The Boston Stock Exchange (BSE) is supporting the New York Stock Exchange's stance on the proposed plans for bolting the OptiMark Technologies trading facility to the Pacific Exchange (PCX), linking them both to the Intermarket Trading System (ITS). In a public comment letter filed with the Securities and Exchange Commission, the BSE argues that unmatched orders sent to the PCX via OptiMark should be first exposed to PCX specialists for potential execution before a commitment to trade is transmitted through the ITS.

For its part, OptiMark wants an arrangement that allows all trading interest on the PCX floor, including unmatched orders, to be included in a commitment to trade through the ITS. The National Association of Securities Dealers, in contrast, has basically supported the parameters of the PCX and OptiMark link. In the comment letter, the BSE says that the most "tried-and-true test of price discovery has been through the auction process for exchange-listed securities, and this process includes a probe or other form of market inquiry."

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OptiMark Technologies dismissed a report that the planned summer launch of its trading system on Nasdaq is likely to be postponed by 12 months. As reported here last month, the challenge of Year-2000 compliance will be a higher priority next year among trading desks than cementing links with OptiMark. Downplaying the delay report, OptiMark has noted that the Year-2000 bug is partly the reason it committed to an aggressive summer launch. Scott Peterson, a spokesman for Nasdaq, says the exchange's goal is still "complete implementation of OptiMark by summer 1999."

Meanwhile, many Nasdaq market makers, fearful about the possibility of losing order flow because of OptiMark, seemed quite pleased by the reported delay. Even so, at a press conference in early September, OptiMark co-founder Bill Lupien said he had spent months showing market makers a presentation on how they can enhance their profitability using OptiMark. "A lot of them are more relaxed," he said. Meanwhile, OptiMark's planned launch as a facility of the Pacific Exchange has itself been slightly delayed again and is now set to go live in January, instead of this month.

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Turmoil in emerging markets is often bad news for some trading professionals specializing in these regions, with pinks slips and cutbacks a regular occurrence. Bankers Trust Corporation for example fired 20 traders from the New York emerging-markets desk of subsidiary BT Alex. Brown & Sons in late October, a reliable bank official confirmed. The 20 professionals worked mostly with Latin American securities in the equity and fixed-income sales and trading areas. The firings leave 15 traders on the emerging-markets desk. The bank official said five more employees may still be transferred off the desk before the end of the year.

The firings come just weeks after Bankers Trust eliminated 34 jobs in its Mexico City office, and brought the remaining Mexican traders to New York. The cuts were part of an expense-reduction program announced after Bankers Trust disclosed larger-than-expected losses in the third quarter. The bank plans to reduce expenses by $300 million or eight percent a year by scaling back some of its riskier businesses. Last month, Bankers Trust announced losses of $488 million in the third quarter, its largest quarterly decline in nine years.

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Record prices for two seats on the American Stock Exchange put a special shine on its November 2 merger with the National Association of Securities Dealers. The seats were sold for $489,000 and $490,000 only two days before the merger. The previous record was set on February 1 at $480,000, while the exchange's last seat was sold a month earlier for $440,000.

With the merger fully completed, Nasdaq and the Amex are set to be run as separate markets, overseen by the Nasdaq-Amex Market Group, a newly-created subsidiary of the NASD. One of the first priorities of the merged entities is the development of an electronic limit-order book and a trade-routing and transaction system for equity orders. The system is being designed to allow individual investors and traders to enter and electronically execute orders from on and off the trading floor.

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Tom Bliley has an appearance straight out of central casting: tall, white-haired and courtly. But he's no actor. Bliley is chairman of the House Commerce Committee.

And the Republican congressman from Virginia was at the center of a political storm in the waning hours of the 105th Congress last month.

Bliley single-handedly derailed proposed compromise legislation that would have placed a one-year cap on revenues for the federal government raised from Section 31 transaction fees. The cap would have limited the levy to an estimated $150 million in 1999 based on current equity-transaction volume, enough to buttress the Securities and Exchange Commission's budget.

Bliley foiled the efforts of House Rules Committee Chairman Gerald Solomon (R-N.Y.), who was spearheading a Section 31 relief campaign spurred by an activist group of trade associations and exchanges led by the Security Traders Association.

So for now, the equity-trading community must face the continued toll of full-scale Section 31 fees, though efforts to reintroduce a relief bill are expected on Capitol Hill sometime during the next session

(Solomon's unsuccessful legislation is separate from a proposal by the National Association of Securities Dealers, filed with the SEC, to eliminate the double-counting on Nasdaq market makers' riskless principal trades.)

Solomon's Strategy

Solomon's aim was to attach his proposed fee-cap legislation to the omnibus spending bill in Congress, coming just hours before lawmakers headed home for Election Day. But in the end his effort collapsed because of Bliley's strong opposition.

"When [lobbyists and others] came to see me about reducing Section 31 fees, I said what you have to do first is get the agreement of all the committees involved, and I will go right along with that," Bliley told Traders Magazine, recounting the background of his efforts.

Speaking minutes before the floor debate on the spending bill, Bliley, who chairs the panel which has jurisdiction over the SEC, said the problem was that supporters of a reduction didn't get agreement from the relevant committees.

"They tried to do an end run and go through the [House] Rules Committee," he said. "And it wasn't just me objecting, but the appropriators were objecting too. The White House was objecting. [SEC Chairman] Arthur Levitt was objecting. And so it just didn't make it."

Capitol Hill observers dismissed Bliley's public position, saying it was a smokescreen for his deeply-rooted opposition to the Section 31 relief campaign. "Bliley's opposition doesn't stem from any philosophical disagreements," said an aide to a Republican congressman. "It stems from a fear of being perceived as helping liberal Democrats that lobby for groups such as the Securities Industry Association," claimed the aide. The SIA is a member of the ad hoc Section 31 coalition.

Bliley, an avowed conservative, bucked the hopes of many key Republicans who co-sponsored the original bill of GOP colleague Solomon for permanent fee-cap relief, including House Majority Leader Richard Armey (R-Texas), House Ways and Means Committee Chairman Bill Archer (R-Texas), and House Appropriations Committee Chairman Robert Livingston (R-La.).

Bliley even ignored the sentiments of the staunch GOP allies among the Washington tax-cutting crowd. Even the U.S. Chamber of Commerce and the National Federation of Independent Businesses went on record in support of the Solomon bill.

The White House

Jacob Lew, the director of the White House Office of Management and Budget, presented the administration's position in a letter dated October 12 to Rep. John Dingell (D-Mich.), the ranking Democrat on the House Commerce Committee.

"New legislation altering fee collections and SEC funding if enacted without adequate consideration or input from all affected parties could upset the delicate balance so carefully crafted [in 1996 legislation]," the letter stated.

In the waning hours of Congress, it was a race to the wire, with Solomon offering his compromise to cap fees for one year with a provision to allow hearings in 1999, which was meant to appease Bliley. Solomon was desperate for victory. Earlier, he co-sponsored, along with Rep. Robert Menendez (D-N.J.), his original but unsuccessful Section 31 fee-cap bill which would have provided permanent relief. A Republican staff member said Solomon was in his "tenacious mode" during the final days of the congressional session.

Just after House and Senate Republican leaders publicly declared the omnibus spending bill closed to further additions, a frustrated Solomon blamed the failure to have Section 31 included on the "lack of hearings" at the House Commerce Committee. But he refrained from criticizing Bliley, the panel's chairman, though he inferred he was responsible.

Even at the 11th hour, Solomon was in overdrive. "There are still things being added to it, and if we can convince the appropriate people, we'll still be able to maybe save it," Solomon said. The appropriate people included Bliley, he chuckled, noting that "there are really no objections on the Senate side."

The SEC was another matter.

"Arthur Levitt is very powerful in this process, much too powerful," said a source who spoke on condition of anonymity. "He was supposedly neutral, and he is now actively opposing the bill." The source accused Bliley and Dingell of "carrying water for the SEC."

In fact, Levitt wrote to Dingell on October 7 because of their mutual concern about the Solomon bill. Rushing to change the fee-reduction mechanism adopted in the National Securities Markets Improvement Act of 1996, "without hearings or sufficient public discourse, may produce a solution that itself requires further revisions," the SEC chairman wrote.

House Speaker

In a footnote to the campaign for Section 31 relief, House Speaker Newt Gingrich (R-Ga.) was thought to be supportive of Solomon's efforts. In a brief exchange with Traders Magazine, he inferred, however, that the issue may not even have been brought to his attention. "I don't know anything about it, honestly," Gingrich said.

Solomon, nonetheless, wrote an October 14 letter to the Speaker which would seem to contradict Gingrich's claim. "I want to follow up our conversation today regarding my legislation (H.R. 4213) capping SEC stock-transaction fees, as well as thank you for your offer to raise this issue with White House Chief of Staff Erskine Bowles," the letter stated. A copy of the letter was obtained by this publication.

Meanwhile, the outlook for Section 31 relief in 1999 appears clouded."I got the commitment from Chairman Levitt to work with us to try to get the fees more in line with the cost of operating the SEC," Bliley said.

As for the tenacious Gerald Solomon, he is retiring from Congress.

The appointment of Democratic party activists to senior posts at Washington-based trade groups is raising a furor among some Capitol Hill Republicans.

Among the most recent batch of Democratic officials appointed is John Hilley, a former top aide in the Clinton White House. Hilley was named earlier this year as executive vice president for strategic development at the National Association of Securities Dealers.

His connections and experience in the White House and on Capitol Hill were clearly a factor in his appointment. But the appointment has drawn a stinging rebuke from House Majority Whip Tom DeLay (R-Texas).

"The [NASD's] hiring of John Hilley is a very big mistake," DeLay told Traders Magazine. "In the face of creating a relationship with the Republican majority, for an organization to hire a highly-partisan Democrat gives me great concern because I won't deal with such organizations."

DeLay's comment echoed sentiment expressed by other Republicans when former Democratic congressman David McCurdy was named to head the Electronics Industry Association, a trade group based in Washington. The controversy was reported in several newspapers, including the Washington Post, and in several publications covering Capitol Hill.

As reported earlier, opposition from Rep. Tom Bliley (R-Va.) to Section 31 relief was attributed to Bliley's fear that he would be perceived to be helping hired liberal lobbyists.

DeLay complained that for the past 50 years a culture has taken root in Washington that places partisan Democrats "at the heads of all these trade associations, lobbying groups and other organizations."

Not surprisingly, Senate Minority Leader Tom Daschle (D-S.D.), Hilley's boss, was critical of Delay's outburst.

Hilley was one of the White House negotiators involved in the balanced-budget agreement that was signed in 1997. Before that, he worked on Capitol Hill on policy issues for the Democratic party.

Pragmatic View

One Capital Hill pundit had a pragmatic view of the partisan bickering. The pundit said tempers could be cooled if the NASD appoints an even number of Republicans and Democrats to posts that utilize their political experience.

"Frank Zarb [chairman and chief executive of the NASD] believes he is the Republican mover and shaker at the organization, so who gives a curse as long as they have additional lobbyists who are Republicans," the pundit said. The NASD declined to comment.

Are there any real surprises contained in the Securities and Exchange Commission's recent report on soft-dollar practices? Yes and no.

On the surface, the report, based on the SEC's sweep of 75 broker dealers and 280 investment advisers, seems tame.

It contains, for instance, a series of staff recommendations aimed at improved reporting and disclosure. The report also notes an undisclosed number of referrals to the SEC's Division of Enforcement for further investigation, as well as the voluntary repayment by advisers of approximately $4 million to clients, "as a direct result" of the sweep and earlier inspections.

Careful Reading

But a careful reading suggests it would not be wise to leave the report to collect dust, one expert says. "There is an awful lot in it," said Lee Pickard, the Washington-based counsel to the Alliance in Support for Independent Research, a soft-dollar trade group.

For example, the sweep found that 35 percent of the broker dealers and 28 percent of the advisers scrutinized provided and received non-research products and services in soft-dollar arrangements.

Some advisers were found to be using soft dollars to pay for office rent, cellular telephone service, legal expenses and hotel and rental-car costs.

Inadequate disclosure of soft-dollar arrangements by advisers to their clients, and the improper allocation of the cost of so-called mixed-use items, were also problematic, according to the report.

Under soft-dollar practices, products or services other than executions of securities transactions are obtained by an adviser from or through a broker dealer in exchange for the adviser directing client brokerage transactions to the broker dealer.

SEC rules require an individual or firm to exercise investment discretion over an account in order to use client commissions to obtain research under Section 28(e) of the Securities Exchange Act of 1934.

After the SEC abolished fixed commission rates in 1975, Congress created a safe harbor under Section 28(e). The safe harbor was designed to protect advisers from claims they had breached their fiduciary responsibilities, by causing clients to pay more than the lowest available commission rates in exchange for research and executions.

The test is whether products and services obtained by advisers with soft dollars provide lawful and appropriate assistance to the adviser in the performance of investment decision-making responsibilities.

Recognizing the conflict of interest that exists when an investment adviser receives research, products or other services as a result of allocating brokerage on behalf of clients, the SEC requires advisers to disclose soft-dollar arrangements to their clients.

The SEC's staff recommendations outline four areas of concern:

* The need to clarify the scope of the statutory safe harbor, and to emphasize the obligations of all participants in soft-dollar arrangements. Safe-harbor protections relating to the uses of electronically-provided research and items that may facilitate trade execution also warrant clarification.

* The adoption of recordkeeping requirements that would provide greater accountability for soft-dollar transactions and allocations.

* The revision of reporting requirements to ensure more meaningful disclosure about the products received that are not used in the investment decision-making process. Advisers should also be required to provide more detailed information when requested by clients.

* The strengthening of adviser and broker-dealer internal-control procedures regarding soft-dollar activities.

Step Forward

Pickard views these recommendations as "a step forward, yet not a radical step forward. For the first time since 1983, the staff has at least been talking about the definition of research under Section 28(e)."

Rep. John Dingell (D-Mich.), the ranking Democrat on the House Commerce Committee, disagreed.

"The SEC has found serious, and in the case of disclosure, widespread violations and problems," he said. "But, the SEC's recommendations for addressing the problems fall woefully short."

The sweep examined $274 million in soft-dollar payments for third-party research. This represented an estimated 32 percent to 41 percent of all soft-dollar commissions paid for third-party research by advisers from January 1996 through October 1996.

The central theme of both the Securities and Exchange Commission's and the Association for Investment Management Research's reports on soft-dollar practices is disclosure, disclosure, disclosure. Not only is the SEC requiring it, but an increasing number of pension-plan sponsors are requesting information on how their commission dollars are being used to benefit the performance of their plans.

The SEC report on soft-dollar practices found that "most broker dealers and advisers lacked comprehensive soft-dollar controls. This lack of comprehensive controls may have led to instances of incomplete disclosures to clients, using soft dollars for non-research purposes without disclosure, and inappropriate mixed-use allocations."

It's clear the SEC and plan sponsors will continue their probes in this area. To be compliant, most firms will need efficient methods for providing the details for these ongoing audits. The question is, Is there something more to be gained from keeping more accurate records of soft-dollar arrangements? We think the answer is yes.

Four Benefits

There are four benefits that can be derived from taking a systematic and comprehensive approach to managing commission expenditures. They are: better commission utilization; a disciplined assessment of compliance with regulatory requirements; more complete information for evaluating the value derived from each brokerage relationship; and improved relationships with plan-sponsor clients based on proactive disclosure.

The operative word here is systematic. More specifically, systems need to be developed that create a closed information loop on commission expenditures. The objective should be to provide management with a tool for allocating, tracking and reporting all expenditures for regulatory purposes, as well as for client relationship development and overall business management.

Better utilization of commissions has become a key determinant for the success of a money-management organization. The growth of commission-recapture programs, the increasing demand for independent research, and the importance of compensating key brokers to ensure ongoing access to a range of valuable services are all competing for the same commission dollars.

In order to manage these competing needs, a system must be developed that starts with a budgeting component. This would allow a firm to allocate commissions for client-directed programs as well as proprietary and third-party services. Knowing what resources are being used, by whom and for what purposes, would allow duplications and inappropriate services to be eliminated.

Compliance becomes increasingly complex as more research and other brokerage services are delivered electronically to advisers. Automating soft-dollar reporting practices is becoming more important because of the time spent on record keeping, and the other complexities involved.

Or as the SEC report aptly stated: "The use of electronically-provided research has increased. We found inconsistency in the way in which broker dealers and advisers classified various items used to send, receive and process research electronically. Industry participants are grappling with decisions involving whether the devices needed to obtain access to research and to analyze data constitute research or non-research."

Also, a systematized approach to record-keeping practices for soft-dollar arrangements would benefit advisers in their determination of what constitutes "mixed-use" items, products or services obtained by advisers that have both research and non-research uses. The SEC report found that many advisers "were either not allocating the purchase price of mixed-use items between hard and soft dollars, or could not justify how the hard-dollar to soft-dollar allocation was reached."

By taking a systematic approach, managers will have the information they need to evaluate the appropriateness of each broker's compensation in light of the value provided. In short, they are now in a position to gain the full value of each commission dollar spent.

Perhaps the biggest benefit to be gained from accurate record keeping is the opportunity for proactive client service. Armed with details, a money manager would be able to articulate the correlation between investment strategy and the use of commissions. This type of dialogue builds trust, the foundation of lasting client relationships.

The Chicago Stock Exchange (CHX) hired Paul O'Kelly a former Chicago Mercantile Exchange and Securities and Exchange Commission staffer as its executive vice president of market regulation and legal compliance. In the newly-created position, O'Kelly will be responsible for all regulatory and legal functions at the CHX. Before joining the CHX, he was an 11-year veteran of the Chicago Mercantile Exchange, serving most recently as general counsel. O'Kelly began his career at the SEC, working in the commission's Chicago office for 13 years.

Cleary Gull Reiland & McDevitt recently added two senior traders Bob Hurley and Steve Iskalis to its Milwaukee headquarters. Hurley, a former Chicago-based trader with Nesbitt Burns and ABN-Amro Chicago Corp., joined the firm as head of over-the-counter trading. Iskalis rejoined Cleary Gull as a senior coverage trader. Iskalis had left Cleary Gull two years ago for Vector Securities in Deerfield, Ill.

David Coons left Cantor Fitzgerald & Co. to co-manage the trading desk at Resnick Capital Management, a Los Angeles-based hedge fund. Coons, a partner in the firm, had been an employee of Cantor Fitzgerald for seven years, trading on the firm's institutional equity desk in Los Angeles.

Michael Lewis was appointed head of international sales trading at Commerzbank Capital Markets Corporation. Lewis will build a New York trading desk for the firm, a New York arm of London-based Commerzbank Global Equities. Lewis was previously an employee of now-renamed Warburg Dillon Read, serving as a managing director and establishing a sales-trading desk for the firm in London.

The Philadelphia Stock Exchange (PHLX) promoted Ken Meaden to chief regulatory officer. Meaden began working at the PHLX in 1997, and was appointed vice president of market surveillance in August. In his new role, he will be responsible for all of the exchange's regulatory areas, including market surveillance, regulatory services, securities and examinations.

The PHLX also named Adrienne Hart vice president of market surveillance. She will directly oversee all market-surveillance operations. Prior to joining the PHLX, Hart was a sales and trading manager at CoreStates Financial Corporation in Philadelphia.

Dan Katrowitz joined J. Alexander Securities in Aventura, Fla. as a senior Nasdaq trader. He was previously a Nasdaq trader at North American Institutional Brokers in Fort Lauderdale.

Jonathan de L. Squires was hired as a managing director within the investment-banking division of Credit Lyonnais Securities. He will support marketing and business origination in corporate finance, equities and mergers and acquisitions for the New York-subsidiary of Paris-based bank Credit Lyonnais. Prior to joining Credit Lyonnais Securities, Squires was a managing director and head of technology at Gruntal Capital Markets in New York.

Steven Levine, assistant chief of credit margins and regulation at the New York Stock Exchange, retired after 25 years of service. Levine, 56, was responsible for interpretation of Securities and Exchange Commission, Federal Reserve Board and Big Board rules regarding credit margins. He will be succeeded by Albert Lucks, director of credit regulation at the NYSE.

BNY ESI & Co., a New York-based brokerage subsidiary of the Bank of New York Company, acquired San Francisco brokerage firm Alpha Management. Alpha Management will operate as a division of BNY ESI & Co., with Alpha Management President Kenneth L. Kahn being named general manager of the new division. Kahn will be responsible for operations at Alpha Management. Terms of the deal were not disclosed.

Alpha Management was formerly the brokerage unit of Callan Associates, a San Francisco consultant for individual investors.

Beth E. Weimer left Nasdaq to join the New York office of global service firm Arthur Andersen as a partner. Weimer a ten-year employee of Nasdaq and its parent, the National Association of Securities Dealers most recently managed online surveillance operations at Nasdaq. In her new position, she will lead the New York-area offices of Arthur Andersen in regulatory consulting for capital markets.

After clashing with executives at new parent Nationsbanc, Thomas Weisel resigned as chairman and chief executive of Nationsbanc Montgomery Securities. Lewis W. Coleman, chief operating officer at Nationsbanc Montgomery, is expected to succeed Weisel.

Charlotte-based Nationsbanc bought Montgomery Securities last October for $1.2 billion, and kept Weisel on board as head of the San Francisco investment bank. It has been reported that Weisel strongly disagreed with Nationsbanc executives over how much influence the parent would have over its new subsidiary.

Stephen K. Lynner was named president of The AutEx Group. AutEx is a Boston-based developer and provider of pre-trade processing and execution information in global securities. The firm has over 3,000 subscribers and 64 client firms around the world. Prior to joining AutEx, Lynner was president and chief executive of Delta Clearing Corp., a Jersey City-based developer of clearing services for securities.

Marc R. Junner joined the Jersey City desk of Hill, Thompson, Magid & Co. as a Nasdaq trader. He was previously an equity trader at M.H. Meyerson & Co. in Jersey City. Junner reports to Nicholas Ponzio, Hill Thompson's managing director.

Edward J. Powers was appointed director of U.S. securities-industry business development for the financial-services practice of DMR Consulting Group. DMR is a New York-based provider of information-technology services. In his new role, Powers will responsible for aiding clients within the securities industry in information-technology intitiatives. Powers was previously responsible for business and product development at Automatic Data Processing in Jersey City.

In the first four months of testing, roughly 650 individuals took the new National Association of Securities Dealers' exam for Nasdaq and over-the-counter traders. Of those 650, almost 25 percent or 150 people failed.

All Nasdaq and OTC traders are required to take the test the Limited Representative-Equity Trader Examination, or Series 55.

A two-year grace period was granted to 17,000 traders to pass the examination. The grace period ends May 1, 2000.

John Pinto, a former executive vice president of member regulation at NASD Regulation, the NASD's regulatory arm, said the passing rate for the Series 55 75.5 percent is consistent with the early rate for new NASD exams introduced in the past.

Pinto, however, expressed concern that only 650 examinations were proctored through September.

"That's a very low number," Pinto said. "People think they have a lot of time to take the test. But we're almost six months into the two-year grace period, and 650 is a very low number. I think that's an area of concern for firms."

The examination numbers were confirmed by NASD Regulation.

The Series 55 was prepared by the NASD in 1997, and all traders were given the opportunity to file for the grace period before its August 31 deadline.

According to NASD Regulation, 80 percent of those required to take the Series 55 filed for the extension before the August 31 deadline.

But Pinto said of those 17,000 professionals filing for the grace period, as many as 3,000 will not sit for the Series 55. "A lot of firms filed for extensions for people who won't have to take the exam," he said. "Compliance people. Managers. Some firms were just playing it safe."

Pinto currently heads the Washington branch of Dover International, an Atlanta-based consulting firm. A Dover subsidiary, the Investment Training Institute (ITI), is offering a course and study guide for the Series 55.

Pinto said professionals taking the ITI course which is endorsed by the Security Traders Association have a Series 55 passing rate of 85 percent. He recommends professionals spend at least 25 hours studying for the examination.