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December 1, 1998

Is This a Market Made in Heaven? Trader Proposes Best' Bulletin Board Market

By John A. Byrne

Also in this article

  • Is This a Market Made in Heaven? Trader Proposes Best' Bulletin Board Market
  • Page 2

A New Jersey-based market maker in thinly-traded, over-the-counter stocks has created a plan to bring more liquidity, enhanced best-execution practices and limit-order-protection to the OTC Bulletin Board.

A sanitized version of the Securities and Exchange Commission's order handling rules? No. A dream come true for individual investors? Perhaps.

The plan is the First Best Market Concept, the brainchild of Tony Broy, president of Jersey City-based Hill, Thompson, Magid & Co., and a trading veteran who claims his plan would massively invigorate market making in the sometimes shady world of micro-cap stocks.

Simply put, the plan would require order givers to send their trades to bulletin board market makers on the basis of simple merit.

"The single standard guiding the flow of every order would rest upon which market maker has the best bid or offer at the time," Broy postulates in a discussion paper. "To the extent that two or more market makers display the best market, the market maker which first set its market would receive the order."

What tempted Broy to create his plan? After all, why change a business that still handsomely rewards skilled market makers? The proliferation of new trading rules and regulations on Nasdaq was the temptation, Broy responds.

"I felt if I didn't step forward and propose something that made sense for the bulletin board," he said "then the regulators were going to put in something that didn't make sense and ruin a good market."

Broy, a former supervisory examiner at the National Association of Securities Dealers, was referring to the order handling rules, and to Manning protection rules which do not apply to the bulletin board or to the pink sheets. Hill, Thompson, Magid's management endorses the First Best Market Concept.

Hill, Thompson, Magid makes markets in about 4,500 bulletin board stocks, ranking it the largest bulletin-board trading firm measured by positions. The firm is the second largest bulletin-board firm, ranked by average daily share volume. The largest bulletin board firm, based on average daily share volume is Jersey City-based Knight Securities. The rankings were provided by reliable market sources though a breakdown was not available.

Eventually, Broy thinks the bulletin board's relatively low-level of technology and special capital-commitment requirements for thinly-traded stocks will no longer be enough to stave off the heavy hand of regulators.

Moreover, he argues, the media focus on micro-cap fraud is helping to place the bulletin board under the same regulatory spotlight shone on Nasdaq earlier this decade.


Broy's plan is radical, though, because it could effectively challenge firms who traditionally attracted order flow by paying rebates to customers, and it could potentially bring upheaval to current rebate practices.

Broy makes no apologies, however, saying the First Best Market Concept would guarantee superior order execution for retail investors, and unleash market competition as never seen before.

"In today's electronic environment, tolerating order preferencing may be acceptable, but, in the usual case, should not the objective determinants of price and quotation size drive the decision as to which market maker is selected for the trade?" the discussion paper postulates.