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April 1, 2000

The Changing Marketplace

By Peter Chapman

Chris Holter, who runs Nasdaq trading at First Union Securities, is enthusiastic about Nasdaq's planned platform change giving market makers automatic execution on trades up to 9,900 shares.

"SuperSOES is going to be faster and more efficient," Holter said. "It will create a true marketplace."

Holter said SuperSOES sends a signal: Don't be there unless you mean to sell and be there for what you want to sell. "The days of these shadow markets that aren't real and don't have any depth are numbered. You're either going to sell stock or you're going to get out of the way," he said.

Dominate Stocks

Holter said the new platform is a major advantage for firms like First Union that want to dominate and own stocks. "We're in stocks we want to buy and sell. The fact that you have easier access to us...I see that as a positive," he said. Holter believes traders will have to show greater size, something that many do not like to do. "You've got to show greater size and you've got to have a reserve book in there," Holter said. "If you want to stay at [a certain] price and you want to hold that price, you've got to show at least 1,000 shares and you must have size behind it."

Holter believes the switch to automatic, and away from negotiated, executions will force market makers with 1X1 quotes at the NBBO - that is, 100 shares on the bid and the offering sides - to show more shares if they hope to buy or sell more than the current mandatory minimum 100 shares.

On the super montage side of the platform changes, he was similarly enthusiastic. "I think the super montage is great. All of the liquidity [trading desks] are running against prop accounts [their own books] will be visible to the Street," Holter said.

Most Nasdaq firms sweep their own books and internalize most of their order flow, he added, noting that the Street never gets to see it. Holter believes the plans to show three levels of orders will add a lot of liquidity to the market. He argued that this should take some of the volatility out of the marketplace.

"The less volatile the stocks are, the more the portfolio managers will be willing to be a part of that market," Holter said. "Right now the market is so retail driven that it's tough for a portfolio manager to establish a good sized position. It's hard for him to get in. It's hard for him to get out."

Decimal Switch

First Union's trading bosses have some trepidation, however, about the switch to decimal stock pricing. If spreads narrow, First Union sees itself eventually moving to single price trading on Nasdaq.

Stocks that are easier to trade and are supported by more market makers will only earn First Union's desk a penny a share, predicted Mike Murphy, head of First Union's equity

trading unit.

"We'll cross 100,000 [shares] in and out at $35 a share," Holter explained. "It doesn't matter how the stock is quoted at that point. Investors will pay us for the value-added. If we can add value on the research, the bank and trading, we'll get our 5 cents [sales credit]. If we're not adding value we'll get a penny or we'll get nothing."

Holter said there would be stock trades where value is added by the desk and other stocks where it is not. "Over time this market will become very efficient," he said. "Those who have been skimming the cream off the top are going to find the cream has gone away."