The National Association of Securities Dealers is seeking the approval of the Securities and Exchange Commission to allow market makers to quote all Nasdaq stocks in 100-share minimum proprietary trade quotes, J. Patrick Campbell, Nasdaq's executive vice president for market services, told the annual mid-winter convention of the Philadelphia Security Traders Association.

Currently, 150 Nasdaq stocks are subject to an actual-size rule, allowing traders to quote these stocks in minimum trade sizes of 100 shares. The NASD had proposed the elimination of the 1,000-share minimum quote-size rule on all stocks as a natural consequence of the order handling rules. The proposed new Nasdaq trading system, in fact, may hinge on traders being allowed to quote all stocks in minimum trade sizes of 100 shares.

Nasdaq made it clear that if artificial quote-size requirements on all Nasdaq securities are not eliminated ahead of a new integrated order-delivery and execution system, some order-entry features of the facility would not be appropriate.

Campbell said in an interview during a break at the Philadelphia convention that approval of the NASD proposal "will enable a trader to manage the risk, manage the quote, with one more dimension and that's size other than just price."

He added that the SEC so far has been supportive about the proposal, requesting a considerable amount of information from the NASD as it pursues its petition.

Sen. Robert Bennett's (R-Utah) proposed legislation to require public companies to file Year-2000 compliance information is unlikely to merit a footnote in history.

The Securities and Exchange Commission recently issued Year-2000 disclosure requirements, and the White House weighed in with the appointment of a Year-2000 czar, putting a break on the Utah Republican's political initiative.

Enthusiasm

While Bennett is still planning to continue Senate oversight hearings on his bill, enthusiasm for the proposed legislation has substantially waned.

"I haven't looked at the bill," Sen. Phil Gramm (R-Texas), chairman of the securities subcommittee of the Senate Banking Committee, told reporters at a National Press Club breakfast. He added that he would prefer corporate America to handle the issue on its own.

The Securities Industry Association also dampened the prospects of Bennett's legislation. "We don't think it's necessary," said SIA President Marc Lackritz.

Specifically, Bennett recommended a detailed description of a corporation's progress in Year-200 remediation efforts; a statement of likely litigation costs and liability outlays associated with the defense of possible lawsuits; disclosure of insurance coverage for computer failures and related lawsuits filed by investors; and a breakdown of contingency plans for computer failures.

Interruptions

As previously reported, Bennett expressed his fears about Year-2000 compliance on trading desks in an interview last December. He was particularly concerned about interruptions in market-data streams, noting that a glitch could cause serious harm.

There is no doubt that Bennett helped to focus more attention on Year-2000 compliance even though the SEC and the White House stole much of his political thunder.

For some pundits, Bennett's effort shows just one thing that hours of staff work, burning the midnight oil writing Year-2000 legislation, may, in hindsight, seem fruitless. But for other pundits, the sheer detail in Bennett's legislation, in addition to his Senate hearings, demonstrate a remarkable vision that will not be forgotten easily.

The Securities and Exchange Commission has published for public comment proposed changes to 15c2-11, the rule that governs publication of quotes in securities that are not listed on Nasdaq or an exchange (see Release No. 34-39670).

The rule covers quotations in the pink sheets and on the OTC Bulletin Board as well as the over-the-counter markets in corporate bonds and foreign securities. While the SEC has good intentions, I think the rule would have unintended consequences highly detrimental to investors, issuers and the secondary markets.

The rule would require all market makers to:

* Obtain, review and verify the accuracy of information about an issuer when they initiate quotations in a non-Nasdaq OTC security.

* Obtain, review and verify the accuracy of that information annually if they publish priced quotations.

* Document their compliance and publish the collected information.

The proposed rule requires market makers to have a reasonable basis for trusting that issuer information is accurate and obtained from reliable sources. Market makers would have to ascertain if there are indications of potential or actual fraud or manipulation. The review process applies to both SEC-filing and non-filing issuers.

The proposed rule, however, is based on two flawed premises: that micro-cap fraud will cease if legitimate market makers discontinue publishing quotations in questionable securities, and that market makers should be responsible for issuer information.

It is wrong to give traders responsibility for the accuracy of information produced by third parties they do not control. The potential liability from an implied right of action by investors would drive legitimate firms from making markets, providing the remaining market makers an incentive to refrain from publishing prices.

In fact, it is much easier to manipulate trade reports when firm bids and offers are not transparent. This way, the crooks would have free reign as the honest players exit the business.

A competitive and transparent market should be available for all securities. Regulators should have the tools to punish entities that seeks to manipulate the markets or to defraud investors.

Fraud, of course, takes places across all markets. New York Stock Exchange-listed Centennial Technologies defrauded investors of more than $350 million. The corrupt New York-based penny-stock firm Stratton Oakmont was lead manager in twenty-seven Nasdaq stock offerings, according to Securities Data Publishing.

On Feb. 26, an officer of New York-based A.R. Baron & Co. was convicted of twenty-five charges, including enterprise corruption, scheming to defraud, falsifying business records, perjury and manipulating prices of eight Nasdaq-listed companies.

Alas, forcing issuers to provide financial disclosure does not prevent fraud. Other fraudulent outfits, Comparator Systems and Systems of Excellence, both Nasdaq companies, filed information with the SEC.

The issuers, promoters and retail brokerages that commit micro-cap fraud are violating and ignoring existing securities laws.

But placing higher regulatory and liability burdens on market makers that have no relationship with the issuers, promoters or retail brokers is not the answer to the problem. The market maker's role is to find a price point where supply equals demand. If there are falsehoods in the marketplace distorting the supply and demand, it is the entities that are lying that should be punished, not the honest participants.

As long as securities exist, investors will buy and sell them. If the cost of quoting securities in the pink sheets and the OTC Bulletin Board increases, market makers will pass along the cost to investors in the form of wider spreads and less liquidity for all non-Nasdaq OTC securities.

At the same time, issuers and investors will seek other trading forums with less regulatory overhead, such as issuer web sites or offshore market makers. Consequently, a rule that would encourage a black market does not benefit the public.

While I view the current proposal as the wrong response to a real problem, I hope the final result will be rules and regulations that work. These regulations should:

* Increase investor awareness through education and disclosure.

* Increase the competition, ease of entry, transparency and efficiency while lowering costs to investors for OTC trading.

* Provide issuers with economic incentives to increase disclosure.

* Give enforcement agencies the tools and staffing to keep the markets honest.

The securities industry should view the SEC's proposal as an opportunity to create regulations that will help stop micro-cap fraud. Firms should not just reject the SEC's proposal, but instead offer alternative, viable solutions. I hope the industry finds a reasonable solution that protects investors.

For its part, the National Quotation Bureau has filed a proposal with the SEC to automate the pink sheets and to set up a public repository of non-filing issuer information to enhance market quality.

(The SEC must receive comments on the proposed rule on or before April 27,1998.)

Cromwell Coulson is chairman of the New York-based National Quotation Bureau, owner and operator of the pink sheets.

The National Association of Securities Dealers has proposed an ambitious remodeling of Nasdaq.

The blueprint, however, fails to give credit to the architectural firm that had the most to do with the new design namely, the Securities and Exchange Commission.

Instead of calling the new market Next Nasdaq as originally envisaged, they should have named it Secaq.

The clear message to the dealers is simple: Thanks very much for building such a fine marketplace, but please close the door on your way out.

Admittedly, this exaggerates the effects of the proposed changes, at least the immediate effects. There will still be a need for market makers in Secaq, but that need is clearly diminished. The consolidated or central limit-order book (participation is supposedly optional) is a direct challenge to the heart of the dealer market.

As previously noted in Traders Magazine, the dealers are stinging from a slap across the face.

Some observers, of course, would say that the dealers are getting what they deserve, referring to allegations of price fixing and embarrassing settlements with the SEC and others.

I think, however, that the scandal simply hastened the inevitable takeover by the SEC.

The SEC has taken advantage of the opportunity to force its order handling rules upon the industry, and it is these rules that provide the impetus for Secaq.

It may be that Secaq will be a wonderful marketplace, thanks to the brilliant architects at the SEC. But I have to wonder why they have ceded so much power, and whether investors ultimately would be better served by curtailing that power.

I cannot think of any other market where consumers have benefited from such a concentration of authority in the hands of a government agency.

Nasdaq, with all its faults, is a tremendous success story.

In just a quarter of a century, Nasdaq turned the backwater over-the-counter market into a rival of the New York Stock Exchange. And all that was accomplished while it remained an unabashed dealer market.

As serious as the trading scandal was, it did not frighten away investors.

Even so, Nasdaq has been treated by the SEC as if it were fatally flawed, unable to continue business without a wholesale redesign of its trading system. And, it appears, the NASD has done little more than throw itself upon the mercy of its master.

What can the dealers do? Probably not much. Can they abandon the NASD and form their own self-regulatory organization? Maybe, but they would still have to report to the SEC.

Can they challenge the SEC's authority? They can, but success is unlikely, given their weakened political position. The dealers are now portrayed as the bad guys.

Their every effort to resist the changes being forced upon their marketplace is viewed as a greedy attempt to maintain their unnecessary position as middlemen, skimming off a fat profit that would otherwise stay in the pockets of investors.

A key point lost in the fray is that the SEC, and now even the NASD, is taking away the dealer marketplace. This is made possible by the membership and governance structure of the NASD, as stipulated by the Securities and Exchange Act.

Unlike the exchanges, which are still allowed to limit their memberships, the NASD is required to extend membership to any registered broker dealer.

Because of this open membership, the dealers who made Nasdaq such a success are now faced with the prospect of being squeezed out having lost two things.

First, they have lost the power to control the way Nasdaq is operated, because of the dilution of their power as members.

Second, they have lost the increase in the value of membership.

This means that, not only have they lost control of Nasdaq, but they have also been deprived of any benefit due to the increased value of Nasdaq, for which they are largely responsible.

It is truly ironic, at least to me, that the process of converting Nasdaq to a more order-driven market is the process by which the Nasdaq dealers will lose what exchange members have preserved.

It remains to be seen whether the dealers will leave with a whimper or a bang.

Jeffry Davis is a senior economist with Economists Incorporated in Washington, and formerly was director of economic and policy research at the Securities and Exchange Commission.

Equities trading is about to change, and change dramatically. Ever since Congress passed the Securities Reform Act in 1975, the Securities and Exchange Commission has been attempting to facilitate the establishment of a national market system for trading securities, using modern technology, to accomplish the congressional mandate.

Initially, the commission got it right. The SEC recognized that the best way to obtain the most favorable prices for investors was by leading the industry towards the development of a new system in which all bids and offers for each security could be entered and queued in price-time priority. First-come, first-served, the traditional American measure of fairness would be invoked.

The name of the feature that would make this possible was variously known as a central limit-order book, or CLOB, composite limit-order file, central limit-order file and electronic book.

The ultimate goal was to get investors' orders into this book or file. There was little consideration of integrating market makers' and other intermediaries' bids and offers as well.

However, in an effort spurred by the economic self-interest of the dealers and coordinated by the New York Stock Exchange deathly afraid of a dreaded "black box" approach to trading the market centers talked the commission out of proposing a CLOB. The CLOB was replaced with the disconnected triumvirate of the Intermarket Trading System, the Composite Quotation System and the Consolidated Tape System. When the SEC approved these three systems, it unwittingly ensured that a national market system, as envisaged by Congress, would be almost indefinitely delayed.

But now, nearly a quarter of a century later, following pressure from large institutional investors and others, recognition has finally dawned on at least one market-center operator that the day of the CLOB has finally arrived. Fragmentation of order flow has reached an intolerable level, and it is time to put Humpty Dumpty back together again!

Nasdaq's proposed trading system, containing a limit-order file permitting both investor orders and dealer quotes to be integrated, has caused consternation among many members of the National Association of Securities Dealers.

"Why," they ask, "should the NASD, our regulator, build a system, partly with our money, which will compete directly against the systems we have built or are building with the blessing and encouragement of the SEC?"

That's a tough question with no easy, satisfactory answer for the dealers. So who's to blame? My candidate is the SEC itself. From the day it wimped out and decided to scrap the CLOB, until now, it has focused on encouraging competition about where to trade, rather than at what price the trades should take place. That makes about as much sense as encouraging competing air-traffic controllers at a single airport.

In addition, having a self-regulator it makes little difference if it is the NASD or the NYSE also operate a for-profit trading system creates irreconcilable conflicts of interest. That became evident in the Department of Justice's and the SEC's investigations of the NASD and Nasdaq, and the civil litigation that cost the industry hundreds of millions of dollars.

What should be done? First, Nasdaq should be privatized, and its ownership transferred to the NASD membership that use the system. The NASD should stick to what Congress meant when the Maloney Act created it: self-regulation.

If a privatized Nasdaq can capture the market, let it do so. If other market centers prove superior, let the market not the government decide on winners.

Nasdaq has two important existing advantages, however. First, it is the largest over-the-counter trading system extant today. Second, and perhaps even more importantly, it embraced the concept of a limit-order book, and linked with the most powerful and innovative facility in the last 25 years, OptiMark, a system though unproven, appears to meet the needs of most institutional investors for low-cost and efficient order handling, minimal market impact and anonymity.

In the meantime, there will be a major battle among the dealers who wish a CLOB would disappear and the executives who make policy for Nasdaq. The SEC will be an interested observer, and will have to balance the needs of investors against the interests of intermediaries. It will be a fascinating fight to watch. The winners, hopefully, will be American and international investors.

Junius W. Peake, a former NASD governor, is Monfort distinguished professor of finance at the University of Northern Colorado.

The creation of a file for the consolidatation of investor orders, or a CLOB, was proposed as far back as 1976 by the Securities and Exchange Commission. But Professor Junius W. Peake believes the CLOB was overwhelmed by dealer objections, causing the SEC to "wimp out." The CLOB finally reemerged as an NASD proposal last December. Peake provided the following chronology of SEC plans as outlined in commission releases.

1976

The commission believes that there is a need for further modernization and improvement of our securities markets…Further, existing limit-order mechanisms are unable to provide nationwide limit-order protection, and thus cannot always provide the degree of protection for limit orders which hopefully could be furnished by a composite book.

Finally, a composite book appears to be well-suited to assuring an opportunity for public orders to meet without the participation of a dealer.

(Securities and Exchange Commission, Release No. 34-12159, March 2, 1976)

1978

The commission continues to believe that one of the basic principles upon which a national market system must be based is the assurance that all agency orders in qualified securities, regardless of location, receive the benefits of auction-type trading protections.

To this end, the commission believes the several self-regulatory organizations should take joint action promptly to develop and implement a central limit-order file for public agency orders to buy and sell qualified securities in specified amounts at specified prices…

The objectives of a central file are relatively simple: to make available a mechanism in which public limit orders can be entered and queued for execution in accordance with the auction-trading principles of price and time priority.

(Securities and Exchange Commission, Release No. 34-14416, Jan. 26, 1978)

1979: The End of the CLOB

The commission received several proposals describing alternative means of achieving the goal of nationwide limit-order protection. The National Association of Securities Dealers submitted a "Technical Plan for the Development of a national market system," describing an electronic facility (based upon the technology and hardware of the existing Nasdaq system) functionally similar to the central file proposed by the commission.

The technical plan contemplates that any qualified broker could enter limit orders into the facility for execution by qualified market makers based upon price and time priority within the system. The NASD's board of governors, however, expressly reserved judgment on the policy and regulatory issues associated with implementation of the facility described in the technical plan.

Specifically, the NASD noted that further study was necessary to determine whether exclusion of non-public limit orders from the central file and whether protection of orders entered in the file against executions at the same price as well as executions at an inferior price would be appropriate.

Most other self-regulatory organizations opposed creation of a central file…These commentators argued that the absolute time priority proposed to be afforded public limit orders entered in the central file would have significant deleterious effects on the exchange-trading process.

(Securities and Exchange Commission, Release No. 34-15671, March 22, 1979)

Two months after being named co-head of Nasdaq trading at Paine Webber, William Heenan left the firm to join New York -based Donaldson, Lufkin & Jenrette. Heenan and Patrick Davis took the helm at PaineWebber in New York after the much-publicized resignation of Richard Bruno in December. Heenen joined the over-the-counter trading department at DLJ.

Jeff Moskowitz joined C.E. Unterberg, Towbin in New York as managing director of equity trading. He was previously a general partner at New York's Genesis Capital Management.

Durango, Colo.-based OptiMark Technologies hired two senior vice presidents of account relations, Anette Kolenda and Richard Yau.

Kolenda, a former White Plains-based IBM general manager of banking, finance and securities, is responsible for managing marketing services to OptiMark's buy-side clients. Kolenda is based in New York.

Yau, also based in New York, is responsible for client liason for sell-side firms and securities exchanges. Before joining OptiMark, he served as director of Salomon Brothers' Asia Pacific Business Technology Organization in Hong Kong.

Wynn Portny moved to Sharpe Capital in New York as an over-the-counter trader. Portny was formerly an OTC trader at New York's Paragon Capital. Sharpe also promoted three assistant traders Allan Hoes, James Kessler and Barbara Payer to equity traders.

Portny, Hoes, Kessler and Barbara Payer report to William Kirincich and Judy Payer, co-managers of equity trading.

Ceaser Fraschilla joined New York-based W.J. Nolan & Company as a senior vice president and syndicate manager. Previously, Fraschilla was a managing director and syndicate managr at LT Lawrence & Co. in New York.

Roger Levine, formerly a partner and head equity trader at Volpe, Brown, Whelan & Co. in San Francisco, moved cross-town to Preferred Capital Markets. Levine is director of equity markets and sales trading at Preferred Capital.

Dresdner Kleinwort Benson North America, the investment-banking arm of New York-based Dresdner Bank Group, appointed Rahul Merchant an executive vice president and head of information technology and operations. Merchant was a senior vice president and global head of technology at Sanwa Financial Products in New York prior to joining Dresdner. He will continue to be based in New York.

Lynne P. Fagan joined the equity-trading department of Brown Brother Harriman & Co. in New York as an investment officer. Before her move, Fagan was a senior institutional clerk on the floor of the New York Stock Exchange for Harvey Young Yurman.

New York-based Nikko Securities Co. International hired Brian Clark as a senior vice president and co-manager of the system's planning division. Clark works with Hiroto Shoji in directing the management and development of systems and technology for the firm's businesses. He was previously with Citibank in New York in a similar post.

Penson Financial Services, a Dallas-based clearing firm, hired James Kubisak as manager of trading operations for its new Chicago office. Kubisak was previously a vice president with marketing and trading operations responsibilities at Dempsey & Co. in Chicago.

Allan Skinn and Mary Beth White also joined the new trading operation at Penson in Chicago. Skinn, formerly as vice president of over-the-counter trading at Sterne, Agee & Leach in Atlanta, was named a vice president and trading manager. White, formerly a trading assistant at Dempsey, was named a Penson equity trader.

Lynette Woodard, a sales trader at Magna Securities in New York, was selected by the Detroit Shock in the Women's National Basketball Association expansion draft. Woodward, a starting guard for the WNBA's Cleveland Rockers last summer, will limit her responsibilities at Magna to play for the Shock. The Shock and the Washington Mystics will join the eight charter WNBA teams in the league's second season this summer.

Tim Norton, a former market maker at Robertson, Stephens & Company in San Francisco, moved cross-town to the Nasdaq desk at Cantor Fitzgerald & Co. New York. Cantor trader Mike Gould will transfer to the firm's San Francisco office to work with Norton.

The National Association of Securities Dealers is splashing $10 million on television commercials that encourage investors to trade more Nasdaq stocks.

A small cash windfall for CNBC and CNN? Nope. ABC perhaps? Nope.

The money, in fact, is paying for spots broadcasted by London-based networks in the U.K. as part of an aggressive effort by Nasdaq's international team to build itself into a supranational stock exchange.

Nasdaq Commercials

"Our research shows that advertising considerably stimulates awareness among retail investors who have not traditionally traded U.S. equities," trumpeted Charles Balfour, senior vice president of Nasdaq's 20-person international outpost in London.

Balfour and his team carefully helped to select the spots. Some of the dollars were spent on commercials sandwiched between a live broadcast of the Super Bowl. More went on breaks between shows that attract London's yuppie community.

The advertisements, which first aired in September, emphasize Nasdaq's technology-heavy listings, and showing viewers shots of Microsoft and Intel. Appetites whetted, viewers are then reminded that more information is available on Nasdaq's website, www.nasdaq.com.

About 18 percent of investments in Nasdaq, most of it institutional, come from outside the U.S. But market research conducted by Nasdaq indicates an untapped market in the U.K. for direct investments in the U.S. stock markets.

Holding back the growth, however, are transaction costs. "Trading out of London is still cost prohibitive," Balfour lamented. "An investor here typically goes to a U.K. broker or U.K. bank, who then goes to a U.K. broker, who then goes to a U.S. investment bank in London, who finally passes it to a U.S. investment bank in New York."

"The whole process," he added, "comes back with considerable costs, including foreign exchange costs."

U.K. advertising is aimed directly at increasing demand for Nasdaq stocks. Increased demand, in turn, would make it more attractive for U.K. brokers to improve Nasdaq dealing services, further driving demand for Nasdaq stocks among U.K. investors.

Indeed, Nasdaq is working with some of the top U.K. stock brokers, including Barclays and NatWest Securities, about launching a share-dealing service on the Internet.

Some investors in the U.K., in fact, already deal directly with the U.K. affiliates of U.S. discounters. Said Balfour: "U.K. investors can now go onto our web site and see just how easy it is to get information on Nasdaq stocks and deal directly with one of the houses here with Internet services, such as Charles Schwab & Co."

How much exactly does it cost to trade a block of stock? "Nobody quite agrees on a standard measure of trading costs," one expert said. "Several measures are used."

Costs head south if the trade beats the intra-day spread, but head back north if the trade results in negative market impact three days after it has crossed.

Soft-dollar rebates reduce costs, and some fees increase costs.

How to measure trading costs may even split the experts.

But more than 90 percent of executives at major investment firms do agree on one thing trading-cost analysis will be more important as a money-management tool over the next five years.

Measuring

According to a survey of 500 institutions by New York-based institutional brokerage Midwood Securities, these executives said trading-cost analysis is fast becoming a widely-accepted tool for measuring trading performance.

"One of the key factors driving it is the growing need for best execution," said Midwood President Terry March.

Among institutions that currently purchase or have their own systems, a large number use trading-cost analysis as a decision-making tool, according to the survey.

Another 29 percent use it for selecting broker dealers; 50 percent use it considering a switch to other broker dealers; and 32 percent use it when deciding how frequently to use them.

Gauge

Moreover, most of the institutions use trading-cost analysis to gauge the performance of staffers; 88 percent use the analysis to measure the performance of the trading desk; and 59 percent use it to chart their portfolio managers.

Almost 75 percent of the respondents prefer a system which measures both the quality of execution and the subsequent market impact of each trade.

One quarter use a system that focuses exclusively on the quality of execution, while 75 percent evaluate trading execution on both a trade-by-trade basis over a period of time.

Outside the U.S.

Half of the respondents stressed the importance of a system that analyzes trading costs in markets outside the U.S.

Sixty-two percent of the respondents reported that they currently use trading-cost analysis. Of those, 76 percent purchase a system, 18 percent use their own system and six percent use both.

Midwood is a nine-year-old New York Stock Exchange-member firm founded by March, a former senior financial officer at New York-based Dillon, Read & Co. (now part of SBC Warburg Dillon Read) and Sanford C. Bernstein. staff reports

John Chalsty stepped down as chief executive of Donaldson, Lufkin & Jenrette, the firm he helped to transform from a mid-sized broker dealer into one of Wall Street's top investment banks and trading powerhouses.

Chalsty, 64, who will continue as chairman at DLJ., was succeeded by Joe Roby, previously president and chief operating officer at the firm. The change temporarily leaves vacant the position of COO.

Chalsty began his career at DLJ in 1969 as an oil analyst. He was named chief executive in 1986. Under his leadership, the firm expanded in the areas of underwriting, sales and trading and investment banking, and revenues grew from $732 million in 1986 to $4.64 billion in 1997.

Roby, 58, began his career as an investment banker at DLJ in 1972.

Separately, on April 1, Claude Bebear will retire as chairman of the Equitable Companies, which is 72-percent owner of DLJ. Bebear will be succeeded by Henri de Castries, Equitable vice chairman and director.

Equitable's majority shareholder is global giant AXA Group. Bebear will retain his post as chairman of AXA's executive board.