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February 1, 1999

Is the Agency-Quote Proposal Plausible?: Buyside and Sellside Say It's Only an Interim Step

By Michael L. O'Reilly

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  • Is the Agency-Quote Proposal Plausible?: Buyside and Sellside Say It's Only an Interim Step

Most traders want to level the proverbial playing field on Nasdaq. Only no one can agree on how to do it.

Buy-side traders want limit-order protection, price transparency and a more-centralized market. Broker dealers and market makers complain about unfair competition from electronic communications networks (ECNs) and day traders.

So first, the National Association of Securities Dealers' introduced its NAqcess proposal, a failed small-order execution system. Then there was the recently-shelved limit-order book, which would have provided a central facility for the execution of limit orders.

Now it's the so-called agency-quote proposal.

The NASD hopes its newest proposal for the handling of limit orders allowing market makers a second quote for agency orders will satisfy both buy-side and sell-side traders, while maintaining access, choice and transparency in the market.

But many traders on the buyside and sellside, while supporting the new agency-quote proposal, do not feel it's a permanent solution.

"I don't think it's a long-term fix," said George Jennison, head of Nasdaq trading at Wheat First Union in Richmond, and a former member of Nasdaq's Quality of Markets Committee. Jennison recently completed a three-year term on the committee, during which time the NASD designed both the limit-order book and the new proposal.

"It seems like another step," Jennison added. "It doesn't smell like a long-term solution. It's hard to believe having two different quotes will solve all the problems in our market."

Bart Green, manager of over-the-counter trading at Edward Jones in St. Louis, also feels the proposal is just a small step toward improving the market.

"There is probably a better way of doing things," Green said. "It's a positive proposal when you compare it to the current market. But doubling the number of quotes could muddy the waters."

Both Jennison and Green like most sell-side traders are at least satisfied the new proposal has replaced the limit-order book, which would have competed with market makers for orders.

Many buy-side traders, on the other hand, favored the limit-order book, and were disappointed with its failure.

"I was in favor of the limit-order book," said a buy-side member of the Quality of Markets Committee, who requested anonymity. "The buyside wasn't vocal in supporting it, and the sellside made their voices heard. The agency-quote proposal is just a step. I still hope Nasdaq gets some reasonable facsimile of a limit-order book."

Harold Bradley, a portfolio manager at American Century Investment Management in Kansas City, and a buy-side member of the Quality of Markets Committee, blamed many market makers for the failure of the limit-order book.

"Market makers are trying to preserve their economic self-interest," he said. "They all want to roll back the clocks and trade the way they've always traded. But they ought to figure out what's best for the market."

The Proposal

As currently envisioned, the agency-quote proposal would allow each Nasdaq market maker to publicly display agency orders to the market in a second quote, separate from the market maker's proprietary quote.