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Conquering Fear in Trading

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November 1, 2000

At Deadline

By John A. Byrne

Levitt's Stand

Arthur Levitt, the Securities and Exchange Commission chairman, is taking a strong stand on internalization and payment for order flow arrangements. The SEC chief, speaking at the annual Security Traders Association Conference in Boca Raton, called for more limit order transparency. The introduction of decimal pricing, he said, made that an imperative. Without greater limit order transparency, Levitt said, "the ability to price orders of any meaningful size effectively will become increasingly difficult."

"If, as a marketplace, we fail to embrace a level of transparency clear enough for penny increments," he added, "there will be no good excuse behind which we can hide." Levitt also raised the agency's concern that internalization is hurting the quality of executions. "Simply put, those dealers willing to stand up and improve upon the quote, and those investors who place aggressive limit orders, often are going unrewarded today," he told the attendees.

Microcap Sector

A tedious requirement for traders in the microcap sector is slated for elimination. The Securities and Exchange Commission has given NASD Regulation the approval to amend its Three Quote Rule, Mary Schapiro, president of NASD Regulation, told attendees at the STA Conference.

Under the changes to Rule 2320(g), traders of OTC Bulletin Board and Pink Sheet stocks will no longer have to phone three market makers to obtain the best price if a stock is quoted on both the OTC Bulletin Board and the Pink Sheets' Electronic Quotation Service. That covers about 1,700 stocks.

NASD Regulation proposed the rule in April after a trading surge in microcap stocks resulted in market makers not answering their phones. NASD Regulation stated at the time that the Three Quote Rule hurt investors by causing "significant delays in obtaining executions."

Separately, the NASD has filed a proposal with the SEC that would require market makers to send to the NASD their inside quotes and other data about their electronic Pink Sheet quotations.

NASD Regulation

NASD Regulation is eyeing a future as a provider of contract services to start up exchanges and other stock markets. That is the message from Robert Glauber, the incoming president and chief executive of the National Association of Securities Dealers. NASD Regulation will remain a unit of the NASD, as will the American Stock Exchange, after Nasdaq becomes a shareholder-owned company.

NASD Regulation may try to woo alternative trading systems that are planning to become stock exchanges under Regulation ATS. The NASD's regulatory arm is busy. NASD Regulation, for example, currently provides regulatory services to the International Securities Exchange, the new electronic options market. Nasdaq will continue to use NASD Regulation for its regulatory services under a multi-year contract. Glauber, who was speaking at the STA Conference, said he expects the second phase of the Nasdaq spinoff to be completed this year.

Decimal Scare

Decimal trading could cause more volatility and poor fills, warned Patrick Boyle, a block trader at Credit Suisse First Boston. Speaking on a panel at the STA Conference, Boyle used recent trading in Time Warner, a listed stock, as an example. When the order left his firm's desk for the Big Board floor, the price moved incrementally from five cents to 10 cents to 12 cents and then to 15 cents. Eventually, the customer cancelled the order. "Wait until all the stocks start trading in decimals, it is going to drive the institutional customer base crazy," Boyle predicted.

Boyle, who was quick to say he did not want to appear as a harsh critic of specialists, nonetheless said they should be monitored more closely. Another panellist, Lisa Utasi, a senior equity trader SSB Citibank Asset Management Group, called for more market transparency, a view supported by Boyle.

Aldo Parcesepe, head of Nasdaq trading at Bear Stearns & Co., who was in the audience, predicted that when the Supermontage is introduced, spreads will widen dramatically when there is no natural liquidity, even on large-cap stocks like Intel.