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June 30, 1998

Traders Eye Reduced Nasdaq Transaction Fees:The NASD's Section 31(a) Fight Is Praised by Market-M

By Jeffrey L. Winograd

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  • Traders Eye Reduced Nasdaq Transaction Fees:The NASD's Section 31(a) Fight Is Praised by Market-M
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The lukewarm regard many Nasdaq traders have for the National Association of Securities Dealers is almost legendary. But animosity notwithstanding, some traders this month singled the NASD out for special commendation for fighting a controversial Nasdaq transaction fee.

The NASD's effort itself the direct result of intense lobbying by a coalition led by the Security Traders Association is expected to result in Securities and Exchange Commission rulemaking that reduces 31(a) transaction-fee collections on riskless principal trades.

Among critics of 31(a) fees on Nasdaq, NASD Chairman and Chief Executive Frank Zarb has spoken strongly in favor of relief, while STA Chairman John Tognino has expressed the concerns of his own members.

A Little Jig

Meanwhile, some traders are doing a little jig over what seems like certain relief. "The NASD has listened to the STA and the market-making community," one regional market maker said. "This is a step in the right direction for further relief on 31(a)."

The 31(a) fees, authorized under the Securities Exchange Act of 1934, will raise more than $400 million from Nasdaq this year for the U.S. Treasury and indirectly for the SEC budget under current projections. An estimated $20 million roughly five percent of the total Nasdaq collection would be saved annually by market makers, pending SEC approval of the NASD measure.

Sources said the NASD is working on companion language that would bring further 31(a) relief on fees involving step-outs by market makers.

Officials at the SEC have indicated their support for the NASD's measures.

As previously reported, the NASD board of governors' recent approval of the measure would, in effect, count as one trade instead of two transactions the buying and reselling of a Nasdaq stock by a desk acting as principal when it is not a market maker in that stock.

The transactions are distinct from agency transactions because the market maker acts as a principal but assumes no risk. Market makers argue that riskless principal trades unfairly make them liable two times for the 31(a) fees (charged by the SEC at a rate of 1/300 of one percent for each sale.)

What's Riskless Principal?

At the moment, it is unclear what precisely will constitute riskless principal trades. A former director of the SEC's Division of Market Regulation, retained by the 31(a) coalition, prepared the following analysis:

"A riskless principal transaction, as defined by the NASD, would include only those situations in which a member of the NASD who has received from another member, or from a customer, an order to buy or sell a security, then purchases (in the case of a member or customer order to buy) or sells (in the case of a member or customer order to sell), as principal (that is, for its own account), the same security from or to another member to satisfy the original member's or customer's purchase or sale order."

The analysis argues that the SEC's interest in riskless principal purchases and sales arises because such transactions generally inflate volume reporting by the NASD. This is because such transactions in reality amount to only one and not to two trades.