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May 31, 1999

From Zarb's Mouth to Levitt's Ear!

By William Hoffman

The SEC seems to have outdone NASD Chairman Frank Zarb in surprising traders. First, Zarb mystified many with his cryptic request that independent broker dealers back a new central limit order book. But now the SEC has surprised many by re-opening the comment period for the proposal.

The public had until June 1 to offer comment before the SEC decides whether to adopt the proposed rule change.

As the comment period remained open, the SEC declined comment on the CLOB proposal. The NASD also declined to comment for the record.

James H. Lee, president of the Electronic Traders Association and co-owner of Houston, Texas-based Momentum Securities, said that even though volatility in equities markets best serves the bottom line of some electronic traders, instituting a central limit order book is the best public policy choice.

The question, Lee said, is whether market-makers will see it that way. "I just think that [SEC] chairman [Arthur] Levitt and [NASD] chairman [Frank G.] Zarb have a major fight on this with the market makers," Lee said.

David Whitcomb, professor of finance at Rutgers University and CEO of Automated Trading Desk, Inc., in Charleston, N.C., said he used

to favor a CLOB. (Whitcomb is currently on a one-year leave from Rutgers University.)

But today, he said, "The private [electronic commerce networks] have proved to me an unexpectedly competitive and dynamically innovative sector of the Nasdaq market."

A central limit order book, such as that championed by Zarb, would choke off that competition and innovation, Whitcomb believes.