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June 30, 1998

NASD May Team With an Outside Execution Auditor

By John A. Byrne

The National Association of Securities Dealers is studying a plan to use a private auditor for monitoring the quality of market makers' executions.

The hiring of an outside outfit is now a top NASD priority since a federal appeals court ruled that best execution is no longer compatible with the best market available on U.S. exchanges the so-called national best bid and offer, or NBBO.

The emphasis on best-execution obligations was originally fostered by the Securities and Exchange Commission's scathing 1996 report on Nasdaq price-fixing allegations. The report urged brokers to "regularly and vigorously" examine execution quality and to obtain the best terms possible for investors.

However, the landmark Newton vs. Merrill Lynch federal appeals-court ruling helped to dramatically change the outlook for market makers seeking compliance with that responsibility.

One option now being considered is a uniform audit system for market makers. A senior NASD official said the association is looking at a business arrangement with The Transaction Auditing Group (TAG), a Northport, N.Y. firm specializing in audits that measure execution quality for exchanges and broker dealers.

Speaking in New York at a compliance conference hosted by the Securities Industry Association, Jim Cangianlo, senior vice president at the NASD's regulatory subsidiary NASD Regulation, did not elaborate on possible arrangements for a TAG connection.

A spokesman for the NASD said it had no current business relationship with TAG, but was interested in its technology.

TAG was hired earlier this year by the Chicago Stock Exchange to conduct audits on a quarterly basis, based on a set of price-improvement, order-fill, liquidity and timeliness statistics.

TAG President Alan Shapiro acknowledged that his firm has had discussions with Nasdaq, but agreement had not been reached as of press time. "We would be happy to do business with Nasdaq," he said.