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November 1, 1998

Many STA Members Favor Charging Nasdaq Commissions Over Spreads

By Michael L. O'Reilly

As many as 70 percent of respondents to a recent survey by the Security Traders Association said that Nasdaq desks should charge institutional clients agency commissions rather than trying to make money on spreads.

The results of the survey, conducted by Laura Cooley, an STA strategist, during an October 5 business meeting at the organization's annual conference in Boca Raton, suggest a definite consensus among Nasdaq traders that spreads have narrowed beyond the limits of profitability on institutional trades.

"Trading on a commission basis has to come down the road sometime," said William Rothe, head of Nasdaq trading at BT Alex. Brown & Sons in Baltimore, in a telephone interview. "Spreads aren't covering costs, much less allowing market makers the chance to make a profit. Institutional business will have to be this way, like upstairs listed trading."

Many Nasdaq desks still make money on institutional trades based on a spread between the bid and offer prices. The resulting charge to buy-side clients is referred to as Nasdaq credits, or net trading costs.

But with spreads narrowing due to smaller trading increments, market makers are said to be profiting less on institutional trades.

Rothe explained that the industry must eventually charge institutions agency commissions to ensure a minimum profit for providing liquidity. Listed institutional trading is done mostly on an agency commission basis.

The survey polled roughly 300 conference attendees mostly sell-side traders and market makers, but also buy-side traders, exchange officials and technology vendors who responded to a series of questions prepared by Cooley.

Answers were immediately although unscientifically recorded and made available at the business meeting through an electronic audience-response system.

In other results, survey respondents resoundingly reported that net trading profits in 1998 would be lower than profits in 1997.

But although 82 percent indicated lower net trading profits this year, only 27 percent said firms would decrease its number of equity traders over the next 12 months. More than 31 percent said firms would add equity traders over that time span.