Coe's quote with one or two other dealers before routing his order to Coe's desk.

But more orders are being routed electronically. For example, on a VERSUS system, operated by the Toronto-based developer, distributor and licensor of electronic trading systems, VERSUS Technologies, trades are routed directly from a U.S. dealer to the designated exchange or crossed with a participating broker. Orders routed electronically are sent to a Canadian-dealer's desk from an American desk.

Trades executed in Canada are normally cleared in Canada, and Canadian dealers are subject to their national regulatory agencies. On the other end, the U.S. firms are subject to regulation by the Securities and Exchange Commission and the National Association of Securities Dealers.

Canadian Exchanges

All major Canadian exchanges have switched from open-outcry floor environments to electronic trading. Floor brokers have moved to their firm's offices, with trading done from far-reaching and remote locations over computer networks. Each exchange has created its own terminal-based system for trades to be crossed in the electronic pit or filled by the specialist.

Among Canadian exchanges, the TSE accounts for more than 84 percent of the country's trading activity. The 11th most active stock exchange in the world, the TSE set its fifth consecutive yearly value record in 1997 at Canadian $423 billion. Currently, the TSE quoted market value stands at Canadian $1.27 trillion.

Owned by its 101-member brokerage firms, the TSE is currently implementing TOREX, a new trading complex. The TOREX system will offer traders a workstation or trading application to process, monitor, record and execute trades of the TSE's 1,720 listed stocks.

"TOREX will be quite a leap for some of our traders," Bowes said, "but I know it will help our investors in the long run."

The Canadian Dealing Network, a subsidiary of the TSE, is Canada's only organized over-the-counter market. The competitive dealer market similar to Nasdaq traded 2.8 billion shares in 1996, up 70 percent from 1995.

The Montreal Stock Exchange (MSE) is Canada's second major exchange. In 1997, the total MSE trading value reached Canadian $61.91 billion, surpassing the previous record set in 1996 by 23 percent. The MSE saw 1.93 billion transactions last year for its 852 issues. The Boston Link, an agreement with the Boston Stock Exchange, allows the electronic exchange to route retail orders to Boston for automatic execution. The agreement allowed Montreal and Boston dealers to jointly trade 34.3 million shares in 1997.

On the Pacific coast, the Vancouver Stock Exchange (VSE) is a growing market for small-cap and volatile young companies looking for exposure, according to Camilleri-Power. "It's a shooter's market, attracting investors looking for a big gain," she said.

In 1997, a total of Canadian $1.47 billion was raised through the VSE. The electronic venture-capital market specializes in resource-based companies, although technology, commercial and industrial companies have grown in listings in recent years as the exchange has grown. In fact, the VSE welcomed 54 new listings in 1997, the most in seven years.

American Outposts

A number of Canadian firms have opened outposts in the U.S., and are becoming members of American exchanges.

"I think that with globalization and increased regulation, more and more firms are becoming members of foreign exchanges," said Richard R. Angle, head of international trading at Vancouver-based Georgia Pacific Securities. "Sometimes you can get a crappy deal unless you are a member of the foreign exchange you are dealing with."

Camilleri-Power explained her firm has opened an office in New York with three international equity traders, and is now a Nasdaq and New York Stock Exchange member.

Toronto Dominion Bank, the large dealer subsidiary of The Toronto-Dominion Bank, jumped into international trading two years ago with the surge in northbound order flow. They have nearly 25 equity traders in New York, with five focusing on orders originating in Canada for execution on American exchanges. Ray Tucker, vice president and director of the firm, estimates ten percent of TD's international trading is orders sent from Canada to American exchanges.

Trading South

For international traders in Canada dealing with the U.S., the majority of orders are sent from the U.S. for execution on Canadian exchanges. To be sure, some Canadian firms do send orders south for execution in America, and many combine north and southbound business.

Large firms with offices in the U.S. normally send orders from their Canadian desks to their American desks for cheaper executions. Other firms make deals with U.S. firms that send order flow north, Coe said. He added that 30 percent of Yorkton's international trading activity is orders sent to the U.S.

"The trading is no different than that done by U.S. firms sending us orders," Coe added. "But there are just more willing investors and more capital in the U.S."

"Americans," Chalmers added, "are just more likely to buy stock,".

These Canadian dealers remain confident Americans will continue to explore the Canadian markets.

"We think that Canada [Canadian stock] is a wonderful opportunity for U.S. firms," Bowes said. "With our technological innovations, we hope they find it easier to take a second look."

With the surge in U.S. order flow, several technology vendors are integrating systems to streamline and modernize the trading of Canadian equities.

Toronto's VERSUS Technologies is a developer, distributor and licenser of electronic trading systems, and the parent of electronic brokerage firm VERSUS Brokerage Services (VBSI) and The VERSUS Network (VTN). The VTN is a private electronic network connecting institutions and investment dealers to Canadian exchanges and other liquidity sources.

Brokers sponsor institutional access to the VTN. VBSI, the 15th largest Canadian broker dealer, is one of 17 participating brokers in the VTN. "What we offer is ubiquitous access," said John Reilly, chief executive officer of VBSI.

Here's how U.S. traders use the VTN: After entering the Canadian stock symbol in the system, the user receives a quote in U.S. funds with the current quoted spread and size. The order is then sent to the appropriate exchange. The participating Canadian broker receives an agency commission on the American order. Filled orders are reported to the system in U.S. dollars.

Reilly said the sponsoring broker pays 12 percent of their agency commission to the VTN. The client pays only when VBSI is the sponsoring broker.

The VTN has a daily volume of roughly 20 million shares, and routes about 20 percent of the electronic orders directed to the Toronto Stock Exchange and the Montreal Stock Exchange, according to Reilly.

Participants handling more than 90 percent of Canadian assets have VTN access. VTN users can interface through the network with market-data and backoffice service providers.

At the moment, VERSUS operates the only major electronic trading system in Canada. Still, other systems are in use on Canadian desks including platforms from U.S. vendors Davidge Data Systems and Automatic Data Processing, and the Canadian vendor Dataphile Software.

DAVNET, the New York-based Davidge's message-routing network, links brokers with exchanges and institutions with brokers. DAVNET routes over 50,000 messages each day between 1,000 institutions, 80 brokers and 27 exchanges and market makers.

Users of DAVNET can buy the system and pay a licensing fee, or become a monthly subscriber, paying a U.S. $650 monthly fee, plus a U.S. 25 cent per-execution charge for all fills.

John Davidge, sales manager at Davidge, said DAVNET is more oriented to the sellside as a tool for retail customers. "With a system like VERSUS [the VTN], it is a more developed platform with full service in one place," he said. "We feel like we give our Canadian clients more choices. They can integrate other applications and make their own choices with DAVNET."

A competitor in Canada and the U.S., Automatic Data Processing is a Roseland, N.J.-based provider of electronic transaction processing, data communications and information services. Last year, their brokerage system handled an average of 475,000 trades in North America each day. The company boasts 750,000 clients with links to more than 18,000 dealers worldwide.

Dataphile Software is a Vancouver-based vendor operating a front-office system for order management and portfolio analysis. The company, which also offers a real-time backoffice system and an Internet-accessed account system, processes more than 500,000 orders a year.

"You have to find the newest ways to satisfy American clients," said Paul Chalmers, director of international trading at Vancouver-based Canaccord Capital and Dataphile client. "Using the current technology is a way to do that."

Canadian Securities Industry The Statistics

1997 1996 Change

Firms 182 180 1%

Employees 31,962 28,891 11%

Integrated-Firm Revenue $4,281 $3,503 22%

Institutional-Firm Revenue $981 $869 13%

Retail-Firm Revenue $973 $971 0%

Firms With Profits 143 140 2%

Firms With Losses 39 40 -3%

Operating Revenue $6,235 $5,345 17%

Operating Expenses $2,479 $2,103 18%

Operating Profit $1,541 $1,413 9%

Note: Figures tabulated January to September

Note: All dollar figures in millions, Canadian

Source: Investment Dealers Association of Canada

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About 65 traders had a private meeting with Nasdaq officials last month at New York's Marriott Financial Center. The officials stood before the crowd of market makers with a strange air of optimism and resignation.

The crowd came seeking the truth: Will the integrated order-delivery and execution system proposed by the National Association of Securities Dealers bore a big, gaping hole in their bottom line?

The mood at the Marriott was slightly surreal. Cordial but tense. No shouting matches, no brawls, just some bruised egos and professionals worried about the future.

OptiMark

Earlier in the month, diplomacy seemed to fly out the window, leaving many market makers seething over the atmosphere of secrecy that preceded Nasdaq's agreement in principle with OptiMark Technologies to fuse OptiMark's electronic crossing network with Nasdaq.

Worse, some market makers said stitching these two systems together would have horrible consequences.

"The OptiMark agreement is a total abomination," snapped Kenneth Pasternak, president and chief executive at Jersey City-based wholesaler Knight Securities, in an interview days after attending the meeting. "Market makers are totally against it."

Like the voluntary limit-order file sponsored by the NASD if it is approved, the separate OptiMark link in the NASD's plan for a new trading platform originally dubbed Next Nasdaq could disintermediate much of the order-execution process.

That would allow, for example, institutional and retail customers to anonymously, and without disclosure, search out the best prices for their orders using unique satisfaction profiles. In fact, OptiMark promises to aggregate and cross buyers and sellers every 90 seconds using algorithms and powerful computing that only recently dropped sufficiently in price to make its utilization cost effective [see Trading Strategies, page 84].

Still, OptiMark has not received the same serious public scrutiny as other trading systems did in the past, partly because only a handful of people seriously understand how it works, raising fears that it may be unsatisfactory like a well-marketed damp squib, according to some industry pros.

What's more, some traders are worried that Nasdaq will exercise warrants enabling it to acquire an ownership stake in a system that could accelerate Nasdaq's drift towards an order-driven agency market.

Interviews

In other interviews days after the meeting, which was sponsored by the Security Traders Association, feelings among traders about the NASD's proposals were running deep. "If we give access to institutions, then what in hell do they need us for anymore, except when they can't get anything done," said Bill Whalen, head of Nasdaq trading at New York-based Furman Selz. "Institutions can now become our competitors."

Another Nasdaq trader, Fred Ott of Neidiger Tucker in Denver, said, "the old traders, guys that have been in the business for 30 years, feel these proposals are a slap in the face."

STA President John Tognino was more diplomatic, but did not mince his words either. "The concerns [of traders] are genuine and center on whether the NASD, as a self-regulator, should be allowed to develop a voluntary, consolidated limit-order book that could become a defacto [mandatory] limit-order book," he said.

Nasdaq was represented at the meeting by its president, Alfred Berkeley, and executive vice president J. Patrick Campbell. On the NASD side was chief operating officer Rick Ketchum, senior vice president of trading and market services Bill Broka, and senior vice president of NASD market operations Glen Shipway. They spent the meeting taking tough questions and selling Nasdaq's latest proposals with undeniable courage.

No, this was not an easy sell. But some parts are easier to sell than others. For one thing, Nasdaq proposes to provide market makers relief, however clunkily, from orders sent to their desks by firms somehow seeking to manipulate the market. The plans gives traders up to 17 seconds to adjust, accept, decline or do nothing on orders up to 5,000 shares, and up to 32 seconds on orders of 5,000 shares or more.

For another, few Nasdaq market makers question the proposal to scrap SOES and SelectNet and replace them with a single entry point for order executions and trade negotiation. The past 12 months have been a living nightmare for traders whose pocketbooks depend on these systems.

That's because the SOES and SelectNet windows allow a trader to access another trader's quote almost simultaneously on SOES and SelectNet, subjecting that latter trader to an unintended double liability. The problem is further complicated when traders are working a combination of telephone and SOES and SelectNet orders.

Traders, however, have hard feelings about an integrated order-delivery system stitched to OptiMark. Many resent the fundamental shift they see taking place in Nasdaq, implemented by the NASD under Securities and Exchange Commission prodding.

Reform Mode

With the fires of two government investigations and a class-action lawsuit settlement against Nasdaq still smoldering, Nasdaq is in a reform mode. But some traders think it is moving too far, too fast. "It makes me very queasy," said Dan Franks, an equity trading boss at Scott & Stringfellow in Richmond, Va.

Nasdaq is traveling on the road built by the order handling rules, leading to a marketplace partly conceived in private meetings of its Quality of Markets Committee. The Promised Land is pools of liquidity, electronically interacting to match customers' best bids and offers on a price and time-priority basis.

Stretching the biblical metaphor, could Nasdaq be destined to wander aimlessly in the desert? That's open question, but some traders do think Nasdaq is traveling carelessly.

"I am not against technology," Franks explained, "but we need to slow down first on rule changes until the current changes in our market have worked their way through the system and been tested in a variety of markets."

Some traders on the institutional buyside have a different view. "Nasdaq is listening to the institutional investors," said Harold Bradley, head of trading at Kansas City-based American Century. "It is trying to move its market closer to the point of purchase, which is what these institutional investors have said in survey after survey. They want anonymity. They want control."

Bradley is very close to the major developments now swirling about Nasdaq. He is a member of Nasdaq's Quality of Markets Committee and American Century is an investor in OptiMark.

Fait Accompli?

Although the NASD new-look trading platform is hardly a fait accompli, and must first be approved by the SEC, some market makers have concluded the current plan could hurt their business.

When E.E. "Buzzy" Geduld, president of Jersey City-based wholesaler Herzog, Heine Geduld, protested at the Marriott meeting that the NASD proposals if enacted would compete with market makers, the NASD's Ketchum brushed his concern aside with a sly dig that payment-for-order-flow arrangements today give market makers an unfair competitive advantage over others.

Leveling the playing field was repeated ad nausea by Nasdaq officials at the meeting, according to one participant, a medium-sized, market maker based in the New York area.

Nasdaq officials at the meeting said Nasdaq wants to share revenues generated on the voluntary limit-order file with firms designated as primary market makers. They did not make it exactly clear how that revenue-sharing arrangement would work, but the aforementioned market maker interpreted the comments as good news for medium-sized firms and bad news for wholesale-trading powerhouses.

The trader said the proposal could give his firm an opportunity to pick up business previously monopolized by several large wholesalers with payment-for-order-flow arrangements.

At the moment, Nasdaq is aiming to tighten primary market-making standards. While these currently set the minimum frequency market makers must be on the best bid and offer in a stock, and provide a short-sale rule exemption, among other requirements, the potential rewards are wonderful, said the same trader with the medium-sized New York-area firm.

"The retail customer will pay a tiny, de minimus commission to his broker, but the customer will still save money on price improvement," the trader said. "The broker, in turn, will send the order to me or put it directly in the book, and I will be guaranteed a proportion of the fee for providing liquidity." Primary market-making status is also required by market makers that want to sponsor institutional access to the new system.

However, the STA's Tognino said it was premature to draw conclusions about revenue-sharing arrangements.

In fact, it is too early to count who the real winners and losers would be if Nasdaq ploughs ahead with its new trading-platform plan. Conceivably, Instinet and POSIT, as well as market makers who duke it out for order flow today, may not have to do so in the future. Sadly or not, order flow may simply bypass them.

American Century's Bradley is not worried. "These systems are based on a hugely flawed market structure," he said. "It took somebody to come down and threaten the existing infrastructure and expose it as a fraud."

As traders dissolved gloomily after the Marriott meeting into the Manhattan evening, snatches of overheard conversation told another story. Some market makers are on a slow boil.

Nasdaq desks are increasingly burdened by new trading rules and other market developments. Sometimes, traders do not fully understand their obligations.

Remarkably, however, market makers are now hiring independent compliance consultants and using their own compliance staffers, rather than turning to the National Association of Securities Dealers for support.

Yet, less than two years ago, a sense of cooperation existed between the NASD and its member firms. Compliance was often an afterthought. Penalties for trade violations frequently were limited to slaps on the wrist. Alas, the partnership has given way to animosity and mistrust. And one reason for the dramatic change is economics.

Trading profits were once king, and little else mattered. In 1997, with implementation of the Securities and Exchange Commission-approved order handling rules, and the switch to trading stocks in sixteenths, spreads narrowed dramatically. NASD fines and sanctions for market-making activities, which can range from $5,000 to $100,000, were no longer just another cost of doing business.

A second reason is that traders simply lost faith in the NASD. Traders rely on instincts, and their instincts tell them the NASD is too hostile to broker dealers in general, and to market makers in particular.

Throughout 1997, trading desks were repeatedly burdened by the NASD's stepped-up surveillance program that featured unprecedented numbers of examinations, reviews, inquiries and market sweeps.

Oftentimes, firms concurrently fielded as many as three of these reviews. Trading had to be disrupted as head traders retreated to back rooms to investigate possible trade violations, some going back to early 1996. The NASD's findings usually led to accusations of late trade reporting, backing away and quote violations, and concluded with fines and sanctions. It was not uncommon for the NASD to assess a $20,000 fine for two or three violations in a test universe of 40,000 trades.

Above all, traders are practical people. While trading in the present, they are mindful of the future. Looking ahead, market makers realize that regulatory compliance is likely to get worse before it begins to get better. New rules and trade-processing developments have been proposed. Last year's order handling rules continue to be difficult to implement. The regulators have new priorities.

Compounding these issues, market makers have fewer places to turn for help. Lines of communication with the NASD have been effectively cut off. Meanwhile, assistance among trading desks is not practicable because traders on these desks are riled about backing-away charges they have leveled against each other.

To be sure, life at the NASD in 1997 was no bed of roses. The association was severely sanctioned by the SEC in August 1996 for not having adequately controlled the activities of its member firms, that in turn were accused by the SEC of abusive practices to suppress competition and mislead customers. The NASD, through its NASD Regulation (NASDR) subsidiary, fought back. NASDR adopted an aggressive and adversarial posture that featured by-the-rule-book surveillance techniques and zero tolerance for trade-rule violations, intentional or not.

All the while, the NASD busily implemented a restructured governance and organization that was largely influenced by the SEC. Association staff members, many of whom were relatively inexperienced, sorted through the same new trading rules that confronted and confounded traders. Even now, examiners, analysts and attorneys in NASD Market Regulation, District 10 and other district offices are moving en masse to the dealer side, lured by attractive compensations.

Nevertheless, by year-end, NASDR had amassed an extraordinary record of disciplinary actions against its member firms and their associated persons. The regulator's downside may be that while the NASD is winning the battles with its member firms, it is losing the war.

Mindful of these issues, every trading desk should begin to develop an effective compliance strategy. A trader's first step should be to gain a better understanding of trade compliance. What is driving the NASD's efforts? What are the key rules and issues? Who is out there to help? What should broker dealers and the NASD be doing? Think of these exercises as needs analysis for reinforcing trade-rule compliance and for renewing relations between the NASD and its member firms [see sidebar above].

First of two-part series.

Next month: Compliance checklist and other matters.

Howard L. Haykin, CPA, is president of Compliance Solutions, a New York-based specialist in regulatory compliance for broker dealers and investment advisers.

Trading in 1998 will be driven in large part by the market rules and developments that were introduced in 1997, and the changes that are envisioned for this year. Let us look briefly at several key areas.

Limit Order Display Rule The Securities and Exchange Commission's new Limit Order Display Rule 11Ac1-4, introduced in August 1996 and implemented throughout 1997, was designed to improve the handling of customer orders. In general terms, Nasdaq market makers are required, upon receipt of a customer limit order that is priced equal to or better than its quote, to immediately that is, within 30 seconds display the price and full size of the order in its quote.

Traders may choose instead to execute the order or send it to another broker dealer (a market maker or an electronic communications network) to display the order. Certain block-sized or de-minimus orders, as well as working or not-held orders, need not be displayed. Customers may also request that the market maker not display their limit orders. Compliance is difficult and labor intensive, and National Association of Securities Dealers' examinations have found that traders frequently violate the rules. Traders are encouraged to read Notices to Members 96-65 and 97-49 for guidance.

Best Execution Best-execution obligations apply to all Nasdaq and OTC Bulletin Board securities. While the definition of best execution has been elusive, recent NASD Market Regulation examinations appear to focus on customer transactions executed outside the current inside market (NBBO, or National Best Bid and Offer).

In general, the rules obligate traders to seek out the most advantageous terms for their customers' orders and, in particular, limit orders. Reasonable care or diligence should be in evidence.

In September 1997, the NASD provided interpretive advice on a member's best-execution obligation when handling a customer order, especially in light of the SEC's Order Handling Rules and the NASD's Limit Order Protection (Manning) Rules. While not complete, Notice to Members 97-57 provides valuable guidance.

Amended Quote Rule and Minimum Quote Sizes NASD Market Regulation conducted an August 1997 investigation of market-maker quote displays. They found many rule violations. The SEC's Amended Quote Rule 11Ac1-1 requires market makers to update their quotes to reflect all orders (customer and proprietary) placed in an electronic communications network (ECN), unless the ECN's display is included in the Nasdaq system and there is access to that ECN. Unpreferenced orders broadcast on SelectNet do not qualify for an exemption. Market makers are also required to update quote sizes to at least the minimum SOES tier-size whenever they change quote prices. Traders should read Notice to Members 97-49 (Compliance With SEC Order Handling Rules and Nasdaq Trading Rules).

Next Nasdaq It remains to be seen if the SEC steps in again to foil the latest NASD intentions, as it did to a previous plan in 1996, replacing the proposed NAqcess trading system with the SEC-approved order handling rules. Many Nasdaq market makers and ECNs have expressed strong opposition to the proposed integrated trading platform, originally dubbed Next Nasdaq, while the NASD, several small trading firms and both institutional and retail investors have supported the plan.

OATS Nasdaq's Order Audit Trail System (OATS) is a real-time electronic system designed to gather and report 25 details of an order, from receipt to execution. Events will need to be timed in seconds. This level of detail may appear to be carrying things a bit too far, particularly for traders who have made the mistake of time-stamping tickets with such dates as Jan. 32, 33 and 34. As proposed, orders captured or directly entered into an electronic system would first comply with OATS requirements. Non-electronic procedures would be subject later, followed by all other procedures.

Year 2000 Compliance The existing computer systems of trading firms and their clearing brokers may be heading for functional melt-downs unless they are reprogrammed to handle the change in century dating from 1999 to 2000. Trading firms should assess the computer systems that process their trades. The penalties for non-compliance will be astronomical. If your firm just started to look into the issue, a first step would be to respond to a recent NASD survey on Year 2000 compliance.

SEC and NASD Priorities All traders should anticipate the regulators' agendas and be proactive in uncovering and correcting problems before the NASD or SEC finds them. Last year, the larger trading firms were the primary targets of the NASD. Their problems are principally matters of volume. In 1998, smaller traders, especially those with retail operations, will become NASD targets, and it is likely the association will find that many of these firms are unprepared because they lack the systems, staffing or full understanding of their market-making obligations. Consequently, they are ripe for the picking by the NASD.

On Jan. 13, Durango, Colo.-based OptiMark Technologies and Nasdaq inked an agreement in principle to integrate OptiMark's supercomputer-driven matching system with the Nasdaq Stock Market. But first the plan must be approved by the Securities and Exchange Commission. OptiMark, of course, is not short of ambition, aiming to allow institutions and retail customers to trade anonymously and without disclosure, based on price, size and satisfaction levels.

OptiMark's chairman and chief executive is Bill Lupien, former head of Instinet and previously a specialist for 17 years on the Pacific Exchange (PCX). He co-invented OptiMark with John "Terry" Rickard, who is the company president.

Here, Lupien answers some questions on traders' minds.

Q: Your agreement with Nasdaq is big news.

A: Well, we have always recognized the need to provide investors with a way to trade over-the-counter as well as listed equities. So it was natural for us to approach Nasdaq, as the primary market in OTC stocks, to discuss offering OptiMark to National Association of Securities Dealers' members.

We were pleased when Nasdaq indicated not only an interest in making OptiMark a facility of Nasdaq, but expressed a desire in integratating OptiMark with its planned limit-order file. By increasing liquidity, the integration of OptiMark with Nasdaq will make trading OTC stocks more efficient and less costly for institutional investors.

In addition, brokers representing small investors will be able to use OptiMark to give their retail customers access to the better prices frequently offered by institutional investors something they cannot readily do today. For OptiMark, the agreement in principle with Nasdaq, the largest and fastest growing electronic market in the world, provides a level of credibility that will continue to attract buy-side and sell-side users.

Q: What inspired you to develop OptiMark ?

A: We were looking for a comprehensive solution to a pervasive problem plaguing the securities industry: how to find liquidity at a reasonable cost.

The structural deficiencies of the securities market primary among them, information leakage have forced traders to withhold liquidity in order to avoid giving the market information that might cause prices to move against them. Such adverse price moves typically associated with large orders and referred to as market impact and the inefficient strategies that traders use to avoid them, cost investors billions of dollars annually.

The problem has been getting worse every year, as more and more assets are concentrated in mutual funds and pension funds.

Q: So what exactly is OptiMark?

A: OptiMark is an optimal, supercomputer-driven, trade-matching mechanism with features to satisfy the trading desires of all market participants, from small retail investors to large institutional investors.

OptiMark incorporates two powerful, patented features. First, it allows the anonymous and non-disclosed representation of a trader's willingness to trade over a continuous range of prices and sizes. Second, it provides a means of optimizing the sequential allocation of trades between buyers and sellers at different prices and sizes based upon a measure of mutual willingness to trade and a deterministic set of trading rules. Additionally, order entry and cancellation can be accomplished at electronic speeds over a 100 percent FIX-compliant transaction network. OptiMark will function as a frequent – that is, every 90 seconds – multi-price call market.

Q: How much will OptiMark cost users?

A: OptiMark charges a penny a share to the clearing broker for completed trades, a transaction fee comparable to floor brokerage. There is no charge to the desk for installation or maintenance. The only other cost is the modest effort required to learn how to use a powerful new tool, a cost that will be paid back many times over in reduced market-impact costs.

OptiMark will be a facility of Nasdaq for trading OTC stocks, just as it is a facility of the PCX for listed stocks. As is the case with the PCX, we expect Nasdaq to charge its members approximately a penny for each share transacted through the OptiMark-Nasdaq facility. Market makers will receive a discount. Currently, the PCX has set its fee at a penny per side, for each share transacted through OptiMark.

Nasdaq will pay OptiMark on a share-transacted basis for operating the facility. Similarly, the PCX will pay OptiMark a fee for operating the facility. Non-PCX member users, namely institutional investors, will pay their brokers a commission at a rate they negotiate with their brokers.

Q: Explain how OptiMark-generated orders are entered and canceled at electronic speeds over a FIX-compliant network?

A: OptiMark, with a messaging format that operates as an extension of FIX, will be accessible through a wide range of gateways, including its own 56 k/bps FIX-compliant transaction network. Thus, any order-management system that can route trades through a FIX-compliant interface can route them easily to OptiMark. Likewise with cancellations.

Q: Won't a call market running every 90 seconds stretch the human capacity of individual traders?

A: The methodology for creating OptiMark profiles is extremely user-friendly and designed for speed. A wide array of templates are resident on the system for representing and customizing commonly-employed strategies. In addition, profiles placed in OptiMark will remain in force from one call-cycle to the next, unless they are withdrawn. They may also be pegged to certain underlying variables, indices for example, so that adjustments to the auction market are made automatically. This methodology, versus the effort required today, can actually lessen the workload.

Q: What about market participants representing their full trading interest with satisfaction profiles. Creating such profiles surely will stretch human capacity?

A: In many cases, a profile equates to a conventional limit order or a limit order with discretion, and can be entered with the same effort. To facilitate rapid entry, the system includes custom templates for automatically creating complex profiles to represent frequently-used strategies. Such profiles can often replace the laborious task of entering multiple individual orders. OptiMark requires no more effort than today's trade order-management systems, and is easier than the use of most DOT systems.

Q: Fine, but suppose a trader with 100 stocks on his blotter selects 25 to go into OptiMark. Perhaps he'll buy 100,000 shares here and a million shares there, and do that 25 times over. The trading day is roughly 7 hours long, or 420 minutes multiplied by 60 seconds. Divide that by 90 seconds for every call and that comes to 280 calls. Isn't that a lot of exposures to follow in one day?

A: Those 280 daily calls actually mean 280 breaks, each more than a minute long, when a trader doesn't have to follow the matches. This method is much less burdensome than watching every tick in a continuous market.

Q: If negative news hits the market, a trader may want to withdraw his order.

A: A trader can cancel any or all of his orders virtually instantaneously in OptiMark without any manual intervention, as is required for exchange orders. In addition, order cancellation in OptiMark has advantages over orders canceled in a continuous market. For example, in OptiMark, the existence of an order is unknown, and is not executable until the next match occurs. OptiMark is also customizable, able to accommodate many third-party and user-created programs designed to deal with special situations, such as auto cancel in the event of news.

Q: If a user enters a buy profile and nothing gets done, can't the user reasonably assume there are no sellers at his stated level?

A: Yes

Q: What protection do institutional customers have when a seller goes into OptiMark, clears out all the bids on XYZ stock buying it down a point and then offers the stock back to institutions that may have previously bought the stock at the higher price?

A: If we assume that it's a seller clearing out the bids, then the buy-side institutions represented in OptiMark will have paid whatever the down-a-point price was, which would seem at least temporarily advantageous and not in need of protection.

If the other institutions' orders are exposed by being part of the disseminated quote, they will have an opportunity to participate in the OptiMark print by being sent an Intermarket Trading System (ITS) commitment to trade at the print price for whatever size is shown.

Q: How does OptiMark facilitate price discovery?

A: Users can employ the system's order-representation capability to indicate the price they are willing to pay or accept at a variety of size points, including the largest quantities they may wish to buy or sell, and not just at the retail-size points they now typically disclose. The system's matching algorithm determines the prices and sizes at which buying and selling interest overlap, thus discovering market-price for an instrument during every matching cycle or periodic call.

Q: Can users get price improvement?

A: Yes. OptiMark searches for optimal matches, based upon both mutual satisfaction and a set of priority rules. Within a totally secure environment, it enables a large-size trade to interact with all contra-trading interest at once, avoiding the serial leakage of information and resulting market impact involved in executing such a trade in small pieces.

OptiMark also takes retail interest and aggregates it whenever possible to satisfy institutional interest, and this uniquely allows the small investor a chance at price improvement against a more aggressively priced institutional order.

Q: If OptiMark is successful, won't it be difficult to see prices?

A: As in today's market, bid and ask prices for immediately executable orders will be displayed in the continuous exchange-based market, and the prices and sizes of all trades, including those that have been matched in OptiMark's periodic call market, will be printed on the exchange ticker.

Q: Let's turn to non-disclosure and anonymity. Do institutions surrender non-disclosure as soon they send trades to clearing brokers for settlement?

A: Users have the option of selecting immediate or end-of-day broker notifications for their OptiMark transactions. These options will prove adequate for a wide range of users and trading strategies. In addition, users may designate anonymity brokers for clearing and settlement of their OptiMark transactions, ensuring end-to-day anonymity and non-disclosure.

Q: How does an institution using OptiMark avoid giving a broker information about its intentions?

A: In OptiMark, institutions can trade directly with each other, and the broker is informed of the results only at the end of the day if a trade is completed.

Q: Say an institution is selling 75,000 shares of XYZ. Could the institutions' clearing broker ascertain that the institution has a larger order behind this trade from public filings?

A: Public filings are too outdated to be a meaningful factor in most trading. Value players who hold positions have it a bit tougher, but the markets typically move faster than the information. And of course disclosure of who a trade is for on a trading floor itself is prohibited. In addition, brokers have the ability to extend the anonymity period beyond the trade date. Sensitive orders may flow to those that offer such a service.

Q: What exactly is the role of the PCX?

A: The PCX will offer OptiMark to investors through members as a facility of the exchange. The relationship is non-exclusive.

Continuous trading on the PCX and any other exchange that offers OptiMark in the future will operate as before. OptiMark is fully integrated with the National Market System (NMS) through the PCX's participation in the ITS.

Q: How is OptiMark different from other electronic trading systems?

A: In a nutshell, the system uniquely combines satisfaction, anonymity, non-disclosure, price discovery, instant ingress/egress and optimal execution.

OptiMark is the only system that enables market participants to represent their full trading interest with certified confidentiality, in a completely anonymous and non-disclosed manner. By anonymity, we mean you don't know who is doing whatever in the market. By non-disclosure, we mean you don't know what the market participant is doing, or trying to do.

OptiMark also allows expression of trading interest across a range of prices and sizes the participant considers acceptable. That interest is coupled with a standardized presentation to the system of the degree of willingness to trade at each price and size point, across a spectrum ranging from a 1 completely willing to trade to a 0 unwilling to trade. References to OptiMark as three dimensional are based on this, with the three dimensions being price, size and satisfaction level.

OptiMark is an open rather than proprietary system, functioning as a facility of the existing infrastructure and requiring users to have their own clearing and settlement brokers. Thus, rather that fragmenting the market as closed systems inevitably do, the OptiMark system will help to integrate the market, increasing liquidity and lowering market-impact costs.

Lastly, because the system optimizes the matching of orders, filling those that represent the highest levels of negotiation value first, and because of its abilities to attract additional liquidity to the market and to aggregate small orders to provide a match with larger orders, the opportunities for price improvement are enhanced.

Q: Are OptiMark's features available from other electronic markets and crossing networks?

A: No. Instinet provides anonymity, but does not provide non-disclosure. The Instinet Crossing Network and POSIT are designed to provide anonymity and non-disclosure among users, but do not provide internal price discovery.

In addition, both of the aforementioned systems are operated by broker dealers, which means that their use by institutions supplants other brokerage relationships. OptiMark is not a broker dealer. The Arizona Stock Exchange (AZX) system offers a periodic, anonymous, single-price call market, but with far less frequent calls (now three times a day rather than every 90 seconds with OptiMark). The AZX accepts only standard limit orders, as opposed to the expression of total trading interest available via OptiMark satisfaction profiles. In addition, the AZX is a proprietary system. OptiMark is an open system and integrated with the NMS.

On OptiMark, a participant's strategy is never disclosed to anyone, including OptiMark personnel; as represented on an OptiMark profile, a strategy remains private, known only to the fully-secure, Deloitte & Touche-tested OptiMark system itself.

Even when a trade results from the matching of a participant's trading strategy with one or more participant strategies, only the results of the trade are made public. The identity of a participant is revealed only after a trade is executed, and only at the end of the day to the clearing broker. The only exception made to this rule is for surveillance purposes by exchange and regulatory personnel.

Q: Will OptiMark hurt broker dealers' business?

A: No. Broker dealers will use OptiMark for their proprietary trading and as agents for retail and institutional trades. Although some institutions may directly access OptiMark to preserve confidentiality, such institutions, of course, must still designate, and pay a commission to, one or more broker dealers to handle clearing and settlement of any trades that result. Thus, brokers will not be cut out of the process.

In fact, far from losing business, broker dealers should enjoy increased business if OptiMark results in significantly increased trading volumes, as we expect it will. Many brokers are developing value-added services for their customers around the OptiMark system. As with specialists, OptiMark provides broker dealers and market makers with the ability to reliquify proprietary positions with speed and anonymity.

Q: Are specialists vulnerable?

A: No. The specialist book for participating exchanges can be fully represented in the system, allowing specialists to utilize OptiMark's liquidity every 90 seconds to find liquidity for their limit orders, while, between OptiMark calls, they handle market-order and executable limit-order trades. OptiMark allows specialists to reliquify their positions with a speed and confidentiality otherwise unavailable.

Q: How does the Nasdaq and OptiMark plan affect dealer capital?

A: OptiMark provides market makers with a mechanism for price verification and proprietary-book reliquification in an anonymous environment. Many dealers have expressed the expectation that these facilities will lower their capital risk.

Q: Will OptiMark force brokers to reassess the value of their research services?

A: OptiMark does not change the relationship between broker dealers and their clients. This fact distinguishes OptiMark from other electronic trading systems.

It is true that institutions can trade directly with one another using OptiMark, but they must designate, of course, a broker to handle clearing, settlement and credit. These brokers receive their commissions for the trade just as they would for a non-OptiMark trade.

If a broker dealer provides valuable research to an institution, that institution can designate that broker to receive credit for its trades as compensation for providing the research. In fact, since an OptiMark trade is, by definition, best execution, we make it easier for smaller research brokers to get compensated by institutions that use their research.

Q: If the New York Stock Exchange does not sign up with OptiMark, investors could still send listed business directly to Nasdaq dealers or to OptiMark?

A: OptiMark is an open system, and none of our agreements are exclusive. Any exchange can enter into an agreement to make OptiMark available as a facility for its members' use.

Q: Finally, will OptiMark be used exclusively for U.S.-listed equities and Nasdaq stocks?

A: The PCX expects to launch the OptiMark system for trading listed equities in mid-1998. Subsequently, Nasdaq also plans to introduce OptiMark to its members. Trading in options and other instruments is scheduled to commences on the PCX and on the Chicago Board Options Exchange after the initial launch of the system.

OptiMark is also pursuing agreements and relationships with other domestic and international equity and futures markets.