Measuring trade execution quality is not new. But an upstart company based in Northpost, N.Y., is pulling out the stops to nab business, measuring trade execution quality for orders of 5,000 shares and more.

The Transaction Auditing Group (TAG) started the service last month, offering to measure the trade execution price against the midpoint between the bid and asked price. This measure, commonly referred to as liquidity premium, is a topic of popular discussion in academia.

"Liquidity premium is a very intuitive measure of trade execution," said Charles M.C. Lee, an accountant and finance professor at Cornell University. "This measure provides another dimension by which to analyze and measure trade execution quality."

TAG's audits evaluate trade execution against a number of measures, including price improvement, order fill, liquidity and timeliness. TAG has established an industry advisory board dedicated to fostering a dialogue on issues that affect best execution.

Arthur Levitt has suggested he will propose eliminating multiple counting on each Nasdaq trade, to dramatically reduce the transaction fees paid by market makers.

The Securities and Exchange Commission chairman raised the issue at a Senate Appropriations Subcommittee, and said afterwards he will meet Nasdaq officials to discuss how trades are counted.

Levitt's action is controversial. The double and triple counting of each Nasdaq trade has long been cited as giving an inflated account of Nasdaq volume. Unlike trading on the New York Stock Exchange, a huge proportion of Nasdaq trading is principal business, requiring the passage of each trade among two or more trading desks.

Nasdaq, however, made no apologies before now, in part because its reported volume gives it marketing heft, experts say. But the intervention of Levitt, as well as market makers' frustration over a congressional decision to introduce 31(a) transaction fees on Nasdaq, may give Nasdaq second thoughts.

Fund U.S. Treasury

The transaction fees are now charged at a rate of 1/300th of one percent of the value of each Nasdaq sale, and are used to fund the U.S. Treasury, and ultimately to finance the SEC. Market makers complain they are paying an unfair proportion of the fees compared to traders at the Big Board.

Levitt's suggestion could bring them relief.

"There is some question whether Nasdaq double counts fees, which they do, and I think shortly we'll see some adjustment that will reduce the fees," Levitt told the Senate.

Whether Nasdaq would countenance a cut of up to 50 percent in its reported daily volume and the loss of prestige that would likely bring is not clear. But supporting the change could hasten the end of Nasdaq traders' efforts on Capitol Hill to get relief on 31(a) fees, market insiders say.

Publicly, Nasdaq says the current system might be best left untouched. A spokesman for Nasdaq noted that the current structure was approved by the SEC and does what other exchanges do: When capital is risked, volume is counted once.

The current structure "provides investors with maximum transparency, and less reporting may not be in the best interests of investors," NASD spokesman Reid Walker told a reporter.

Privately, however, some Nasdaq brass, caught offguard by Levitt's proposal, may be looking for wriggle room. Indeed, Walker said that the NASD was "always open to discussing the matter [of trade counting] further with the SEC."

At press time, the Security Traders Association, and a coalition that includes the Securities Industry Association, the Chicago Stock Exchange and the Big Board, continued their fight for a relaxation in how 31(a) fees are levied.

Sen. Judd Gregg (R-N.H.), chairman of the Senate Appropriations Subcommittee that has jurisdiction over the SEC's budget, said there is a proposal to reduce 31(a) fees on both listed and Nasdaq trades by $400 million over five years. But he cautioned that "if eliminated, we still need to find additional funds for the SEC and the other people in government who will pick up the fees."

A congressional source said an overall reduction of 30 percent to 50 percent is sought in the estimated fees to be collected.

"It has to be in a range of comfort for the SEC," said David Franasiak, an attorney representing the STA, in an interview earlier this year after an annual STA-sponsored legislative conference in Washington.

"Budget scoring will ultimately hang on the specific language of a final proposal," a congressional budget aide added.

Banking Committee

Sen. Phil Gramm (R-Texas), chairman of the securities subcommittee of the Senate Banking, Housing and Urban Affairs Committee, supports a reduction in the amounts levied.

"We are in preliminary discussions with the various committees and the SEC over how and under what circumstances we can reduce the 31(a) fees," Gramm's spokesman Larry Neal said.

"The jurisdiction is so diverse," Neal added. "Eight committees in the House and Senate would have to reach agreement. Talks are proceeding one by one to see if an accommodation can be reached. Plainly, we are some distance from producing legislation, but there is initial movement in that direction."

Sen. Alfonse D'Amato (R-N.Y.), chairman of the Senate Banking Committee, expressed his own concern about 31(a) fees in a letter dated March 3 to Sen. Pete Domenici (R-N.M.) and Sen. Frank Lautenberg (D-N.J.), the chairman and the ranking member of the Senate Budget Committee, respectively.

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).

Cooked the Books'

What particularly upsets market makers is the amount of money that 31(a) fees are generating. One Nasdaq trader griped that the SEC "cooked the books" when it sent revenue estimates to the Office of Management and Budget prior to congressional approval of the fees in 1996.

"The [excess budget amount over the cost of running the SEC] will be so huge it will be an embarrassment," Franasiak said.

Federal Expert

Traders have estimated an excess budget of $300 million. But according to a federal budget expert, who requested anonymity, the annual excess coming into government coffers from transaction, registration and other sources "is not even $100 million relative to total expenditures."

The budget expert estimates that 1999 fiscal-year administration budget includes $180 million from Nasdaq transaction fees. "This is somewhat more than expected," the expert said.

According to a government source, the money collected is designed in part to protect the SEC from engaging in bruising battles with Congress for operating funds.

At the STA Foundation earlier this year, Franasiak said a reduction in the amount levied in 31(a) fees could be achieved with legislative riders or an amendment to a fiscal year 1998 supplemental budget.

However, with Monica Lewinsky and Linda Tripp et. al the butt of cocktail banter on Capitol Hill these spring days, 31(a) fees hardly set the Beltway on fire. Eliminating 31(a), Franasiak said, "is not unlike going for the Super Bowl in the first year of a franchise's existence. It is an extremely, extremely difficult task."

Separately, the SIA has proposed that the National Association of Securities Dealers make other changes in how 31(a) fees are collected because the current arrangement has resulted in clearing firms and electronic communications networks being charged for transactions initiated by their own customers.

Reeling from the relentless allegations about President Clinton's extracurricular activities, news of the merger talks between Nasdaq and the American Stock Exchange stirred nonchalant reactions in Washington.

Yes, this was a big yawn of a yarn.

Even so, the merger has an important place in the heart of Washington. A proposal in principal to merge both exchanges must be approved by the Securities and Exchange Commission. And it does raise anti-trust concerns.

"I would expect the Senate to take a close look at it if the transaction goes forward," a Senate source said, lamely. "But we won't jump way out ahead of it. It's too soon to say whether hearings would begin before or after the SEC begins its review."

A Senate staffer said, "things will have to progress a little further to warrant any official action up here."

One mildy-excited House staffer said the paper that broke the Watergate scandal looked a little ridiculous. "The Washington Post got scooped by The New York Times and the Wall Street Journal on the Nasdaq and AMEX merger."

Now that's a story.

The Securities and Exchange Commission approved a new schedule for the Order Audit Trail System (OATS), giving market makers the extra time they said is necessary for compliance.

OATS, an electronic system designed to gather up to 25 trade details, was proposed as part of Nasdaq's agreement to more aggressively police its members in the wake of price-fixing allegations.

On March 1, 1999, electronic orders received by market makers or electronic communications networks must be reported to OATS.

All electronic orders must be reported to OATS by August 1999, and all non-electronic orders, or manual orders, must be reported to OATS no later than July 31, 2000.

On August 7 this year, all computer-assissted clocks must be synchronized for OATS compliance, while all mechanical clocks must be synchronized by July 1, 1999.

The National Association of Securities Dealers said its NASD Regulation subsidiary will use data collected via OATS with data currently reported through the Automated Confirmation Transaction Service and through Nasdaq to substantially improve its operation.

The NASD said OATS will be an "integrated audit trail of quotation, transaction and order data, greatly enhancing NASD Regulation's surveillance and examination capabilities."

OATS was formally proposed in a filing with the SEC last summer. The new OATS schedule was introduced under prodding by market makers and the Security Industry Association's OATS Ad Hoc Committee.

The group argued it would have been impossible to provide most of the proposed components by an earlier start-up date for those orders currently captured in an automated system.

At a meeting in March last year, members of the OATS committee expressed its concern to SEC staffers present.

Laura Unger, the Securities and Exchange Commission's newest commissioner, provided a glimpse of how she will guide her policies in office, promising flexibility and foresight.

Speaking at the Security Traders Association's annual Washington Conference in the Watergate Hotel, Unger said she would strive to "maintain the appropriate balance between investor protection and liquid and competitive markets."

"The approaches we take should be flexible, and the industry should consider 30 years ahead," Unger said.

This view seemed contrary to the vast majority of comment letters submitted in response to the SEC's concept release published last June. Most of these letters took the view that the status quo was preferable, according to Unger.

The National Association of Securities Dealers' proposal for a voluntary limit-order book, she said, "raises a lot of fundamental market-structure issues," including the role of Nasdaq as both regulator and market participant.

However, she supports a new order-delivery and execution system combining SelectNet and SOES in a single system. "[Currently these two systems] work at cross purposes, " Unger added.

Turning to the controversy on 31(a) fees, Unger said without elaboration that these fees affect traders' "bottom line. The feeling is you're being squeezed in the pocket book."

Elsewhere, Unger is a proponent of quoting in decimals. "At least with decimals, people will know what you are talking about," she said.

One Cent

Once decimalization is in place, the remaining issue would be whether to quote in increments of one cent or five cents, according to Unger. "You will all work that out in the industry," she added.

However, she acknowledged the challenge of adjusting systems to quote stocks in decimals, recognizing the other major operational challenges ahead, such as Year-2000 compliance.

Unger thinks SEC Chairman Arthur Levitt agrees with her outlook, and speculated that the House, which is considering legislation mandating decimalization, will probably base any new initiative on the results of a General Accounting Office (GAO) report. "Left at the mercy of the GAO," is how she put it.

Prior to Unger's November 1997 appointment to the SEC, she served as counsel to the Senate Banking, Housing and Urban Affairs Committee which is headed by Sen. Alfonse D'Amato (R-N.Y.). Earlier, she was an attorney in the SEC's enforcement division.

Steve Davenport, managing director and head of over-the-counter trading at Merrill Lynch & Co. in New York, transferred to Sydney to run the firm's Australian equity sales and trading operations. Davenport, who will also oversee equity trading in New Zealand, will continue to report to Bob McCann, managing director and head of global equities, as well as Greg Bundy and John Magowan, chief executives of Merrill Lynch Australia. Tom Wright will replace Davenport in New York. Wright will also continue in his previous duties as head of institutional OTC trading at Merrill.

Capital Institutional Services, a Dallas-based institutional brokerage firm, named R. Douglas Jones director of research and product marketing. Jones, previously a compliance analyst director at Fidelity Investments in Dallas, will oversee the firm's research marketing and public-relations functions.

Joseph S. Rizzello, executive vice president of business development, marketing and new product development at the Philadelphia Stock Exchange, resigned from his position to join The Vanguard Group as a principal. Rizzello will manage the firm's brokerage arm, Vanguard Brokerage Services, in Malvern, Pa.

Frank Angelilli left New York soft-dollar firm Standard & Poor's Securities to join Vandham Securities as a vice president of institutional sales. Angelilli, a vice president of sales at Standard & Poor's, will be based in New York.

William Hotchkiss, a project manager for peer review and liaison with the Securities and Exchange Commission, retired from the National Association of Securities Dealers. Hotchkiss, a 34-year NASD veteran and former director of compliance, is 58.

Chicago's ABN AMRO Incorporated named James Keeney director and senior analyst of the equity-research department. Keeney, previously a senior director in the research department at Rodman & Renshaw in Chicago, will cover domestic pharmaceutical and drug-delivery stocks.

Warren G. Shore, former president of clearing firm First Options of Chicago, joined Durango, Colo.-based Optimark Technologies as a senior vice president of market-maker relations. He will be responsible for communications between OptiMark and its market-maker customers.

SBC Warburg Dillon Read named Bill Schneider director of its U.S. equity block-trading desk. Schneider, previously head of the equity block-trading desk at Salomon Smith Barney in New York, will be based in the firm's new Stamford office complex. He will report to Daniel Coleman, managing director of all U.S. equity trading.

EVEREN Securities added six traders in their main offices in Chicago.

Equity traders Richard Friedman and Ryan Spencer joined EVEREN from Rodman & Renshaw in Chicago.

Steve Roy and Jeff Snower joined the Chicago-based firm from the Second City equity desk of Nesbitt Burns. Both will trade on the equity desk.

Maria Gonzalez was named a trader on the equity desk at EVEREN. She was previously an assistant on the agency desk at the firm.

And Kristina Thorlakson joined EVEREN as an agency trader. She was previously an agency trader at Olde Discount Corp. in Detroit.

Matt Higgins, an equity trader at Hill, Thompson, Magid & Co., left the Jersey City firm to join New York-based Fidelity Capital Markets on their equity desk. He will report to Tom Stones, head equity trader at Fidelity.

Preferred Capital Markets in San Francisco hired Edward Albert as co-director of equity trading. Albert was formerly a senior equity trader at Hambrecht & Quist in San Francisco.

Preferred also added Steve Boeckmann to the equity desk as a trader. Boeckmann was previously an equity trader at BancAmerica Robertson Stephens in San Francisco.

Jim Gallagher was named chief operating officer of the Philadelphia Stock Exchange (PSE), replacing current COO Tony Ward. Gallagher was hired as a consultant at the PSE by outgoing chairman and chief exeutive Lee Korins in December.

Gallagher is a former president of the Pacific Exchange and executive vice president of the Toronto Stock Exchange.

New York's Nash, Weiss, a market-making division of Fleet Securities, appointed Neil Feldman its president and chief executive. Feldman will manage the trading floor for Nash, Weiss. A 33-year Wall Street veteran, Feldman joined the firm from Prime Charter in New York, where he headed Nasdaq trading as a partner and managing director.

Nash, Weiss also named James J. Welsh an executive vice president. He will assist Feldman in the management of the trading floor.

Welsh was previously head Nasdaq trader at New York's Highlander Asset Management.

Both Feldman and Welsh will report to Pascal J. Mercurio, chairman of Nash, Weiss.

Looking to expand its brokerage operations in the U.S., Waterhouse Investor Services, a unit of Canada's Toronto-Dominion Bank, agreed to acquire La Jolla, Calif.-based Jack White & Co. for $100 million.

EVEREN Securities opened its ninth branch office in the Chicago metropolitan area. The new Orland Park office currently has six employees. EVEREN is a Chicago-based firm.

About 70 percent of sell-side traders interviewed in a new survey have expressed opposition to Nasdaq's proposed consolidated, or central, limit-order book. An equal proportion of buy-side or institutional traders, however, are in favor of the book.

If there was to be a Nasdaq-sponsored central limit-order book, approximately two-thirds of all respondents, both buyside and sellside, said they would feel compelled to use it.

That's two of the results of the Security Traders Association's 1998 annual survey of members on hot-button topics, a survey which generated 865 responses, including 182 from STA buy-side members.

STA President John Tognino said the survey will be used to develop policy positions on a wide range of issues.

Circuit Breakers

More than three-quarters of respondents strongly favor the use of circuit breakers to curb trading during rapidly declining markets. Most would prefer to see a circuit-breaker formula based on a percentage relationship between the amount of the decline in the Dow Jones Industrial Average, and its opening-day value formula. Less than 20 percent favor the use of absolute numbers (such as a decline of 250 points). Nearly two-thirds of respondents favor reopening the markets after a trading halt in order to establish closing prices for the day.

An equal number of buy-side and sell-side traders, 66 percent, expressed a preference for setting the minimum trading increments at 5 cents, if quotation prices were to change to decimals from the current use of fractions.

A total of 70 percent of buy-side traders and 87 percent of all others said decimilization should be delayed at least until next year. Of this segment, almost 50 percent from the buyside and 64 from the sellside thought decimilization should be delayed until after 2000.

ECNs

Seventy-four percent of all respondents said electronic communications networks (ECNs) should be regulated as broker dealers or as a separate category of firm; 25 percent of each category felt they should be regulated as exchanges and only a small percentage thought they should have the same status as customers.

About two-thirds of buy-side respondents thought Nasdaq should have a trade-through rule, while a slight majority of others were opposed.

Seventy-two percent of sell-side respondents felt that broker dealers should be able to charge fees similar to ECNs, while 52 of buy-side respondents thought the same.

1998 STA Survey of Members

Should Nasdaq contain a central limit-order

book built and run by the National Association

of Securities Dealers?

Yes % No % Total

Buyside 109 69 50 31 159

Sellside 193 29 463 71 656

Total 302 37 513 63 815

Source: Security Traders Association

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Freedom Securities in Boston is acquiring Milwaukee-based Cleary Gull Reiland & McDevitt, a merger that will create a new Nasdaq market-making dynamo.

The deal, valued at roughly $25 million (comprising 80 percent stock and 20 percent cash) was contingent on Freedom going public in a New York Stock Exchange initial public offering.

At press time, Freedom and Cleary had signed a definitive agreement in principal. The deal was expected to close in mid-April.

Network

Freedom is the holding company of Freedom Capital, a retail and investment-banking firm, and parent to two brokerage subsidiaries, Boston's Tucker Anthony and San Francisco-based Sutro & Co. Both Tucker and Sutro are Nasdaq market makers, serving Freedom's network of roughly 600 retail brokers.

Cleary Gull is an 11-year-old, 100-person, privately-held institutional brokerage, investment bank and market maker with recently-opened offices in Denver and Chicago. The firm was involved in 30 transactions last year valued at $12.7 billion, including $700 million in led or co-managed public equity offerings.

Freedom said its acquisition is a good strategic fit, combining Cleary's Midwest presence with Freedom's coastal outposts. Cleary Gull will independently manage its offices in its current locales, and keep both its name and current management and staff.

Cleary Gull's equity trades will be cleared through Freedom's clearing agent, Wexford Clearing Corp, a subsidiary of New York-based Prudential Securities.

"Clearly, the deal brings a lot of synergies and cost savings on the backoffice side," said an official at Cleary Gull. "On the trading side, more capital will be available for Cleary Gull's institutional and Freedom's retail-oriented businesses." Currently, no staff cutbacks at Cleary Gull are planned.

New Office

Cleary Gull's recently-opened Denver office has a five-person equity-trading staff, headed by Bob Neugebauer, formerly a trader at the firm's Milwaukee office. The new office will hire four institutional sales traders and a banking and research staff.

The Chicago office will concentrate exclusively on research and banking.

"Cleary Gull will expand our capabilities in key market segments that complement our existing capabilities at Tucker Anthony on the East Coast and at Sutro & Co. on the West Coast," said John H. Goldsmith, chairman and chief executive of Freedom, in a prepared statement.

"This alliance allows us to pick up our retail and research capabilities," added David K. Prokupek, chief executive at Cleary Gull. "And we expect our asset-management business to hit $1 billion by year's end."

Jefferies Group is spinning-off its New York equity trading and research firm, Investment Technology Group (ITG), under a plan to separate it from its affiliated Los Angeles-based investment bank, Jefferies & Company.

Jefferies Group is currently the holding company of Jefferies & Company, and owns 82.3 percent of ITG.

Under the plan, Jefferies Group shareholders will own 100 percent of Jefferies & Company under a new holding company, Jefco. In a tax-free transaction, the remaining Jefferies Group assets, 15 million shares, or 82.3 percent of ITG, will be merged with a new holding company, ITG Group.

All Jefferies & Company's shares will be distributed tax free to Jefferies Group shareholders. Currently, public shareholders control 17.7 percent of ITG. After the spin-off, Jefferies Group will transfer its 82.3 percent ownership in public shares.

"This spin-off allows us to give stock compensation back to our employees, based purely on our own performance," said Jefferies & Company President Michael L. Klowden. "ITG will be free of the constraints of Jefferies Group holding the majority of its stock. It will be free to make strategic acquisitions with its stock."

Klowden does not expect the spin-off to have much impact on the day-to-day operations of either unit.

"ITG has really always functioned on its own," he said. "Jefferies Group is relinquishing control of ITG, allowing it to be free of all constraints."

Klowden said the split will also allow Jefferies & Company to increase regulatory capital to support their underwriting capabilities. In 1997, the firm was the lead or co-manager of 55 high-yield offerings, and 35 equity offerings.

The spin-off is awaiting approval by the Internal Revenue Service because of the tax-free nature of the split and stock redistribution. Jefferies Group has retained global investment bank J.P. Morgan & Co. for the transaction.

A new blue-chip index of the top 60 stocks traded on Nasdaq and U.S. listed exchanges is challenging the preeminence of the Dow Jones Industrial Average.

The USLX was created by the Financial Information Forum (FIF), a New York-based market-data service company, which is licensing the index to vendors, broker dealers and other parties.

Automatic Data Processing, Bridge Information Systems, Data Broadcasting Corporation and ILX Systems have signed licensing agreements to publish the USLX.

Two Strengths

The USLX is obviously far from being a popular benchmark, but it does have at least two strengths: unlike the Dow Jones, the USLX includes Nasdaq stocks and is available to users free of charge.

"We think a lot of vendors won't be able to afford the new charges for the Dow Jones," said Tom Jordan, executive director of the New York-based FIF. "We want to provide vendors with an alternative average."

Dow Jones & Company, publisher of the Dow Jones index, recently announced plans to increase its monthly access fee for index values, raising a furor among some users.

The USLX consists of the 60 stocks with the highest market capitalization traded on the New York Stock Exchange, Nasdaq and the American Stock Exchange. The new index represents almost 40 percent of the total market capitalization of these markets.

The Dow Jones, on the other hand, is a price-weighted average of 30 actively-traded NYSE stocks. The oldest and most widely-followed market index, the Dow Jones represents almost 20 percent of the market value of NYSE stocks.

Better Indicator

Currently, the USLX includes 54 NYSE stocks and six Nasdaq listings. "We couldn't countenance leaving stocks out of a blue-chip index like Intel or Cisco [System Inc.] just because they are traded on Nasdaq," Jordan said. "Including Nasdaq companies will create a better indicator of the marketplace."

Richard Tofel, a Dow Jones spokesman, said the company is negotiating with customers to raise monthly charges for publishing the Dow Jones index. The market-data giant is seeking a $1 per month per terminal fee for real-time feeds. Charges for delayed feeds are significantly less, about 25 cents per month per terminal. Tofel added that the Dow Jones is published on 300,000 data terminals in the U.S.

Tofel acknowledged that the proposed charges have created resentment. "Our raise in charges has spurred a fair amount of public discussion," Tofel said. "But I expect all our major customers to agree to new charges."

For its part, the FIF said it launched the new index partly for strategic marketing reasons. To ensure that the index continues to list the 60 U.S. stocks with the highest market capitalization, the FIF will evaluate component securities once a year for possible relistings.