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July 31, 1998

More ITS Access for NASD Members?

By Staff Reports

The National Association of Securities Dealers has requested that better access to the Intermarket Trading System be provided for New York Stock Exchange-listed quotes posted by market makers.

The ITS is the backbone of the National Market System, linking U.S. stock exchanges.

NASD President Richard Ketchum said in a filing with the Securities and Exchange Commission, dated June 18, that the current arrangement, in place since 1981, restricts NASD members' access to stocks listed on the Big Board since April 26, 1979.

"NASD members are precluded from competing on an equally-effective basis with all the other U.S. exchanges in the most actively and widely-traded securities on the NYSE," Ketchum noted.

The NASD's chances of having its petition approved may have increased since a similar plea was rejected in 1991. Last year, the SEC urged ITS members to grant NASD members better access to its network.

Still, the latest NASD effort may be an uphill climb. ITS members have in the past said the NASD must first modify how it reports its own trades before more access is granted.

A separate rule would continue to prohibit NASD member firms that are also Big Board houses from trading listed stocks off the exchange as principals, during regular trading sessions.

If the NASD is successful, third-market firms that trade listed stocks away from the Big Board may be the biggest winners. These include dealers such as New York-based giant Bernard L. Madoff Investment Securities.

At the moment, these third-market firms trade Big Board stocks listed before 1979, but do not have uninterrupted access to the ITS. These firms view the arrangement as unfair, and say that investors do not always get the benefit of the best prevailing price quotes.

Wider access to the ITS would potentially help investors in another way. Given that the order handling rules have reportedly narrowed spreads on stocks traded by market makers, the rules could eventually have a knock-on effect on listed stocks with wider NASD member access to the ITS, experts say.