J Patrick Campbell, a retired U.S. Air Force Command Pilot, who joined Nasdaq as executive vice president of market services in 1997, is again flying high. He has been named chief operating officer at Nasdaq.

In the newly-created post, Campbell will report to Frank Zarb, chairman and chief executive of the National Association of Securities Dealers, and to Nasdaq President Alfred R. Berkeley III.

"The extraordinary breadth of his expertise in the securities industry ensures that our members, issuers and the investing public will be well served by Nasdaq into the next century," Zarb said in a prepared statement.

Before joining Nasdaq, Campbell was a senior executive vice president and board member of The Ohio Company in Columbus, Ohio. Campbell started his Wall Street career at The Ohio Company in 1971, where he was responsible for equity trading, research, portfolio management, taxable fixed-income trading and the firm's trust business.

Campbell was awarded the Bronze Star and three air medals during his service with the U.S. Air Force.

Separately, Zarb announced the expansion of the Office of the Chairman. It will now include NASD Chief Information Officer Gregor Bailar, NASD Executive Vice President for Strategic Development John Hilley, NASD Deputy Chief Operating Officer Salvatore Sodano, NASD Regulation COO Elisse Walter and Campbell.

PaineWebber named Stephen Mortati head of over-the-counter trading. Previously head of Nasdaq sales trading at ABN AMRO Incorporated, Mortati will remain based in New York.

Greg Prime also joined the New York OTC desk at PaineWebber as a sales trader. Prime was previously a sales trader at San Francisco-based investment bank Hambrecht & Quist.

And Donnie Daniels and Dave Hylka were named OTC traders at PaineWebber in New York, reporting to Patrick Davis, head of OTC trading. Both Daniels, at Robinson-Humphrey, and Hylka, at Salomon Smith Barney, were previously New York-based OTC traders.

Jim Quinton joined Avalon Research Group, a Boca Raton-based institutional research boutique and brokerage firm, as vice president of institutional research and sales. Quinton was formerly a vice president of institutional sales at Nutmeg Securities in Providence. He will be based in Avalon's Providence office.

The over-the-counter trading department at Josephthal & Co. in New York promoted three assistants to traders. Michael Beaver, Dave Holloway and Shkylar Pavel were named OTC traders, reporting to Lex Pomper, Josephthal's head of OTC trading.

Simon Spenser, an astrophysicist turned software developer, joined Jersey City's Knight Securites as a chief strategy and technology officer. Previously, Spenser ran the third-market division at New York's D.E. Shaw & Co. Spenser's hiring is part of a larger employment boom at Knight as the wholesaler prepares for its intitial public offering.

Dennis Kelly, previously a Nasdaq trader at Vector Securities in Chicago, was named head of listed trading at George K. Baum & Company in Kansas City.

Edwin J. McGuinn joined LIMITrader Securities in Princeton as president and chief executive. LIMITrader owned and operated by Greenwich-based Weeden & Co.'s Automated Trading Systems is an electronic bond-trading system. McGuinn is a former executive and manager at Chicago-based Rodman & Renshaw, and New York-based Lehman Brothers and Mabon Securities. He was most recently head of operations at InterVest Securities, a rival bond-trading network, in Berwyn, Pa.

Derek Bayarri moved cross-town to join the Boca Raton desk at J.W. Genesis Financial Corp as a position trader. Bayarri was formerly a position trader at Barron Chase.

Jersey City's Sherwood Securites promoted Peter Battaglia to vice president of broker-dealer sales trading. Battaglia was previously Sherwood's public-relations manager.Sherwood also hired Louise Thompson as a sales trader on the broker-dealer desk. Thompson, who will report to Battaglia, joined Sherwood from New York's D.H. Blair & Co., where she was an agency trader.

Ralph Davis was named director of sales and marketing at Dallas-based Capital Institutional Services. An employee of the institutional brokerage firm since 1988, Davis most recently served as its regional sales manager for northeastern New England. In his new role at Capital Institutional Services, he will oversee all sales, marketing and client service.

The Chicago Board Options Exhange (CBOE) promoted two employees, Carol E. Kennedy and Amy Zisook. Kennedy, previously director of public relations for the CBOE, was named vice president of corporate communications. Zisook, who will continue in her duties as the CBOE's director of civic and governmental affairs, was also named an exchange vice president.

Helene Pientek, formerly head of the agency desk at Salomon Smith Barney in New York, joined Fidelity Capital Markets across town. In her new position, Pientek is in charge of public relations at the firm.

Minneapolis-based Dain Rauscher Incorporated promoted 31-year Wall Street veteran Michael A. Cope to assistant director of equity trading. Cope, previously a senior sales trader at the firm, will help manage all equity-trading activities. Dain Rauscher has 47 traders in three offices, and makes a market in more than 380 stocks. Cope will remain based in Minneapolis.

John G. Kinnard & Company, the Minneapolis-based brokerage firm, hired Paul Hughes as a managing director and director of mergers and acquisitions. Hughes was previously managing director of mergers and acquisitions at Dain Rauscher in Minneapolis.

Knight Securities recently added four traders from other New York-area firms. Fred Ingles, Mark Toney and Brian W. Barry joined Knight's correspondent desk as broker dealers. Ingles was previously on the correspondent desk cross-town at Herzog, Heine, Geduld. Toney was a sales trader at Nash, Weiss & Co. in Jersey City before joining Knight. And Barry was previously an assistant trader at Whale Securities in New York.

Christopher J. Taylor joined the firm as an equity trader. Taylor was formerly an over-the-counter trader at Sherwood Securities in Jersey City. At Knight, Taylor will trade on the OTC desk.

New York-based Wit Capital Group appointed Ronald Readmond to manage its day-to-day operations. Readmond, previously an executive at San Francisco-based Charles Schwab & Co. and a former director at Wit Capital, was named president and chief operating officer of the online investment bank.

OptiMark Technologies attempting to launch the OptiMark Trading System, an institutional trade-matching system opened a new Toronto office. The office, located at 145 King Street West, has been chartered to develop the company's operations in Canada. OptiMark is based in Jersey City, and has offices in Boston, Chicago, Los Angeles, New York, San Francisco and Durango, Colo.

Allan Grolimund retired officially in 1990, ending a brilliant 40-year Wall Street career as the senior trading manager at the Delaware Management Company in Philadelphia.

So then what did he do? He fulfilled a life-long fantasy.

The Queens, New York native moved to Shohola, a sparsely-populated lakeside community at the foothills of the Poconos in Pennsylvania and recharged his Wall Street career amidst the rustling of deer and the chirping sounds of crickets.

Grolimund, the Wall Street pro, has never stopped working, nor has he slowed since starting in 1948 as a teletype operator at Merrill Lynch & Co. in New York.

Retirement Heaven

Now, at an age when his contemporaries are basking in retirement heaven, Grolimund, who's 69, has other passions besides endless rounds of golf, never mind trout fishing, in his beloved Poconos.

Sure, his feet are most definitely planted in rustic Sholola, a 90-minute drive from New York's George Washington Bridge, but his heart is still somewhere in the esoteric reaches of technical research.

"I know it sounds like every trader's fantasy to be out of the rat race, calling your own hours, being minutes if not seconds away from year-round recreation," explained Grolimund, as a mocking-bird sang in the background, "but you would be wrong if you didn't think I still like the action on a trading floor."

After retiring on a non-compete agreement with 28 years of service at Delaware and watching the assets of its group of mutual funds mushroom from $300 million to $25 billion Grolimund started his Fair Market Profile (FMP), a technical research advisory for buy-side and sell-side institutional traders and individual investors.

Adirondack-Style Home

FMP's Sholola office is Grolimund's timber-framed, Adirondack-style home, originally built back in 1928. The surrounding woodlands replace the hard concrete of Philadelphia.

Grolimund uses a list of 200 large-cap and medium-cap stocks for selecting a continuous FMP model portfolio of no more than 30 of the best upward-trending picks. Grolimund maintains the FMP model portfolio has appreciated 230 percent in the past five years, compared with a gain of 150 percent for the Standard & Poor's 500 index.

"We stress that price is the best indicator. Sounds simplistic, but you would be amazed at how most technicians are distracted by the newest or most convoluted analysis technique," said Grolimund, as a barn owl circled silently above his Sholola home and office.

"We tell our subscribers that there isn't anything sacred about our model," Grolimund added. "A superior configuration could probably be devised. We would love it if someone did. But our goal is to teach people how to pick their own positions wisely, using the techniques we have developed."

By day, Grolimund is usually glued to his computer screen or on the phone to affiliated offices in New York and New Jersey. Sometimes, he walks in the surrounding woodlands.

If a deer greedily eyes his wife's vegetable garden, Grolimund won't be bothered.

Aw shucks, he is likely to say, that's life in the fast lane.

Savvy institutional clearing firms have a new sales pitch: anonymity brokerage services.

The latest clearing broker to join the marketing bandwagon is New York-based Citicorp subsidiary Citicorp Securities Services (CSS), which has provided institutional agency-only brokerage and clearing services since 1984.

Citicorp's foray into clearing has been somewhat overshadowed by larger clearing outfits that capitalize on an image of size and service.

Now the planned implementation of the OptiMark Trading System initially for listed business may burnish CSS's image and help it snare more business, clearing experts suggest.

Driving this view is concern among some investment managers about OptiMark's basic design as a supercomputer that aggregates, executes and does not disclose the customer behind an institutional order.

At issue is fear that an investment manager runs the risk of leakage, or revealing valuable information behind a block trade if the manager clears through a firm that has proprietary equity positions. By the same token, agency-only clearing brokers do not take positions, providing investment managers more protection, experts say.

"Agency-only clearing brokers believe they can attract business from OptiMark users nervous about information being revealed," said one person familiar with the institutional clearing business.

Citicorp has signed an agreement with OptiMark and The AutEx Group, a division of Thomson Financial Services. The agreement will allow institutions to route orders to OptiMark via AutEx's TradeRoute, and to designate CSS as its clearing broker. (Thomson Financial Services is the parent of Securities Data Publishing, publisher of Traders Magazine.)

Earlier this year, New York-based Bank of New York's BNY ESI & Co., an agency-only broker and clearing unit for institutional clients, signed a similar agreement with OptiMark.

Nasdaq traders preparing for the National Association of Securities Dealers' Series 55 trader examination can turn to several training programs for help.

One was developed by the Atlanta-based Investment Training Institute (ITI), and is endorsed by the Security Traders Association, the umbrella group for more than 7,000 mostly U.S.-based equity professionals.

Similar courses are provided by the Securities Training Corporation in New York and Chicago's Dearborn Financial Training.

As of April 1, Series 55 accreditation has been required for Series 7 and Series 62 licensed representatives who trade in Nasdaq and non-Nasdaq over-the-counter securities.

Mandate

The regulatory mandate covers market makers, agency traders, proprietary traders in equity or convertible-debt securities, and professionals who directly supervise these activities.

The 90-question examination tests traders expertise in four areas: Nasdaq and market-maker activities, automated execution and trading systems, trade-reporting requirements and securities-industry regulations.

Deadline

Veterans had until May 15 to submit exemption forms to regulators, giving them until May 1, 2000 to pass the examination. Rookies, on the other hand, must sit for the test within 90 days of filing appropriate papers, the same period allowed veterans who missed the May 15 deadline.

Classroom instruction, costing $300 per student, is given for ITI's Series 55 program, while an alternative ITI self-study program is available for $150.

ITI is a subsidiary of Atlanta-based Dover International, a financial-services consulting firm. (The ranks of senior management at Dover include Washington-based executive vice president John Pinto, a former 29-year veteran of market regulation at the NASD.)

With the largest concentration of U.S. securities firms based in New York, Baruch College's Zicklin School of Business in the Big Apple is appropriately the principal site for ITI's classroom training.

Six Series 55 training courses will be held at Baruch this summer. Another four will be held until September at ITI's Atlanta headquarters.

Self Study

Meanwhile, Securities Training Corporation said it is selling self-study materials and classroom instruction for $150.

Supplementary classroom instruction is available for $150. Customized training is also available.

Dearborn Financial Training said it plans to offer study materials starting in the fall.

Charles Schwab & Co., the San Francisco-based discount broker, is launching an online service this year for retail investors in the U.K. who want to trade U.S.-listed stocks.

Guy Knight, a Schwab spokesman in London, said the discount broker is enhancing its web trading service, so that U.K. investors will have the same tools residents in Asia and Latin America now have to buy and sell stocks listed in the U.S.

"We're planning to have it operational before year-end," Knight told Traders Magazine.

About three years ago, Schwab became the first broker in the U.K. to introduce trading on the web. Earlier this year, Schwab launched a domestic service for U.K. investors, which allows them to trade stocks listed on the London Stock Exchange.

Subscribers

More than 1,300 individual investors have subscribed so far to the U.K. online service, though that is merely a blip compared with the 1.7 million Schwab online accounts in the U.S., accounting for roughly $1.2 billion in assets on an annualized basis.

To be sure, the term online retail trading can be misleading. It certainly does not mean direct access to the New York Stock Exchange's SuperDOT trading mechanism, nor to Nasdaq. "The orders must first go to the broker-dealer intermediary that assumes the counterparty risk," Knight stressed.

In the U.K., online orders are first delivered to Schwab's dealer desk in Birmingham. In the U.S., Nasdaq stocks are handled by Schwab's burgeoning Mayer & Schweitzer desk in Jersey City.

For now, Schwab in the U.K. has hitched its online marketing wagon to Nasdaq, betting that its image as the home of U.S. high-technology stocks will resonate with individual investors.

"Nasdaq is heavily promoted here, and there is certainly a demand among our investor bases for its technology-heavy issues," Knight said.

Earlier this year, Nasdaq was one of the sponsors of a private investor conference hosted by Schwab in London.

The National Association of Securities Dealers is studying a plan to use a private auditor for monitoring the quality of market makers' executions.

The hiring of an outside outfit is now a top NASD priority since a federal appeals court ruled that best execution is no longer compatible with the best market available on U.S. exchanges the so-called national best bid and offer, or NBBO.

The emphasis on best-execution obligations was originally fostered by the Securities and Exchange Commission's scathing 1996 report on Nasdaq price-fixing allegations. The report urged brokers to "regularly and vigorously" examine execution quality and to obtain the best terms possible for investors.

However, the landmark Newton vs. Merrill Lynch federal appeals-court ruling helped to dramatically change the outlook for market makers seeking compliance with that responsibility.

One option now being considered is a uniform audit system for market makers. A senior NASD official said the association is looking at a business arrangement with The Transaction Auditing Group (TAG), a Northport, N.Y. firm specializing in audits that measure execution quality for exchanges and broker dealers.

Speaking in New York at a compliance conference hosted by the Securities Industry Association, Jim Cangianlo, senior vice president at the NASD's regulatory subsidiary NASD Regulation, did not elaborate on possible arrangements for a TAG connection.

A spokesman for the NASD said it had no current business relationship with TAG, but was interested in its technology.

TAG was hired earlier this year by the Chicago Stock Exchange to conduct audits on a quarterly basis, based on a set of price-improvement, order-fill, liquidity and timeliness statistics.

TAG President Alan Shapiro acknowledged that his firm has had discussions with Nasdaq, but agreement had not been reached as of press time. "We would be happy to do business with Nasdaq," he said.

Ten years ago, an initial public offering was a rare bird. Capital was raised for corporations with high-yield bonds, revolving credit, secondary offerings and bank loans. Oftentimes, an IPO was just an afterthought.

But a remarkable change eventually occurred IPOs got hot.

According to Securities Data Co., investors pumped up to $109.3 billion into 1,700 new issues within the past two-and-half years.

Access to these potentially lucrative investments was another matter, of course. During much of the 1990s, access was limited to institutional investors and high net-worth individuals.

New Opportunity

Beginning in February 1998, however, individual investors moms and pops had a new opportunity to participate. Greenwich-based Renaissance Capital opened the door through the first-ever mutual fund devoted exclusively to the new-issues market The IPO Plus Aftermarket Fund.

"A lot of investors would love to get in on IPOs at the offering," said Linda Killian, a portfolio manager and one of Renaissance Capital's three founders. "That's the main reason we started the fund."

The fund's three managers, all former investment bankers, founded Renaissance Capital in 1991 to provide investors with an independent source for IPO research.

Now four months old, Killian said The IPO Plus Aftermarket Fund relies simply on word of mouth and does not advertise.

Even so, response has been "very enthusiastic." About 1,500 people have invested roughly $12 million, directly participating in some of the year's most successful offerings.

Moreover, access to these offerings is through some of Wall Street's largest syndicate operations, a gateway critics suggested would be difficult to traverse.

According to Killian, the fund's five largest holdings are:

*Keebler Foods (NYSE:KBL), the world's second-largest manufacturer of cookies and crackers, which debuted at $24 a share in February through a syndicate led by investment-banking giant CS First Boston.

*Steelcase (NYSE:SCS), the world's largest manufacturer of office furniture and related products, which placed 12.13 million shares at $28, through a syndicate headed by investment- banking giant Goldman, Sachs & Co.

*CB Commercial Holdings (Nasdaq: CBCG), one of the largest vertically-integrated providers of real-estate services, such as brokerage, investment management, property management, real-estate market research and mortgage banking through 107 locations. This November 1996 IPO priced 4.35 million shares at $20, through a syndicate headed by brokerage powerhouse Merrill Lynch & Co.

*E*Trade (Nasdaq:EGRP), a pioneer of the online brokerage industry. This August 1996 IPO priced 5.67 million shares at $10 1/2, through a syndicate headed by San Francisco's Robertson, Stephens & Co.

*Delia*s (Nasdaq:DLIA), a leading direct-mail retailer of apparel and accessories for teenage girls. The company's 2.35 million offering in December 1996 opened at $11, through a syndicate headed by San Francisco-based Hambrecht & Quist.

Other Holdings

According to Renaissance Capital's web site (www.ipo-fund.com), some of the fund's other top holdings include mutual-fund giant Waddel & Reed (NYSE:WDR), telecommunications provider Hyperion Telecommunications (Nasdaq:HYPT) and telecommunications-equipment company Reltec (NYSE:RLT).

The fund purchased at offering and still holds both Keebler and Steelcase. CB Holdings and E*Trade were both purchased in the aftermarket, a period defined by the fund as up to ten years after a company goes public.

Aftermarket investments, however, are confined to securities with unseasoned trading and are limited by research, float, public ownership, operating history, or relative anonymity in the U.S. capital markets.

Normal Conditions

Under normal market conditions, the fund will invest at least 65 percent of its assets in common stocks, and up to 25 percent in foreign stocks.

To prevent investors from flipping, or liquidating their holdings during difficult market conditions, the fund imposes a two-percent redemption fee on shares that have been held for less than 90 days.

"That's especially important when you're dealing with a small-cap fund, where stocks are generally less liquid," noted Jim Raker, who tracks the mutual-fund industry for Morningstar, the Chicago-based research outfit.

While impressed with its redemption feature, Raker said the fund's annual management fee of 1.5 percent of net asset value, or NAV, is slightly above the average 1.4 percent of the overall NAV charged for U.S. diversified equity funds.

Renaissance Capital capped total expenses at 2.5 percent of net assets, which is at the high end of average total expenses for mutual funds.

"It's not unusual for smaller funds to have higher management fees because they generally require more maintenance," Raker said.

But, he added: "The bottom line is that we're in an unprecedented bull market and investors don't pay as much attention to 100 basis points when they're making 25 percent or 30 percent each year."

The fund's NAV at the close of trading June 16 stood at $14.08, a 12.28 percent increase over the fund's initial NAV of $12.54 on Dec. 31, 1997, and about 4.6 percent above its NAV when the fund was opened to investors.

IPO Returns

While returns across the IPO market have soured in recent weeks, plummeting from 34.3 percent at the end of April to 12.94 percent as of mid-June, The IPO Plus Aftermarket Fund had pared just 2.8 percent of its gains as of June 16.

As the IPO calendar began to show signs of expanding in June, Killian was encouraged by the high quality and diversity of the new-issues market.

"This year's IPO market got off to a slow start," Killian said. "But throughout, the quality of offerings has remained relatively high."

One of the principal reasons for the robust market is a more diverse set of industries going public.

The emergence of rollups, or companies that consolidate fragmented industries (such as road services and equipment-rental concerns), Year-2000 business, online retailing and the expansion of healthcare, are expected to stoke the IPO machine, Killian said.

Experience

"There are a lot of factors coming together suggesting we'll have a sustainable market for IPOs," she said.

Banking on the long and varied investment experience of its management team, The IPO Aftermarket Plus Fund will consider most IPOs.

According to Killian, the only IPOs the fund disdains are real-estate investment trusts, or REIT's.

"We're diligent investors, and we do our homework on companies where we think there are opportunities," Killian said.

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

A full-blown dispute has emerged between traders and electronic communications networks (ECNs). At issue is the transaction or access fee, charged each time a market maker hits the bid or takes the offer on a stock an ECN is publicly quoting on Nasdaq.

Many market makers complain that these fees should not be charged, in part because ECN orders are similar in one respect to the quotes posted on Nasdaq by market makers. They are all part of the Nasdaq price-quote montage.

Consequently, many market makers, from the largest to the smallest, are refusing to pay access fees on orders executed as a result of ECN price quotes on Nasdaq. ECNs, in turn, are now refusing to accept orders preferenced by some of the brokers withholding access payments.

Compete Publicly

Market maker quotes and ECN customer orders compete publicly each day on Nasdaq. Some of the best known ECNs are Reuters Holding's Instinet and Bloomberg Tradebook. ECNs frequently stand alone at the inside price. In some securities, in fact, ECN orders outnumber market-maker quotes. That is likely to become more common as firms reduce their market-making commitments and new ECNs enter the market.

In addition to the access fees charged at up to one and a half cents per share as well as the ECN's posted stock prices, traders incur Nasdaq's one-cent fee whenever their trades with ECNs are transmitted over SelectNet. ECN customers on the other side of the trade are often charged a similar ECN fee, but are not charged a Nasdaq fee.

Market makers, on the other hand, do not charge an access fee. Nor do they pass along the ECN fees, which can add up quickly, to their customers. As market makers see it, the ECNs should be collecting fees only from their customers, who are getting the benefit of executions on their anonymous orders. Without regulatory guidelines, many market makers, as mentioned earlier, are withholding payments to ECNs. These tactics have resulted in several legal and regulatory issues noted herewith:

*Breach of agreement lawsuits.

ECNs are allowed by the Securities and Exchange Commission to charge a reasonable fee to non-subscribers for accessing an ECN. An ECN, which is responsible for communicating its fee structure, may require that non-customers enter contractual agreements on the payment of access fees. Furthermore, the SEC has informally told ECNs that they may refuse to trade with any entity that does not pay its fees.

The first of probably many lawsuits was recently filed by Montvale, N.J.-based All-Tech Investment Group, operator of the ECN ATTN, against a large Jersey City-based Nasdaq wholesaler.

*Heightened NASD scrutiny for unnecessarily locking or crossing markets.

A locked or crossed market occurs when the publicly-displayed inside bid and offer prices are identical or inverted (e.g., an inside bid priced at 10 1/2, and an inside offer priced at 10 1/2 or 10 3/8). A market maker is more likely to enter a locking or crossing quote when it is denied access to an ECN's inside market in order to attract trading interest. While failure to pay an ECN its fees may not be a regulatory issue, the increased incidence of locked or crossed markets is a market-integrity issue.

*Best-execution violations.

This could occur if traders are unable to obtain the best Nasdaq price available.

Interestingly, the National Association of Securities Dealers does not seem concerned that ECNs, which are registered broker dealers, may be failing to provide best execution when they do not fill their customer orders.

*Disruption of trading operations.

Instead of several seconds to execute an order, a trader who is denied access to an ECN may take the time to either call around to get execution at the inside price or enter a locking or crossing order.

ECNs were approved by the SEC under the terms of the order handling rules to operate trade-matching systems through a SelectNet linkage to Nasdaq. When the two-tiered market ended in January 1997 with implementation of the SEC's order handling rules, there were four SEC-approved ECNs. Now there are eight. A ninth ECN is awaiting final regulatory approval.

ECNs transmit their best customer and subscriber orders to Nasdaq and accept preferenced SelectNet orders from third parties. ECN orders can also be accessed by telephone, while subscribers have direct access to ECNs via dedicated terminals and PC-based modems.

The SEC and the NASD are aware of the current controversy between market makers and ECNs, and are considering rule proposals that may resolve the situation.

One rule proposal, a copy of which was obtained by Traders Magazine, would prohibit ECNs from refusing "to deal with any person who attempts to access the quote of the [ECN] when one or more [ECN] is responsible for the inside quote, on the basis that such person has not paid or will not pay any charge or fee that is in addition to the publicly-quoted price of the [ECN]."

Meanwhile, regulators are keeping a noticeably low profile. It is too early to draw conclusions about their ultimate decision. Nevertheless, Richard Lindsey of the SEC's Division of Market Regulation, informed attendees at a recent Securities Industry Association conference that the SEC looks favorably on the NASD proposal.

An NASD spokesman, however, declined to comment, noting the sensitive nature of the issue.

Times Change

Less than two years ago, many of these same Nasdaq market makers wholeheartedly subscribed to Instinet and paid its transaction fees. Instinet provided anonymity and participation in a two-tiered Nasdaq market: the public quote montage and the better-priced Instinet subscribers' market. Market makers were allowed to attract trading interest at prices inside the Nasdaq public market spread without adjusting their quotes. For Instinet and Nasdaq market makers, it was a "win-win" situation.

Currently, however, the combination of dramatically reduced spreads, significant NASD fines and ECN fees may be just too much for Nasdaq market makers and traders to countenance. And the burden of ECN fees can only worsen as more ECNs enter the market.

Firms may continue to pay the ECNs' fees for accessing their price quotes on Nasdaq. If so, these market makers will have uninterrupted access to all inside markets.

Firms that withhold payments, however, can expect to be denied access to ECN orders. When this occurs, the best advice I can offer is this: market makers must be able to demonstrate that they attempted to access the ECNs prior to entering a quote that effectively locks or crosses the market.

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

An uninterrupted and staggering 20-year decline in the average equity commissions paid to broker dealers by U.S. institutions is slowing unceremoniously, a new report by Greenwich Associates reveals.

"The point of resistance has been reached," said Wayne Wagner, president of the Plexus Group, a Santa Monica, Calif.-based firm that studies institutional-trading costs. "Brokers are simply saying, Let's have no more declines in commissions.'"

Across a range of 400 institutions that responded to the study, Greenwich notes that weighted average commissions in aggregate remained unchanged at 5.6 cents per share for the 12 months ended January 1998, the same average rate of a year earlier.

That's the first yearly measurement taken since 1977 by the Greenwich-based research firm, that average commissions did not decline by roughly one-tenth of one cent each year. (Average commissions are the total commissions reported, divided by the shares executed, irrespective of institutions' weight or size.)

Back in 1977, the average "unweighted" commission was 13.6 cents, compared with 6.4 cents in 1997. Adjusted for inflation, the effective 20-year decline is even more stunning than the more than 50-percent decline.

An official at Greenwich said in an interview that the results in the report, compiled for U.S. institutional equity investors, confirmed what the firm had been anticipating as far back as 1994 that commissions would eventually hold relatively steady. Of course, the closer to zero commission, the smaller the room becomes for rate shrinkage.

Nevertheless, taking the four years starting in 1993, commission rates per share on agency trades, as measured by the reporting institutions' weight, fell until 1995 from 6.3 cents to 6.1 cents to 5.9 cents, and held steady in 1996 and 1997 at 5.6 cents per share.

While some U.S. institutions from mutual funds and pension plans to money managers and other buy-side firms expect downward movement in commissions in the coming year, only the very largest envision slight declines in rates, according to Greenwich.

Increasing Profitability?

But does the study, as the Plexus' Wagner and other experts suggest, really convey that broker dealers are headed for a new period of increasing profitability on the tail of a rip-roaring stock market?

The answer is not that simple. At best, the picture is clouded. For one thing, a breakdown of the unweighted average commissions per share on agency trades shows a divergence in rates paid by the very largest institutions on the one hand, and some of the smallest institutions on the other.

While institutions with total commissions of over $20 million annually saw average commissions dip from 5.7 cents to 5.6 cents, institutions generating commissions of $5 million to $9.9 million reported that their average jumped from 6 cents to 6.2 cents.

On the Nasdaq side, that pattern was only evident between the very small institutions and all the other reporting institutions. Imputed commissions for these smaller buy-side firms rose significantly, while the commissions actually declined for all the rest. (Imputed commission, classified by traders as net-trading costs paid as Nasdaq credits to market makers, are implied by factoring the stock value plus the spread divided by the number of shares executed.)

To be sure, the rate increases noted among the smaller institutions clearly contributed to the reversal in overall commission rates in 1997. Even so, on an unweighted basis, commissions on agency trades fell from 6.7 cents in 1995 to 6.5 cents in 1996, and to 6.4 cents in 1997. On the Nasdaq side, imputed commissions dropped from 7.3 cents in 1995 to 7.2 cents in 1996, and to 6.6 cents in 1997.

Explicit Commissions

The continuing decline in imputed commissions raises the prospect that Nasdaq institutional desk's will eventually charge explicit, or actual, commissions for handling block orders.

That's even more likely if the Securities and Exchange Commission approves a proposal by the National Association of Securities Dealers to eliminate double counting on riskless principal and other trades.

Altering the way trades are counted would result in single prints instead of two-sided prints. "That would make it easier to charge institutions a straight commission," said George Jennison, head of Nasdaq trading at Richmond, Va.-based Wheat First Union.

"At the moment, there is significant margin pressure on Nasdaq institutional business," Jennison added. "We're probably going to see some repricing on orders."

Some institutional traders suggest that institutions themselves are really holding up commission rates. In their view, institutions are loathe to push rates down much further because that would hurt the level of soft-dollar research services they receive.

Greenwich noted that the soft-dollar conversion ratio now hovers at 1.55. In a soft-dollar arrangement, a specified proportion of an institution's total agency-commission business is rebated or softed to institutions in the form of research and other services.

Thus, with a conversion ratio of 1.55, an institution receiving a total of $100,000 in soft-dollar services would be required to transact $155,000 in commission business.

"If commission rates drop much further, institutions would be hurt," said Raymond Murray, director of trading at Minneapolis-based Investment Advisers.

On the other hand, Wall Street firms, such as New York-based Lynch, Jones & Ryan, that specialize in soft-dollar services to institutional accounts, may be holding a lid on commission rates, according to other experts.

"Soft-dollar brokers may be providing a level of competition to executing brokers in general," said Lee Pickard, a Washington-based attorney specializing in soft dollars. "If these soft-dollar firms were not around, rates might now be even higher."

Electronic Brokerages

Finding a clear sign of where commissions are headed, therefore, is not easy.

The popular use of electronic brokerages, such as Reuters Holdings' Instinet, somewhat clouds the landscape. Greenwich's study notes that institutions paid 3.8 cents per share on electronic brokerages, dubbed as "non-traditional" trading systems by Greenwich.

At least 96 percent of institutions generating more than $20 million a year in commissions using non-traditional systems for Nasdaq business. Greenwich further noted that among institutions generating more than $5 million a year in commission volume, 82 percent use non-traditional systems, up from roughly 75 percent in 1995 and 1996.

"Even if use is not so widespread among institutions that are not quite so giant," said Greenwich consultant Bjorn Forfang in a foreword to the study, "it is extremely widespread and rising."

The message now is that there is less homogenization of commission rates than ever before, according to another expert. "Some institutions will pay six cents to a broker for block positioning or capital commitment, and use an electronic broker for plain-vanilla agency execution," the expert said.

By Greenwich's calculations, average commissions on agency trades as distinct from all other business are expected to decline to 5.5 cents in 1998 from 5.6 cents in 1997. But even that may not change the current steady trend in rates. "If the commission rates stay flat and then begin to rise, that could be significant for sure," said an official at Greenwich.

But the official pointed out that the consolidation trend among institutions is likely to put a further squeeze on commissions. "Commissions could go down further in the coming year," the official added.

All told, total commissions generated in the U.S. institutional equity business increased modestly for the 12 months ended January 1998, gaining just two percent over the prior year, according to Greenwich.

Broken down, listed commissions, accounting for more than half of all institutional equity order flow up three percent since 1996 increased by seven percent. Imputed commissions rose by ten percent and now comprise 25 percent of all commissions.

Significantly, commissions generated from new issues or initial public offerings fell dramatically, nearly 25 percent in 1997 from the previous year's record high. At the 75 largest reporting institutions that each generate more than $20 million in aggregate business, commissions dropped from 33 percent to 24 percent of total commissions.

Retail

While Greenwich's study might hint that institutional broker dealers may be headed to higher levels of profitability, that conclusion must be juxtaposed beside the impact of narrowing spreads on Nasdaq (most obviously on the retail side).

Indeed, Greenwich notes that imputed commissions on Nasdaq from handling block orders executed with a spread continued to decline from 6.8 cents per share in 1995 to 7.3 cents in 1996, and to 5.9 cents in 1997.

And the 1998 Traders Magazine Nasdaq Market-Maker Survey revealed profitability, across a range of small to large firms, declined among roughly 60 percent of the desks.

Although that data could not be independently verified, the reported decline was attributed by head traders to the ongoing impact of the order handling rules and the widespread quoting of Nasdaq stocks in sixteenths.

For its part, Nasdaq said spreads declined by up to 33 percent soon after the implementation of the order handling rules in January 1996.

"Over-the-counter profitability is way down," lamented Wheat First Union's Jennison.

Skeptics

Some experts, however, are now questioning if the narrower spreads can be equated with declining profitability.

"During the trading day, I suspect some market makers are simultaneously moving their bid and asked prices up and down on a Nasdaq stock, before committing to handling a large block of shares behind a smaller order," said one expert, who declined to be named.

"On a buy order, institutions are paying more, and on a sell order they are getting less," added the expert. "Spreads have narrowed, but not the effective profitability."

Are market makers engaging in this practice?

"Oh, that's plain silly," snapped a New York-based market maker.

Commission Rates in Cents Per Share (Agency Trades) Commission Volume 93 94 95 96 97 98*

Over $20 million 6.2 5.9 5.8 5.5 5.4 5.4

$10 million to $20 million 6.4 6.2 6 5.8 5.8 5.7

$5 million to $9.9 million 6.1 6.2 6.1 6.1 6.3 5.9

$2.6 million to $4.9 million 6.2 6.5 6.2 5.8 6.3 6

$2 million to $2.5 million 6.8 6.5 6.6 6.5 6.2 5.9

$1 million to $1.9 million 7.3 7.2 6.5 7 6.7 6.5

Under $1 million 8.3 9.1 9.2 7.7 7.7 7.3

Total Institutions 6.3 6.1 5.9 5.6 5.6 5.5

*estimated

Note: Average weighted by Commission and based on matched volume

Source: Greenwich Associates