A decimal-based U.S. stock system has moved one step closer to becoming a reality perhaps in the summer of 2000 thanks in part to the unrelenting efforts of Rep. Michael Oxley (R-Ohio) and Rep. Edward Markey (D-Mass.).

Holding a new General Accounting Office (GAO) report in one hand and a ream of letters from four exchanges, the National Association of Securities Dealers and the Securities and Exchange Commission in the other a triumphant Oxley announced at a Capitol Hill hearing that opponents of decimalization have been brought to their knees.

"With this, we will have completed our goal of bringing competition to stock pricing, modernizing the markets to the benefit of all investors," said Oxley, chairman of the House Commerce Subcommittee on Finance and Hazardous Materials.

Experts Agree

Many industry experts now agree that U.S. stock exchanges will switch from fractions to quoting stock prices in decimals sometime in 2000. The SEC is hoping for a July 2000 switch. September 2000 was the target date agreed upon during a private Feb. 27 meeting by a working group of equity and derivative market representatives in Washington.

The New York Stock Exchange said it is on target to quote in decimals by year's end. The Cincinnati Stock Exchange is planning to be ready by April 1999. And the Pacific Exchange said it will have all necessary systems finished by the end of September 1999.

The NASD and the American Stock Exchange appear to be dragging their heels. The NASD said it is committed to being ready in early 2000, while the AMEX is committed to a conversion in September 2000.

Technology Adjustments

The GAO report noted that the technology adjustments necessary to support a decimal-based pricing system are straightforward and relatively inexpensive. A study by the Newton, Mass.-based Tower Group, commissioned by the Securities Industry Association, estimated the systems changes at almost $170 million.

However, the report concedes that the technology concerns about Year-2000 computer remediation and the 1999 conversion to a single currency in much of Europe pose substantial barriers to decimal trading before 2000.

SEC Chairman Arthur Levitt, in a May 8 letter, stressed that the move to decimals is essential for keeping U.S. markets competitive with foreign markets.

But Levitt warned that a move in advance, or simultaneously, with Year-2000 testing would be imprudent. In addition, firms are working to comply with the NASD's Order Audit Trail System and the European currency switch.

The SIA is coordinating industry-wide conversion efforts, and legislators plan to study the SEC oversight of the massive project.

Common Cents

Oxley and Markey, with House Commerce Committee Chairman Rep. Thomas Bliley (R-Va.), began a legislative drive to mandate decimalization when they introduced the Common Cents Stock-Pricing Act last year. Passage of the bill would be moot if the industry itself moves voluntarily to a decimal system.

The Security Traders Association said it is pleased with the current developments. "I think all market participants are committed to producing the most competitive prices for investors, and we are convinced that competitive forces will ultimately produce the most competitively-priced markets, which is Oxley's objective," John N. Tognino, president of the STA, told Traders Magazine.

The National Association of Securities Dealers has approved a new set of proposals that would increase the responsibilities of brokerage firms that quote small, thinly-traded stocks.

On May 7, the NASD board of governors voted to require broker dealers to review and disclose financial information before recommending a non-Nasdaq, over-the-counter security.

The new rules are subject to approval by the Securities and Exchange Commission.

Broker dealers, meanwhile, worry that the new rules would unfairly place responsibility for company information on trading desks, instead of on issuers, who are the primary source of information.

Currently, only the broker dealer initially quoting an OTC stock is required to review an issuer's financial data. Updates are not required.

"Market makers should not be held responsible for a company's information because they trade that stock," said Nicholas Ponzio, managing director at Hill, Thompson, Magid & Co. in Jersey City. The firm is a leading OTC market maker, covering more than 4,500 issues.

"If firms are held liable, it would be too cumbersome to make markets in small-cap stocks," Ponzio added.

The rules would not apply to stock transactions in banking and insurance companies, and to companies with more than $100 million in assets and $10 million in shareholder equity. Transactions with institutional customers would also be exempt from the new rules.

At the same time, the NASD approved a rule permitting only those companies reporting current financial information to the SEC and insurance and banking regulators to be quoted on the OTC Bulletin Board. Companies would be allowed up to 12 months to comply with the new requirements.

The NASD proposals coincide with a separate SEC initiative to reduce OTC stock fraud.

The OTC market, including the OTC Bulletin Board and the pink sheets, is generally perceived to harbor some questionably-listed companies.

The OTC Bulletin Board, although owned by the NASD, is not held to the regulatory agency's listing standards. The pink sheets are owned and operated by the New York-based National Quotation Bureau.

Through the end of May, the NASD had received more than 60 comment letters on the proposal, according to an NASD spokesman.

Lynn Turner was named chief accountant of the Securities and Exchange Commission in Washington. Turner, who will oversee the accounting issues facing accountants, corporations, investors, and regulators, is a former audit partner at accounting giant Coopers & Lybrand in Denver. Most recently, he was chief financial officer at Symbios Logic in Denver. The SEC had been searching for a new chief accountant since the resignation of Michael Sutton in December.

George K. Baum & Company in Kansas City hired Frank Calta as managing director of equity trading. Calta was previously managing director of institutional trading at Dain Rauscher Wessels in Minneapolis.

John C. Katovich, general counsel and director of public affairs at the Pacific Exchange in San Francisco, joined the growing staff of OptiMark Technologies. Katovich, as co-general counsel, will provide legal advice to OptiMark's board of directors while overseeing regulatory developments affecting the company. He will be based in the San Francisco Bay area.

Robert Race joined Winchester Investments in Overland Park, Kan. as an equity trader. Race was previously an equity trader at Birchtree Financial Services in nearby Kansas City.

Dresdner Kleinwort Benson North America named Joe Scafidi its U.S. head of U.K. and European equity trading. He was previously director of European trading at Deutsche Morgan Grenfell in New York.

Fidelity Investments named John F. McNamara chairman and president of its Boston-based subsidiary, Fidelity Management Trust Company. McNamara, the former chief operating officer of United Asset Management Corp. in Boston, succeeds Denis M. McCarthy, who retired from Fidelity on April 30.

PaineWebber named Robert Clark director of recruiting. Clark was previously director of marketing at the New York-based firm. In his newly-created position, Clark will be responsible for outlining infrastructure developments with PaineWebber branch managers.

William O'Shea was appointed general manager of New York-based CSK Software's trading-systems business. He will continue in his previous role as the firm's chief operating officer. CSK Software provides global financial-information technology for its Tokyo-based parent, CSK Corporation.

Robert A. Tominovich, president and chief executive of Standard & Poor's Securities in New York, retired after 31 years of service at the firm. He had been the firm's top officer since 1982.

Richmond Fisher was named as Tominovich's successor. Fisher was most recently vice president of sales and marketing at Standard & Poor's Securities.

Goldman, Sachs & Company, which is traditionally run by two leaders, named Henry M. Paulson Jr. its co-chairman and co-chief executive. Paulson was previously the private New York-based firm's president and chief operating officer. Paulson will work alongside Jon S. Corzine in his new position.

Fred Busk III was promoted to general manager and the board of directors of the Bank of Bermuda in New York. He had formerly served as the head of business development and marketing for the bank's corporate trust services in the Western Hemisphere.

The National Association of Securities Dealers elected Arthur Rock to its board of governors, replacing Bridget A. Macaskill. Rock, principal of San Francisco-based venture-capital firm Arthur Rock & Co., will serve on the board for the remainder of the year to fill the unexpired term of Macaskill. Macaskill is president and chief executive of the Oppenheimer Funds in New York.

J. Patrick Campbell was named to the newly-created position of chief operating officer at Nasdaq. Campbell was previously Nasdaq's executive vice president of market services. Based in Washington, he will report to Frank Zarb, chairman and chief executive of the National Association of Securities Dealers, and Alfred R. Berkeley III, Nasdaq's president.

Zarb also announced the expansion of the NASD office of the chairman to include: George S. Bailar, NASD chief information officer, John L. Hilley, NASD executive vice president of strategic development, Salvatore F. Sodano, NASD deputy COO, Elisse B. Walter, NASD Regulation chief operating officer, and Campbell.

Nasdaq traders are hitting the books for the National Association of Securities Dealers' new Series 55 equity-trader examinations.

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

"It is a brand new exam, and it's not going to be easy for market makers," warned Paul Weisman, president of Securities Training Corporation, a New York-based provider of securities, banking and insurance training programs, that include the Series 55.

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

Veterans had until May 15 to submit exemption forms to regulators, allowing them up to two years to sit for the examination. Rookies, on the other hand, must sit for the test within 90 days of filing the appropriate papers, the same period allowed veterans who miss the May 15 deadline. Traders who fail the exam have up to three more tries separated by 30-day waiting periods, with a further six-month waiting period after the third failed attempt. New York-based

Sylvan Learning Centers is conducting the examinations under contract with the NASD.

Peter B. Madoff, senior managing director at New York-based third-market trading giant Bernard L. Madoff Investment Securities, has been awarded one of the highest honors bestowed by his alma mater.

Madoff shared the limelight at the annual awards ceremony June 11 at New York's Marriott Marquis Hotel with another successful Queens College alumnus, Eugene F. Murphy, vice chairman of the board and executive officer at General Electric Company.

Madoff and Murphy each accepted a prestigious Q Award, which recognizes leaders whose personal qualities and achievements set a standard of excellence for Queens College students.

Madoff is a past president of the Security Traders Association. He is a former vice chairman of the National Association of Securities Dealers' board of governors, and served on the executive committee and board of governors of Nasdaq. He is past chairman of the NASD District 10 Business Conduct Committee.

Madoff currently serves as a member of the board of governors and the executive committee of the Cincinnati Stock Exchange, and is a member of the NASD Industry Advisory Committee for Technology. He is also a member of the bar of the State of New York.

The Securities and Exchange Commission named Columbia University law professor Harvey J. Goldschmid its new general counsel.

Goldschmid succeeds Richard H. Walker as the SEC's top lawyer. Walker was recently named the commission's enforcement director, which is widely considered the second most important position at the SEC, after that of chairman.

As general counsel, Goldschmid will be the chief legal officer for the SEC. The general counsel advises the SEC on the legality of its policies and procedures. Goldschmid's office will represent the commission on all actions pending in appellate courts, and advise commissioners on enforcement and rule-making issues. He is expected to join the SEC in July.

"Harvey will be a superb general counsel," said SEC Chairman Arthur Levitt Jr., in a prepared statement. "The breadth of his legal knowledge will be a tremendous asset."

Goldschmid, who has been a Columbia professor since 1970, is also a counsel at Arnold & Porter, a Washington-based law firm.

Goldschmid was a candidate for appointment as an SEC commissioner last year, but was opposed for his past criticism of class-action lawsuits.

The interim general counsel, Colleen P. Mahoney, will return to her position as the SEC's deputy enforcement director in July.

Only 12 months after San Francisco's BankAmerica purchased Robertston, Stephens & Co. for $540 million, it is selling the investment-banking firm for an estimated $800 to BankBoston Corporation.

Robertson Stephens had been on the block since BankAmerica announced in April its $59 billion merger with Charlotte-based NationsBanc Corp.

The investment bank was uncomfortable with the merger between its parent and NationsBanc, which owns Montgomery Securities, a Robertson Stephens competitor. Nationsbanc acquired Montgomery last July for $1.2 billion.

It was widely rumored after the merger announcement that the two investment banks, both specializing in healthcare and technology research and based in San Francisco, would not compete as affiliated outfits.

The price being paid for Robertson Stephens will include a $400 million cash payment by Boston-based BankBoston, an additional $300 million paid over four years and $100 million in stock options at market price.

Robertson Stephens will still be based in San Francisco, and will be folded into BankBoston Securities. The firm will be renamed BankBoston Robertson Stephens.

Wit Capital, a 33-person broker dealer that conducts its investment-banking business exclusively on the Internet, is causing tremors on Wall Street.

The digital upstart and National Association of Securities Dealers member firm is offering prospective individual investors access to initial public offerings and other early-stage investment instruments, including plans for a series of angel funds.

"There's no doubt in my mind about the power of the retail investor," said Bob Lessin, New York-based Wit Capital's recently-appointed chairman, and one of Wall Street's high net-worth investment experts, or angel investors. "It's a powerful constituency. As more mergers create [brokerage] behemoths, it is clear there is an underserved niche."

Since opening its capital-markets operation in September, Wit Capital's customers have participated in 12 IPOs originated by ten lead managers, including deals by New York-based firms Bear, Stearns & Co., PaineWebber and Prudential Securities, and Baltimore-based BT Alex. Brown.

In a landscape where the giants keep more of the IPO pie, will such a retail-oriented strategy succeed? One thing is certain: Lessin and his heavy-hitting management team are already raising eyebrows on Wall Street.

"What they're doing is our competition," noted the head of one New York-based syndicate desk. "With their management team, they could be very competitive with full-service brokerages."

Antidote Against Flippers

A key to Wit Capital's underwriting success, according to sources, will be convincing other syndicate members and companies that retail distribution means quality distribution. Critics charge that some retail investors referred to as flippers are quick to take profits in an offering's first day of trading.

Wit Capital's ability to track its customers' trades should discourage flipping. What's more, Wit Capital has another tool to discourage customers from cashing their shares during the first 60 days of an offering: penalties and exclusion from future IPOs.

"We ask investors to make long-term investments," said William Feeley, Wit Capital's director of capital markets. "And, so far, our clients have been aftermarket buyers in every issue but one."

Placing stock directly digital-affinity distribution in the hands of a company's trusted stakeholders, such as customers and employees, is perhaps Wit Capital's best antidote for flipping.

The new technology enables Wit Capital to:

* Tap an issuer's roster of customers, employees and suppliers.

* Open accounts for individuals in the group who want to participate in IPOs.

* Distribute electronic prospectuses.

* Accept indications of interest to purchase shares in an offering.

"This proprietary system enables Wit Capital to quickly and digitally open thousands of accounts for new customers without any incremental cost to the issuer," noted Andrew Klein, the firm's founder and chief strategist.

Complementing its affinity distribution, 140,000 individual investors have navigated to Wit Capital's Internet site over the last eight months. Through co-marketing arrangements, the potential pool of investors climbs to three million, according to firm officials.

To participate in Wit Capital-sponsored IPOs, investors first need to navigate to the investment bank's web site (www.witcapital.com). New accounts must complete an investor profile. The minimum account balance is $2,000. Investors can download a preliminary prospectus from the web site and place an indication of interest.

Stock is allocated on a first-come, first-served basis, and is also based partly on a customer's investment objectives, trading experience and history, Feeley said.

Initially, the firm's capital-markets operations will be divided into five broad sectors: technology and the Internet, healthcare and life sciences, business-to-business services, information services and media and entertainment.

Wit Capital's customers will be able to access pre-IPO and post-IPO investment products, including early and middle-stage private placements; public venture capital, allowing investors the opportunity to invest in emerging companies; online brokerage services; and angel funds.

Product quality is of paramount importance for the upstart investment bank, according to Lessin. "If we put garbage through our system, the franchise is not going to last very long," he said, noting that quality distribution and maintaining syndicate relationships are important considerations.

"Obviously the screen has to be very tight. The rationale is that the Internet will become a viable means of commerce," added Lessin, who has personally invested between $100,000 and $2 million in 45 separate start-ups. "Access to capital will decide who survives, who thrives and who fails."

Online Distribution

In addition to the tracking abilities provided by electronic trading, another advantage of Internet distribution is its demographic reach, according to an official whose firm included Wit Capital in its underwriting syndicate.

Internet distribution gives underwriters access to customers likely to be familiar with a high-tech company's products and services, and are more inclined to be long-term investors. The attraction is so strong, in fact, that some IPO issuers have requested that Wit Capital be included in their underwriting syndicate.

"I used Wit Capital because I thought it would add something to a high-tech offering like ours," said Michael A. Webster, president and chief executive of Viagrafix (Nasdaq:VIAX), a Pryor, Okla.-based publisher of training courses delivered on CD-ROM, LANs, intranets and the Internet.

"We were pretty intrigued by being able to provide users access to our offering over the Internet," said Jeffrey Tauber, chief executive of CyberShop (Nasdaq:CYSP), a New York-based operator of an online mall. "As Wit develops its business model, this will be an increasingly attractive avenue of distribution for high-tech issuers."

So what's next for this avant-garde investment bank? "We have other offerings in the pipeline which are beginning to see heavier traffic," Feeley said. The latest prospective offering to emerge from that pipeline is Genesis Direct (Nasdaq:GEND), a Secaucus, N.J.-based catalog and Internet-specialty retailer.

Wit Capital also hopes to assume the lead role in upcoming offerings, Feeley noted.

To support its underwriting activities, Wit Capital is aggressively beefing up its research capabilities. The firm expects to offer proprietary analysis on its site in the next few months.

"Providing and aggregating research and facilitating a high level of communications between issuers and shareholders are important for Wit Capital's business model," Feeley said.

This year, Wit Capital will launch its Digital Stock Market, touting it as the first-ever web-based electronic trading system. The system will permit investors to buy and sell shares of select listed companies directly with other investors, supposedly without the spreads made in traditional marketplaces.

But the question remains whether Wit Capital will survive to underwrite its own IPO. If the satisfaction of its customers is any indication, don't bet against it. "I think Wit will eventually be a real player with the addition of Bob Lessin and the presence of Andrew Klein," Tauber said. "It's not going to happen overnight."

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

Officials at the National Association of Securities Dealers recently applauded Nasdaq traders for their improved compliance practices. Late trade reporting had declined by 13 percent in a nearly two-year period beginning August 1996, and Nasdaq traders were missing only half of one percent of all SelectNet liability orders.

Interestingly, the NASD largely attributes this turnaround to its Trading and Market Making Surveillance Examinations, or TAMMS exams.

TAMMS Evolution

TAMMS exams were initiated by the NASD in 1996, shortly after the Securities and Exchange Commission issued its Section 21(a) Report, which criticized the NASD for failing to police market makers.

In 1997, the NASD's Market Regulation unit conducted TAMMS exams on 110 of the largest over-the-counter market makers, collectively covering more than 90 percent of Nasdaq and the OTC markets. The staff found patterns of confused reporting practices, failed best executions and deficient supervisory practices.

The NASD imposed sanctions and collected significant fines. Compliance consciousness was raised, and the news on the Street was that the NASD was taking no prisoners.

This year, buoyed by its earlier successes, the NASD has expanded TAMMS exams for all market makers, from the smallest to the largest. NASD Market Regulation will continue to examine the largest market makers. District offices, under the direction of NASD Market Regulation, will perform all other TAMMS exams, concurrent with routine examination schedules.

TAMMS Focus

TAMMS exams are essentially audits of market-making practices and activities. They are intensive, high-powered and controlled by NASD Market Regulation. By contrast, less comprehensive, routine examinations are performed at the NASD district levels, covering general brokerage activities.

TAMMS exams touch upon just about every significant trading and order-handling rule.

Key areas are:

* Automated Confirmation Transaction reporting, or ACT, at the heart of NASD surveillance. Topics include the accuracy of reporting and the use of the .SLD modifier for late trades.

* Customer order handling in the areas of best execution, timely execution of limit orders, auto-routing and execution systems.

* Firm-quote obligations. Topics include backing away, failure to display customer limit orders and orders broadcast on SelectNet.

* 21(a) Report issues such as pricing and size conventions.

* Confirmation of transactions, including full disclosure in compliance with SEC Rule 10b 10.

* Written supervisory procedures and evidence of supervisory reviews.

* Books and records, including missing or inaccurate trading records.

TAMMS Process

TAMMS exams typically start with an announcement letter and end with a letter of sanction. In between, TAMMS examiners are likely to spend two weeks in the field and several months in their home offices during the examinations.

They review hundreds of market-making and customer transactions, and frequently expand their testing, sometimes to levels that border on harassment. Nasdaq trading and market data are also reviewed extensively. Significantly, very little time is spent with the trading desk and key firm personnel.

The examination phase concludes with an exit interview that clearly reflects the NASD's desire to reject compromise and embrace strict interpretations of rules. The Exit Conference Summary Form, with accompanying exhibits, outlines every aspect of the TAMMS exam, and can exceed 20 pages.

Each Nasdaq market maker then has an opportunity to respond. The challenge is to demonstrate that trading-desk activities, as a whole, do not constitute a pattern of rule violations. The NASD has, at least on record, promised to concentrate more on patterns of sanctionable events and less on individual or isolated violations.

To avoid sanctions, market makers must chip away at each and every apparent violation cited by the NASD. Many of the NASD's findings are questionable at best, and reflect the staff's relative inexperience with traders and the trading environment.

Indeed, head traders should help NASD staff understand that in many instances, violations did not occur, or that ambiguous NASD rules were applied. Alternatively, NASD staff should be informed that erroneous assertions of trading practices are being levelled against the desk.

For example, it would be worthwhile explaining to TAMMS examiners that a market maker that gave a print, minutes after receiving a SelectNet liability order, had not backed away from a firm quote.

NASD Assessment

Based on its assessment of the staff's initial findings and any market-maker responses, NASD Market Regulation may propose fines, sanctions and remedial actions. It is anticipated, although not certain, that the next range of sanctions will include individual traders, head traders and supervisory personnel.

Looking forward, Nasdaq market makers that have completed exit interviews should defend their traders and trade practices until the very end. Persistence may dramatically reduce fines and sanctions. Firms that have not yet been visited should prepare for TAMMS exams.

Head traders should emphasize to all Nasdaq traders and principals the importance of TAMMS exams. Traders should assist in the investigation of NASD findings, and, where applicable, be held accountable for errors that result in rule violations.

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.

A low-ranking official at the Securities and Exchange Commission recently fired off a public comment letter about the new trading system proposed by the National Association of Securities Dealers.

"The system," said the official rather inelegantly, "sucks."

The comment letter is one of more than hundreds of messages transmitted via e-mail to the SEC by letter writers who landed upon a home page used by the NASD to promote its integrated order-delivery and execution system.

The controversial system has been variously called NODES, Next Nasdaq, New Nasdaq and some other unprintable names. But the unprecedented use of the web by the NASD made name-calling purely academic.

Some investors and Internet surfers were taken aback. For a time, the site prevented a person from viewing other sites unless they e-mailed a comment letter on the new Nasdaq system to the SEC. The NASD was inundated with protests, and the home-page conundrum presumably prompted the uncharitable response from the low-ranking SEC official.

This was a bad start for the NASD's campaign to win support for the integrated order- delivery and execution system, or NODES. But it was a good, if not troubling, reminder of the subterranean depths the debate on NODES has sunk since the proposal was published on the Federal Register for public comment.

The confusing sounds of market makers, electronic communications networks (ECNs), public investors and other voices make this a battle for the history books.

The e-mails poured in from around the world, from as far away as Turkey, and as near as San Antonio, where retired widow Barbara J. Whiting said she was afraid to buy anything on Nasdaq anymore because "the prices are so volatile."

Some writers were enthusiastic about NODES, but not Mrs. Whiting.

"My broker says that this new system may make it even harder to determine [prices] because my order will be competing with brokers, market makers, institutional traders and other public customers," Whiting stated.

"He has told me some of his concerns about not being able to cancel an order for ten seconds, the anonymity of the contra-party and the ability of the market maker to not fill an order and say he's on the phone."

"Before SOES," added the quintessential little trader from way down South, "I wouldn't trade over-the-counter stocks. If this proposal goes through, I probably won't trade on Nasdaq again."

The wording for the NASD's brief message irritated most market makers and drew the attention of several skeptical ECNs. In summary, the NASD said it was asking the SEC for permission to make "exciting new changes to improve what is already the most popular marketplace for American individual investors."

At face value, the NASD's message was as convincing as a blond bombshell purring half-garbed atop a Cadillac Seville in a slick magazine advertisement. Some might view the NODES pitch as tantalizing. Sure, you'll subscribe.

The NASD said NODES would give matching limit orders the potential to be executed automatically without a spread, providing investors with tangible savings.

"These benefits increased visibility and lower transaction costs are just part of what Nasdaq wants to provide to the individual investor through it new system," the message continued.

Sure, how could you possibly resist? Some might, however. The NASD warned that "several groups are almost certain to be opposed to the Nasdaq-backed system."

Reuters Group PLC's Instinet, in its own public comment letter filed via conventional channels, said the NASD message was "hyper-promotional in nature and does not give the public a reasonable basis from which to offer informed comment. If the NASD member firms were to propose describing their services in such glowing terms on their web site, NASD Regulation would likely find such material in violation of applicable NASD regulations."

From the start, the proposal for a new trading system has been resisted by a large group of market makers, in part because a centerpiece of the proposal is a central, or consolidated limit-order book sponsored by the NASD.

Besides the fear of competition from its own self-funded, self-regulatory organization, market makers would likely have to fulfill several primary market-maker standards before they could provide institutional access to the book.

William Sulya, head of Nasdaq trading at St. Louis-based A.G. Edwards & Sons, welcomed most of the NASD proposal, but expressed several reservations.

For one thing, he xechoed a concern xxthat the xNASD's

voluntary limit-order book may become the de facto standard for best-execution obligations. "The apparent efficiency and fairness of the Nasdaq limit-order file would suggest that member firms would be satisfying best-execution obligations by routing orders to the proposed system," he said.

One of the few features market makers and other participants agree upon is the proposal to merge SOES and SelectNet into one system, thus eliminating the current problem of potential double liabilities on transactions.

The other problems raised by critics, thereafter, are numerous. For one thing, ECNs stepped up their attacks on the NASD's proposed system in the public comment letters.

Instinet said the proposed automatic-execution feature for smaller orders would force ECNs to begin assuming proprietary positions.

Bloomberg, which owns the ECN Bloomberg Tradebook, said the new system would likely put ECNs out of the automatic-execution system "because they could not provide automatic-executions to ECN participants without risking double or multiple executions via the new Nasdaq system."

Bloomberg illustrated, with an example, the dilemma ECNs could face:

Customer A places an order in an ECN to buy 1,000 shares of stock at $20 a share, which becomes the best bid in the ECN and is published in the new NASD limit-order book as the Nasdaq best bid.

Customer B, an ECN participant, enters a priced sell order into the ECN for 1,000 shares at $20 with the intention of hitting customer A's bid. Shortly thereafter, customer C enters an order into the NASD system through a dealer to hit customer A's bid.

Though it would appear Customer A is on the line for a double liability two trades, each 1,000 shares in size the ECN, in fact, would have to provide the 1,000 shares to satisfy Customer C's buy order, according to Bloomberg.

"That outcome would likely cause ECNs to exit the execution business because they would have no alternative but to send their participants' orders on an agency basis to Nasdaq. ECNs would thereby cease to be ECNs for orders of 1,000 shares or less within the SEC's definition in the order-execution rules. And then there would be only Nasdaq."

Instinet hinted at a conspiracy by the NASD, raising the possibility that only the top four or five Wall Street firms would be able to fulfill the NASD's proposed primary market-making standards. What's more, Instinet says the primary market-making standards as currently proposed are unworkable as institutions would be required to enter sponsorship arrangements on a security-by-security basis.

"Given that institutional money managers need the flexibility to trade Nasdaq securities at will, this would literally require dozens of sponsorship arrangements with Nasdaq market makers to insure that an institution could trade any Nasdaq security through the system at a moment's notice," Instinet stated.

A.G. Edwards' Sulya urged that the primary market-making standards not be a condition for sponsoring institutions, adding that A.G. Edwards feared this was the first step toward a bifurcated marketplace between institutional and retail investors.

The proposal engaged an Orwellian flight of fancy, according to another comment letter filed by day trader and Rutgers University finance professor David Whitcomb. He was referring to the firm-quote compliance facility, or the so-called phone-ahead button that market makers would press, giving them 17 seconds to take their quote out of the automatic-execution rotation.

"The worst part about the phone-ahead button is that it officially promotes false advertising. Firm quotes ought to be just that: firm and available," Whitcomb stated.

What about the little guy?

"Without meaningful competition," Instinet complained, "Investors would have less flexibility in determining how best to execute transactions in Nasdaq stocks, and be forced to accept the Nasdaq option."

Instinet thinks the little guy will be shortchanged because Nasdaq would be able to set commission rates independent of competitive pressure.