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April 30, 1999

At Deadline

By John A. Byrne

PCX Book

The Pacific Exchange (PCX) has modified its proposal for a consolidated limit-order book. The modified proposal has been refiled with the Securities and Exchange Commission. A spokesperson for the PCX said the exchange decided to refile its limit-order proposal after lengthy discussions with the SEC over its structure. The changes dealt with order handling and time priority. The limit-order proposal would be part of the PCX's competing-specialist program, which allows more than one exchange specialist to make a market in a single stock. The PCX had operated books separately on its Los Angeles and San Francisco floors.

The Boston Stock Exchange is the only other U.S. floor-based equity market with a competing-specialist system. All U.S. regional exchanges operate some type of limit-order book. The industry consensus is that these books are not successful.

School

Knight/Trimark Group has formalized its market-maker-training program, aggressively recruiting for its trading department. The Jersey City-based firm had been running an informal training program for three years. But with the firm growing to 510 employees - up from 317 last year - Knight/Trimark had to boost its program.

"We thought we would be more successful grooming traders rather than just hiring from Wall Street," said David Kravis, vice president of human resources and the program manager at Knight/Trimark. With classified advertisements and on-campus recruiting, Knight/Trimark has received 1,500 resumes this year, hiring 60 people and enrolling 18 trainees in its program. The firm is looking to enroll 15 more people in the program next month. The program consists of daily assignments and morning meetings with senior traders. The trainees work as assistants for Knight/Trimark's 100 equity traders.

Kravis said after three months of training, participants become trading assistants. Ideally, the trainees will spend three years as assistants before starting to trade. For every 18 trainees, Kravis' expectation is that about 14 assistants will become traders. The firm runs the program at its Knight Securities subsidiary in Jersey City, and at Trimark Securities, an affiliated third-market firm in Purchase, N.Y.

Microcap Fraud

A revised version of the Securities and Exchange Commission's proposal to curb micro-cap fraud is creating a storm among some dealers. At issue is rule 15c2-11, which was adopted in 1971.

Under the rule, a market maker is required to review a public company's financial statements before quoting prices for an over-the-counter stock. The rule allowed other dealers to "piggyback" on trades without seeing the financials. The new rule requires all dealers to review company financials before trading a stock.

The SEC has been flooded with more than 250 comment letters, many saying the new rule would place an unreasonable financial burden on dealers quoting micro-cap stocks.

The stocks usually trade on the OTC Bulletin Board and on the Pink Sheets, operated by the National Quotation Bureau. One small dealer that trades 6,000 OTC Bulletin Board and Pink Sheet stocks would incur an estimated $5 million to $10 million in additional costs to comply with the new rule.

ATS Delay

The Securities and Exchange Commission delayed the roll-out of its new rule for alternative trading systems (ATS), apparently because one major ATS was unable to comply immediately with the systems' requirements. The SEC planned to start by requiring ATSs to display a subscriber Nasdaq order when an individual ATS is responsible for more than five percent of Nasdaq volume in the stock.

These subscriber orders are those not displayed on Nasdaq via SelectNet. The rule would require the ATS to provide the prices and sizes of its best bids and offers in the stocks affected.

The April 21 deadline, which would have covered 50 Nasdaq stocks, has been postponed until August 23. While the SEC did not identify the ATS, some industry pros contend it was Instinet, the largest and most successful electronic agency broker in the U.S. Instinet did not return a telephone call seeking comment.