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February 1, 1998

Face To Face: Market Makers Confront NASD Officials:Does Nasdaq Trading Proposal Put Traders in D

By John A. Byrne

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  • Face To Face: Market Makers Confront NASD Officials:Does Nasdaq Trading Proposal Put Traders in D
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About 65 traders had a private meeting with Nasdaq officials last month at New York's Marriott Financial Center. The officials stood before the crowd of market makers with a strange air of optimism and resignation.

The crowd came seeking the truth: Will the integrated order-delivery and execution system proposed by the National Association of Securities Dealers bore a big, gaping hole in their bottom line?

The mood at the Marriott was slightly surreal. Cordial but tense. No shouting matches, no brawls, just some bruised egos and professionals worried about the future.


Earlier in the month, diplomacy seemed to fly out the window, leaving many market makers seething over the atmosphere of secrecy that preceded Nasdaq's agreement in principle with OptiMark Technologies to fuse OptiMark's electronic crossing network with Nasdaq.

Worse, some market makers said stitching these two systems together would have horrible consequences.

"The OptiMark agreement is a total abomination," snapped Kenneth Pasternak, president and chief executive at Jersey City-based wholesaler Knight Securities, in an interview days after attending the meeting. "Market makers are totally against it."

Like the voluntary limit-order file sponsored by the NASD if it is approved, the separate OptiMark link in the NASD's plan for a new trading platform originally dubbed Next Nasdaq could disintermediate much of the order-execution process.

That would allow, for example, institutional and retail customers to anonymously, and without disclosure, search out the best prices for their orders using unique satisfaction profiles. In fact, OptiMark promises to aggregate and cross buyers and sellers every 90 seconds using algorithms and powerful computing that only recently dropped sufficiently in price to make its utilization cost effective [see Trading Strategies, page 84].

Still, OptiMark has not received the same serious public scrutiny as other trading systems did in the past, partly because only a handful of people seriously understand how it works, raising fears that it may be unsatisfactory like a well-marketed damp squib, according to some industry pros.

What's more, some traders are worried that Nasdaq will exercise warrants enabling it to acquire an ownership stake in a system that could accelerate Nasdaq's drift towards an order-driven agency market.


In other interviews days after the meeting, which was sponsored by the Security Traders Association, feelings among traders about the NASD's proposals were running deep. "If we give access to institutions, then what in hell do they need us for anymore, except when they can't get anything done," said Bill Whalen, head of Nasdaq trading at New York-based Furman Selz. "Institutions can now become our competitors."

Another Nasdaq trader, Fred Ott of Neidiger Tucker in Denver, said, "the old traders, guys that have been in the business for 30 years, feel these proposals are a slap in the face."

STA President John Tognino was more diplomatic, but did not mince his words either. "The concerns [of traders] are genuine and center on whether the NASD, as a self-regulator, should be allowed to develop a voluntary, consolidated limit-order book that could become a defacto [mandatory] limit-order book," he said.