Some of the major technology projects on trading desks are receiving the resources necessary for their completion. According to a study by Boston-based research firm The Tower Group, for the Securities Industry Association, securities firms are wasting no time or money preparing for the Order Audit Trail System, Year-2000 compliance, decimilization, T+1 and capacity expansion. The study, however, stresses that implementing the Year-2000 and other projects – which have Dec. 31, 1999 deadlines – must not compromise separate projects.

"Information technology is critical to the strategic direction and the day-to-day operation of securities firms," said Marc Lackritz, president of the SIA, in a prepared statement. "Industry participants must work together to clearly define project scopes and develop realistic implementation schedules."

ART-

When the Securities and Exchange Commission announced potential ground-breaking proposals on the regulation of alternative or private trading systems, the reaction was dull.

The proposals, however, should not be overlooked, raising the possibility, for instance, that a major Nasdaq trading firm will establish its own stock exchange.

The SEC proposes to give alternative trading systems more choices on how they are regulated, and to provide brick and mortar stock markets a chance to compete with these ambitious electronic networks.

The proposals, which should come before the agency for final approval by year's end, require screen-based systems to register with the SEC either as stock exchanges or as broker dealers. More requirements would be added if volume rises.

The proposals give Nasdaq and the New York Stock Exchange an opportunity to developed their own systems unhampered by the SEC for two years, unless their systems exceeded certain trade volumes. The same proposals apply to alternative trading systems that elect to be regulated as exchanges.

Sen. Alfonse D'Amato (R-N.Y.) is reportedly considering a bill that could save Nasdaq traders up to $20 million annually on 31(a) transaction fees on wholesale orders.

D'Amato, the chairman of the Senate Banking Committee, was apparently prodded by Nasdaq President Al Berkeley, who has expressed support for a concerted campaign by Nasdaq traders for the abolition of fees on dealer-to-dealer trades. National Association of Securities Dealers President Frank Zarb has added his voice to the chorus of protests.

However, D'Amato and the crew may need to win the support of Sen. Judd Gregg (R-N.H), chairman of the Senate Appropriations, Commerce, State and Judiciary Subcommittee, who is not impressed with the traders' fight. He told our man in Washington that the fight was just a "rhubarb" and a lot of hot air.

The order-delivery and execution system recently proposed by the National Association of Securities Dealers is still mired in controversy over its consolidated limit-order book.

Traders fear that the NASD-sponsored book – designed to give them a new option for executing their customers' limit orders – may compete directly with market makers for customer order flow.

Now another equally controversial fear has flared over whether the limit-order book will effectively evolve into a mandatory utility traders must use to remain profitable.

That view became increasingly evident when the NASD recently filed its proposed set of standards with the Securities and Exchange Commission for broker dealers that want to become primary market makers in Nasdaq stocks.

Reemerged

Primary market-making standards were essentially abandoned in the wake of the order handling rules, but have now reemerged as an important carrot to drum up market-maker support for the limit-order book.

Fulfilling the new primary market-making standards allows a market maker to sponsor institutional access to the book. That alone may force scores of market makers to become book users.

"There's not much wiggle room, is there?" one trader asked rhetorically. "A market maker that values his institutional business could be compelled to use the NASD's limit-order book."

What's more, traders say, investors may view the book as the best place to execute their orders. The SEC published the NASD's primary market-making rule proposals in April. The NASD has stressed the marketing value that primary market-making compliance gives trading firms, as well as the more tangible benefits, including exemption from the short-sale rule.

"The exemption frees a market maker to aggressively unwind a position, or otherwise to aggressively sell," one expert explained. "The SEC's intent is to encourage deeper and better-priced markets"

At the same time, the NASD recently suggested that it would engage in profit-sharing arrangements with market makers using the limit-order book, provided they adhere to the new primary market-making rules.

Reincarnated

The new standards have the support of the NASD's Quality of Markets Committee. Under the reincarnated primary market-making rules, a market maker's performance will initially be measured against two standards: how often the market maker buys at the bid when the market is moving down, and how frequently he sells when the market is moving up.

For example, if NASD computers show the market maker is always buying in a down market, the market maker bats a 1.000 average, according to an analogy provided by an NASD official. Always selling when the market is heading up will also produce a 1.000 average. A market maker with an average of at least .670 will be viewed by the NASD as worthy of a primary market-making designation.

However, measuring a market maker's performance in connection with the standards is complex. The NASD's computers will evaluate the proportion of a market maker's trades in a particular stock, and the proportion of the market maker's share volume in that stock. The most valuable traders will produce a high number of trades and a large volume.

The NASD said it would like to implement the new standards on a pilot basis as early as possible. The first month of operation would be used to begin calculating whether market makers are meeting the new criteria.

Market makers would receive their initial ratings and then have the second month to more fully adjust. The third month would produce an actual effect for market makers.

Securities and Exchange Commission Chairman Arthur Levitt has survived the chill in his relations with Sen. Phil Gramm (R-Texas) and Sen. Lauch Faircloth (R-N.C.).

As previously reported, the lawmakers were unhappy with Levitt's support for new derivative-related rules initially proposed by the Financial Accounting Standards Board. Politically, the worst is now behind Levitt.

The Senate Banking Committee Chairman, Sen. Alfonse D'Amato (R-N.Y), asked the Senate to move Levitt's nomination for a second term by unanimous consent.

He got his way, albeit on a voice vote and with most members out of town. Levitt's second term will expire June 5, 2003.

Thomson Electronic Settlements Group's (Thomson ESG) successful fight to win regulatory approval to provide direct, institutional trade-confirmation links to the Depository Trust Company (DTC) has hit a roadblock.

The Securities and Exchange Commission has effectively stalled the plan, pending consideration of a review by the SEC that could require Thomson ESG to create an SEC-supervised clearing depository.

The latest development cast doubt over whether Thomson ESG will become the DTC's first competitor in the potentially profitable business of comparing institutional trades before settlement.

Clearing Depository

At issue is whether Thomson ESG will be allowed to provide one of the final steps in the settlement process, automatically matching trades without being required by the SEC to do so as a registered clearing depository.

The DTC in New York is the exclusive provider of institutional trade-confirmation services, largely because it is a registered clearing depository, filling current rules stipulated for providing automatic matching services.

Industry trade groups, and even the DTC, support Thomson ESG's efforts. The New York Stock Exchange and the National Association of Securities Dealers have also indicated support. (Self-regulatory organizations have filed rule amendments with the SEC to allow private vendors to enter the confirmation business.)

SEC Chairman Arthur Levitt, however, has raised some concerns on allowing private vendors to enter the clearing business outside the regulatory orbit. Levitt said he and the SEC staff will examine the issue further and issue its recommendations over the next several weeks.

His stand comes in the wake of congressional inquiries over why the SEC is considering linking institutional trade-confirmation services to a requirement that third-party vendors register as clearing agencies.

Letter to Levitt

In a letter to Levitt, two congressional securities-industry watchdogs, Rep. Michael Oxley (R-Ohio), chairman of the House Commerce Subcommittee on Finance and Hazardous Materials, and Rep. Edward Markey (D-Mass.), a member of the same subcommittee, demanded an answer.

Levitt responded to the letter by stating that his staff will examine the issue and recommend parameters for industry-wide automated matching. The recommendations will be carefully studied by the SEC.

Levitt favors competition. After a number of meetings with Thomson ESG, the DTC and other parties, he publicly stated that competition is beneficial. "I agree with Thomson that allowing vendors to compete in this area will enhance efficiency in the marketplace," he wrote the two congressmen.

However, SEC approval of the proposed rule changes will prove to be a pyrrhic victory for Thomson ESG if regulators require vendors to register as clearing agencies. For one thing, it raises a laundry list of costly, time-consuming burdens for Thomson ESG.

Levitt acknowledged in his letter to the congressmen that matching services appear to be "the next step in streamlining the confirmation and affirmation process." But he warned that matching services "may raise a variety of issues relating to the safety and soundness of our financial system."

Petition

According to a well-informed source, Thomson ESG had its eyes on providing a matching service. However, this was not at issue when Thomson ESG first filed a petition seeking SEC confirmation and affirmation approval last year.

The source said Thomson ESG "logically assumed" it would eventually be able to combine into a matching service "the two disparate functions of processing allocations and processing affirmations and confirmations."

However, several sources said it is doubtful that Thomson ESG would ever choose to register as a clearing agency. "I would guess that would just not be in their business plan," an industry observer said.

(Thomson ESG is a subsidiary of Thomson Financial Services, the parent company of Securities Data Publishing, publisher of Traders Magazine.)

Sen. Judd Gregg (R-N.H.), chairman of the Senate Appropriations Commerce, Justice, State and Judiciary Subcommittee, has scorned the battle to gain relief from 31(a) transaction fees.

Dismissing the fight as a "rhubarb," Gregg may now have turned his back on the appeals of the 39-member ad hoc 31(a) coalition, representing Nasdaq and other exchanges.

In a brief interview with Traders Magazine, Gregg questioned whether the dollar savings of reduced transaction fees would benefit individual investors' or swell Wall Street profits.

Gregg is reluctant to accommodate a technical correction as a legislative route to bringing relief on 31(a) fees, a Capitol Hill source said. "Of course, the New York community and other traders cannot understand how a Republican can countenance this," the source added.

Estimates

Meanwhile, a source at the National Association of Securities Dealers estimated savings at $18 million to $30 million on one set of 31(a) transaction reductions, a drop of between 12.5 percent and 20 percent.

The coalition has targeted principal trading for a reduction in 31(a) fees, including riskless principal trades, or trades in which a broker dealer buys shares of stock that he does not trade (earning a commission by simultaneously selling the stock to a market maker).

Advocates of a fee reduction argue that Congress did not consider the structural differences between Nasdaq and the listed exchanges when they imposed 31(a) fees on Nasdaq transactions. "The result is that many transactions on Nasdaq that are executed to fill a single customer order are subject to the fee – creating multiple assessments," a Securities Traders Association membership notice stressed.

Interestingly, this view may be getting the sympathetic ear of Securities and Exchange Commission Chairman Arthur Levitt, as reported last month.

"There is some question as to whether Nasdaq double-counts fees, which they do, and I think we are going to shortly see some adjustment in that, which will reduce the fees," Levitt told Gregg's subcommittee on March 19. Asked for an elaboration, SEC spokesman John Heine said, "the statement says what it says."

Meanwhile, as of mid-March, Nasdaq was required to transmit to the U.S. Treasury fees collected for the period of Sept. 1, 1997 to Dec. 31, 1997.

Wall Street firms have been inundated with warnings about potential Year-2000 computer glitches. The media, consulting firms and other groups are stoking the fires of discontent. NASD Regulation, the regulatory subsidiary of the National Association of Securities Dealers, is no exception.

In a foreword in its Regulatory and Compliance Alert newsletter, NASD Regulation pointed out what experts have been hammering home for months.

A typical securities firm should have a Year-2000 plan with these activities completed: a review of all business aspects to determine where Year-2000 failures may occur; a completion of an inventory of any replacement or renovations required; identification of costs and resources; and notification of suppliers and partners to assess and certify Year-2000 readiness.

"The plan should also define how the firm will test or validate its Year-2000 readiness, including options for participating in industry-wide testing, and contain contingency-planning approaches," NASD Regulation stated in the newsletter.

Timely

NASD Regulation urged all members of the NASD to implement their action plans effectively so that they achieve timely Year-2000 compliance.

An irate former Securities and Exchange Commission policy-maker has accused the agency of not giving helpful answers to ordinary regulatory questions from the trading community.

Edward Fleischman, an SEC commissioner from 1988 to 1992, told attendees at an equity-trading conference in April that it was "most surprising to hear senior SEC staff members bob and weave and dodge any straight answers to honest questions."

Fleischman told attendees at the conference, sponsored by the Security Traders Association at New York's Fordham University, that ambiguous responses made it difficult for buy-side and sell-side desks to properly handle trades between the best prevailing bids and offers.

"Ask [the SEC] if the firm is required to cross those orders in-house, and the answer will be an historical review, culminating in a reference to the principles enunciated in the limit-order display-rule adapting release," Fleischman said. "Repeat the question explaining that the trading desk won't be satisfied with a reference to the principles enunciated in the limit-order display-rule release, and the answer will be humorous, with explanations of the relevant dealer-examination modules."

Fleischman, now associated with the law firm of Linklaters & Paine, said the roots of best-execution obligations are decades old, and took on fresh light with the 1975 Securities Amendments Act.

Best-execution obligations became a hot subject as the SEC issued its 21(a) report in August 1996, and censured the National Association of Securities Dealers for not policing its own members.

But that has hardly helped traders get straight answers on best-execution obligations, Fleischman contends. "Good Lord," he added, "we deserve some straight answers, even if they are frightening or counterproductive or wrong."

Richard H. Walker, general counsel at the Securities and Exchange Commission, succeeded William R. McLucas as the commission's top enforcement officer.

The enforcement director, responsible for investigating misconduct in the securities markets, is considered the second most important position at the SEC, after that of chairman.

Walker, who joined the SEC in 1991, is considered to be a hard-line fighter of securities abuses. Before serving as general counsel, Walker was the director of the SEC's Northeast regional office. In that position, he helped expand the parameters defining insider trading.

"Dick has demonstrated good judgment, intelligence and dedication to investor protection," said SEC Chairman Arthur Levitt, in a prepared statement. "His talent as a litigator and a prosecutor are remarkable."

McLucas – who left after eight years as the SEC's enforcement director – has been hired by Wilmer, Cutler & Pickering, a prominent Washington law firm specializing in the securities industry. McLucas joined six other former SEC lawyers at the firm.