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March 1, 1999

CHX Applies for Permission To Trade More OTC Stocks: Nasdaq Challenges CHX Application for 500 St

By Michael L. O'Reilly

The Chicago Stock Exchange (CHX) has applied to the Securities and Exchange Commission to double the number of stocks in its over-the-counter program to 1,000 issues.

The CHX, which is the only regional stock exchange to trade OTC issues, currently trades 500 of the most active Nasdaq stocks. In December, the exchange's application with the SEC sought unlisted trading privileges in 500 more OTC stocks.

"We allotted the last of our original 500 Nasdaq stocks in the last couple of months, and our specialists are interested in trading more of these stocks," said Andrew D. Kolinsky, senior vice president in sales and marketing at the CHX. "The additional 500 will probably be the next 500 most active on Nasdaq."

The CHX said it expects SEC approval sometime this spring.

But Nasdaq is challenging the CHX request, arguing in a letter to the SEC that CHX specialists do not trade the existing 500 OTC issues competitively. Nasdaq maintains that the expanded program would not cultivate competition in the marketplace in accordance with the aim of the unlisted-trading arrangement among U.S. stock exchanges.

The CHX, meanwhile, has an agreement with BRASS the order-routing system operated by Weehawken, N.J -based Automated Securities Clearance Corp. to build an electronic trading system for its OTC program.

The new system will link with the CHX's existing electronic system, MAX, to eliminate the manual entry of orders by specialists. The system will also allow BRASS users to directly access the CHX. Kolinsky expects the new system to be launched in early summer.

In October, the CHX hired William Barclay for a new position as senior vice president of strategic planning for the exchange's OTC program. Barclay, previously an executive at the Chicago Board Options Exchange, is responsible for expanding the CHX's OTC program.

Over the last 12 months, five additional CHX specialist firms joined the four firms previously participating in the OTC program. Kolinsky expects at least two more firms to join the program this year, bringing the total to 11.

In December, the CHX's OTC volume was up 363 percent from the previous December. The exchange's OTC volume finished 1998 up 110 percent from 1997.

In January, OTC volume at the CHX continued to surge, reaching 112.85 million shares for the month, on a record 246,681 trades.

The CHX has experienced record growth and profitability across the exchange, outpacing every U.S. stock exchange in market-share growth last year. Trade volume in 1998 was 16.33 million trades, up 63 percent from the previous year. Share volume at the CHX was up 62 percent, ending 1998 at a record 9.07 billion shares.

Growth at the exchange has been reflected in escalating seat prices. The last CHX seat sale in January was for $65,000, compared to $38,000 at the beginning of 1998.