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.

Paul Bracco, a former sales trader at Sherwood Securities in Jersey City, joined New York retail house Sands Brothers as head of sales trading. Bracco will report to Sabin Danziger, head of capital markets for the firm.

BT Brokerage, a New York-based discount-brokerage subsidiary of Bankers Trust, promoted Ellen Bellamy-Gelman from assistant vice president to vice president of institutional trading.

Prior to its parent's announced merger with Wall Street giant Travelers Group, Citicorp Securities Services in New York appointed Glen Stifelman vice president of trading. Responsible for the firm's trading room, Stifelman joined the Citicorp subsidiary from Green Line Investor Services in New York, USA, the U.S. subsidiary of Canada's Toronto-Dominion Bank.

Citicorp also named Frederick Chapey Jr. head of global derivatives and emerging capital markets sales and trading. Chapey, based in New York, was previously head of global derivatives, and deputy head of capital markets, at Chase Manhattan Corp. in New York.

Bob Michele was named head of the U.S. fixed-income department at New York-based Schroder Capital Management. Previously a managing director and portfolio manager at Blackrock Financial Management in New York, Michele will report to Sharon Haugh, chairman of Schroeder.

Boston-based Thomson Investment Software, a provider of investment-management and operations software, promoted John Jones to global sales director. While continuing to manage the firm's U.S. sales efforts, Jones will coordinate Asian, European and South American sales management.

The Rock Island Company, parent of Rock Island Specialists and Rock Island Securities, appointed Ed Donnellan president. Donnellan joined Chicago-based Rock Island from Sanwa Futures, where he served as the Chicago firm's president. He will report to Andrew Davis, principal and chairman of Rock Island.

Rock Island also completed an acquisition of Chicago's Andover Securities. The acquisition makes Rock Island the largest specialist operation on the Chicago Stock Exchange, with over 500 assigned stocks and 20 traders.

Steve Iskalis rejoined Cleary Gull Reiland & McDevitt in Milwaukee as an institutional trader. Iskalis left Cleary Gull two years ago to join the institutional desk at Vector Securities in Dearfield, Ill.

Cleary Gull was recently acquired by Boston-based Freedom Securities.

The New York Stock Exchange named Janice Stahura O'Neill vice president of listing operations. Overseeing listing-compliance operations and corporate compliance functions, she will report to Catherine Kinney, group executive vice president. O'Neill was previously managing director of listing operations at the NYSE.

The Securities Industry Association named Scott C. Kursman assistant general counsel. Acting as staff adviser to the SIA's Capital Markets Committee and co-adviser to the Federal Regulation Committee, he will report to Stuart Kaswell, SIA general counsel. Kursman is a former assistant general counsel at New Yortk-based Prudential Securities, and an attorney for the Securities and Exchange Commission.

Andrew Fishkind joined B-Trade Services – a New York-based, wholly-owned subsidiary of The Bank of New York – as director of client services. B-Trade provides execution and clearing systems for Bloomberg Tradebook. Fishkind had previously spent most of his career with Instinet in New York, most recently serving as vice president of international equities.

Robal Johnson and Chris Pilder joined New York investment bank Donaldson, Lufkin & Jenrette as senior position traders. Johnson is the former head of trading and sales trading at HSBC Securities in New York. Pilder was previously a senior trader on the listed block desk at Salomon Smith Barney in New York.

CSK Software – the New York-based global financial-information arm of CSK Corporation – hired Steven Suzuki as director of Japanese accounts. Suzuki is responsible for overseeing sales of Japanese insitutional accounts in New York, and liasons with the firm's Tokyo-based headquarters. He was previously a senior vice president at Nomura Research Institute in New York, marketing the company's network management software in the U.S.

The American Stock Exchange elected five new governors; three of the new representaives were chosen from the public sector, and two new delegates will represent the securities industry.

Public representatives elected to three-year terms were: Alan S. Blinder, an economics professor at Princeton University, James L. Packard, chairman and chief executive of AMEX-listed Regal-Beloit Corporation, and Warren Rudman, a former U.S. senator from New Hampshire.

Chosen to represent the securities industry, Leslie C. Tortora, managing director of New York-based Goldman, Sachs & Co., and Barry Ridings, managing director at Baltimore-based BT Alex. Brown & Co., were also elected to three-year terms.

Walnut Street Securities relocated its headquarters in St. Louis. A broker-dealer firm serving more than 2,000 registered representatives, Walnut Street's 100 employees moved to 400 South Fourth Street, Suite 1000 in St. Louis.

Perrin Long Jr., a respected veteran analyst of brokerage firms, died on April 8 in Stamford, weeks after suffering a debilitating stroke. One of the first Wall Street pundits to follow the brokerage industry as an emerging market, Long most recently worked with Horsemouth, an Internet information service. He was 70.

Will the stunning success of an amazingly young Nasdaq wholesaler, and its affiliated third-market trading firm, be parlayed into a hot initial public offering? Jersey City's Knight Securities, and Trimark Securities in White Plains, N.Y., must hope so.

Roundtable Partners LLP, the holding company for both firms and its subsidiaries, is planning to go public this year on Nasdaq, filing a preliminary prospectus at the Securities and Exchange Commission on May 1. The proposed ticker symbol is NITE.

The prospectus noted that 10,000 common shares would be issued at an estimated offering price between $10 and $16. The lead manager is San Francisco-based BancAmerica Robertson Stephens.

Market Share

Both Knight, a Nasdaq wholesaler owned by a consortium of smaller broker dealers, and Trimark, a third-market firm, were launched in 1995, quickly building market share. As stock markets climbed and more money poured into mutual funds and stocks, Knight and Trimark were not far behind.

Knight's advertised share volume, ranked by Boston-based AutEx, grew from 614.7 million shares for January 1997, to 1.2 billion shares for December 1997, and to 1.9 billion shares this March, representing 9.9 percent of total market share.

According to the National Association of Securities Dealers, Trimark's reported share volume in New York Stock Exchange-listed securities grew from 234.2 million shares for January 1997, to 338.4 million shares for December 1997, to 445.6 million shares this March, representing 33.1 percent of total NYSE third-market volume.

With the acquisition of Chicago's Tradetech Securities, Trimark's volume grew most rapidly – to 2.4 billion shares for the three months ending March 31, from 1.5 billion shares for the comparable period in 1997. The volume accounted for 33 percent of Roundtable's overall share volume.

Employees

The combined trading entities employ 337 people. Of Knight's 246 staffers, 142 are employed in market-making activities. At Trimark, 55 people are employed in market-making activities. The firms clear their business through New York-based PaineWebber's subsidiary, Correspondent Services Corp.

Both firms named Omaha-based AmeriTrade, Boston's Brown & Company, San Francisco's Discover Brokerage and E*Trade, and global giant Merrill Lynch & Co. among its customers. While Knight and Trimark have strong niches executing retail-sized orders, the prospectus noted that they "plan to accelerate [their] penetration of the market for institutional investors, which it believes provides an opportunity for growth, and offers higher profit margins [than retail business]."

Knight also plans to increase its market share through the launch of its e.Knight software, which it said will enable broker-dealer and institutional customers to access Knight and Trimark from their desktops via the Internet and other electronic systems.

In a controversial victory for the New York Stock Exchange, PaineWebber closed all of the regional specialist units managed by PaineWebber Specialists.

PaineWebber had operated specialist units on the Cincinnati Stock Exchange, the Boston Stock Exchange and the Pacific Exchange, covering more than 500 stocks. In all, 35 employees were laid off with the closings. The firm will still manage its specialist unit on the NYSE.

PaineWebber declined to comment on the decision, saying only that it was part of an ongoing reevaluation of the firm's equity business. The firm will retain membership and continue to route orders to the three regional exchanges.

But the move by New York-based PaineWebber was significant in the heated rivalry between the NYSE and the regional exchanges over market share.

"The NYSE is absolutely recruiting business for their exchange," said David Colker, chief executive of the Cincinnati Stock Exchange, on the loss of PaineWebber. "I am concerned for the public investor that 85 percent of the trading in NYSE stocks is done in one place."

The regional stock exchanges function primarily as alternative sources of liquidity for NYSE-listed stocks. The regionals offer low cost structures and slightly different rules for investors looking to execute orders in listed stocks. More than 15 percent of volume in NYSE stocks is traded away from the Big Board.

Citing an interest in investor protection, the NYSE has lobbied with member firms for an increase in order flow. And in numerous instances, the Big Board has succeeded.

In 1995, brokerage giant Merrill Lynch & Co. closed their specialist operations on the regional exchanges, and announced their intention to route all listed orders only to the NYSE. The firm alleged it would get better prices for customer orders at the Big Board.

But Robert Jennings, a professor of finance at Indiana University who studied the move by Merrill, suggested that the firm may have received concessions from NYSE specialists for sending all orders to the NYSE.

"There was probably political pressure for Merrill to pull out of the regionals," Jennings added.

In 1996, the former Smith Barney followed suit. The firm – now a part of New York-based Salomon Smith Barney – closed its specialist operations on the Cincinnati Stock Exchange after sustained pressure from the NYSE.

And when PaineWebber made its announcement on April 16, it was not considered surprising. A source at the Boston Stock Exchange said the firm had given prior indication that it would pull out of the regional exchanges.

The source added that political pressure may have largely contributed to PaineWebber's decision. In fact, Joseph Grano, president of PaineWebber, has publicly remarked on the heavy recruitment made by the NYSE.

"He's [NYSE Chairman Richard Grasso] been yelling at me for three years, saying, 'What are you doing, the order flow should be coming to the primary market,'" Grano said in an April article in the Wall Street Journal.

Nevertheless, Grano has denied that PaineWebber's decision was influenced by Grasso's lobbying or political pressure.

Tumult

Separately, PaineWebber has displayed a tumult within its own equity operations in recent months that suggest a reevaluation of operations.

In November, seven Nasdaq traders left the firm, including head trader Richard Bruno. PaineWebber refused to comment whether the resignations were forced or voluntary. Patrick Davis and William Heenan succeeded Bruno as co-heads of over-the-counter trading. Just two months later, Heenan left the firm to join the Nasdaq desk at Donaldson, Lufkin & Jenrette in New York.

And over the last 12 months, the firm stopped making markets in more than 200 Nasdaq stocks, cutting its list from 735 to 525.