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July 31, 1998

Instinet Upset Over NASD's Marketing'Pitch

By Jeffrey L. Winograd

In a dispute over the NASD's proposed integrated order-delivery and execution system, the National Association of Securities Dealers is under renewed attack from Reuters Holdings' Instinet.

The latest salvo was fired in a hotly-worded comment letter from Instinet to the Securities and Exchange Commission, accusing the NASD of "flagrant dereliction of the NASD's obligation as a self-regulatory organization to promote informed and independent public comment."

That reference is to a May 1 letter signed by Cherilyn Cotter, Nasdaq's director of business development, and sent to the principals of several large NASD member firms stating that "it is important that you respond to this [new Nasdaq] proposal that Nasdaq has placed before the SEC."


According to Instinet's June 5 letter, Cotter's letter was "coupled with a form of comment letter supporting the proposal that the recipients are instructed to mail to the commission. Heeding this instruction, several firms have signed and submitted the form letter for inclusion in the public file."

Among the respondents, Instinet named executives at four major Wall Street firms: Frederick Frank, managing director, Lehman Brothers; John Kallop, managing director, Prudential Securities, John McNulty, a partner at Goldman, Sachs & Co.; and Scott Powell, senior vice president, PaineWebber.

The letters state that the firms represented "specifically support" allowing orders from one share to 999,999 shares to be entered, based upon the ability of the market maker to display actual size in their quotations; the full display of all orders entered into the limit-order book; anonymity for firms entering orders in the file; direct-sponsored access by institutions and individual investors; and a process to match orders in a limit-order book at the beginning of each trading day.

"Such tactics could be viewed as regulatory intimidation, and have undermined the legitimacy of the comment process associated with this proposal," complained Douglas Atkin, chief executive of Instinet International, who signed the latest Instinet comment letter. He added that the NASD's "coercive tactics undoubtedly influenced the behavior of all recipients."

Citing the SEC's highly-publicized August 1996 21(a) report on allegations of price-fixing on Nasdaq, Atkin stated that given the "NASD's past practices towards member firms that do not share its vision of proper market structure and behavior, it is hard to imagine that member firms who received Nasdaq's letter were not influenced in their approach to commenting on this proposal."

Urges Withdrawal

Atkin's letter urged the NASD to withdraw and resubmit its controversial proposal for "fresh public comment that is uncorrupted by the NASD and Nasdaq attempts to elicit correct comment from market participants."

In a telephone interview with Traders Magazine, Atkin stood behind his harsh criticism of the NASD, and claimed it is using its "regulatory power to create a monopoly brokerage service. They are targeting brokers who use a lot of high technology, such as Instinet, and other electronic communications networks."

Atkin went on to say that the current Nasdaq proposal is an example of a regulator creating its own brokerage firm competing with its own members.

In a comment letter dated May 8 and signed by Atkin, Instinet accused the NASD of placing "hyper-promotional," one-sided material on the Nasdaq home page, effectively forcing investors to view the information before accessing any other Nasdaq information. "Moreover, for a time the site would not allow investors to view other information until a comment letter regarding the system was e-mailed to the commission, producing literally thousands of e-mail comments," the letter stated.

"Such efforts indicate the chronic difficulty the NASD has in separating its duties as a market regulator from its desire to be a market competitor," the letter added.