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May 31, 1998

How the NASD's NODE's Campaign Backfired Badly: What the World is Really Saying About the Trading

By John A. Byrne

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  • How the NASD's NODE's Campaign Backfired Badly: What the World is Really Saying About the Trading
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A low-ranking official at the Securities and Exchange Commission recently fired off a public comment letter about the new trading system proposed by the National Association of Securities Dealers.

"The system," said the official rather inelegantly, "sucks."

The comment letter is one of more than hundreds of messages transmitted via e-mail to the SEC by letter writers who landed upon a home page used by the NASD to promote its integrated order-delivery and execution system.

The controversial system has been variously called NODES, Next Nasdaq, New Nasdaq and some other unprintable names. But the unprecedented use of the web by the NASD made name-calling purely academic.

Some investors and Internet surfers were taken aback. For a time, the site prevented a person from viewing other sites unless they e-mailed a comment letter on the new Nasdaq system to the SEC. The NASD was inundated with protests, and the home-page conundrum presumably prompted the uncharitable response from the low-ranking SEC official.

This was a bad start for the NASD's campaign to win support for the integrated order- delivery and execution system, or NODES. But it was a good, if not troubling, reminder of the subterranean depths the debate on NODES has sunk since the proposal was published on the Federal Register for public comment.

The confusing sounds of market makers, electronic communications networks (ECNs), public investors and other voices make this a battle for the history books.

The e-mails poured in from around the world, from as far away as Turkey, and as near as San Antonio, where retired widow Barbara J. Whiting said she was afraid to buy anything on Nasdaq anymore because "the prices are so volatile."

Some writers were enthusiastic about NODES, but not Mrs. Whiting.

"My broker says that this new system may make it even harder to determine [prices] because my order will be competing with brokers, market makers, institutional traders and other public customers," Whiting stated.

"He has told me some of his concerns about not being able to cancel an order for ten seconds, the anonymity of the contra-party and the ability of the market maker to not fill an order and say he's on the phone."

"Before SOES," added the quintessential little trader from way down South, "I wouldn't trade over-the-counter stocks. If this proposal goes through, I probably won't trade on Nasdaq again."

The wording for the NASD's brief message irritated most market makers and drew the attention of several skeptical ECNs. In summary, the NASD said it was asking the SEC for permission to make "exciting new changes to improve what is already the most popular marketplace for American individual investors."

At face value, the NASD's message was as convincing as a blond bombshell purring half-garbed atop a Cadillac Seville in a slick magazine advertisement. Some might view the NODES pitch as tantalizing. Sure, you'll subscribe.

The NASD said NODES would give matching limit orders the potential to be executed automatically without a spread, providing investors with tangible savings.