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December 1, 2000

A Kinder, Gentler NASD Regulation? New NASD Chief Says the Group Must Become Smarter

By Sanford Wexler

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  • A Kinder, Gentler NASD Regulation? New NASD Chief Says the Group Must Become Smarter

An academic who once served in former President George Bush's Treasury Department starts his new career as NASD chief executive with a surprising confession: The enforcement unit could do a better job.

The National Association of Securities Dealers' hasn't "done the best job in giving our examiners the cutting-edge tools and training for them to work more effectively," Robert Glauber told attendees at the annual Security Traders Association conference in Boca Raton.

"We have to become smarter and much more effective than we have in the past," added Glauber, a former lecturer at Harvard University.

Angry traders, who believe NASD Regulation often unfairly cites them for unintentional violations, is not news.

But in a speech to the cream of the Nasdaq market making community in sunny Boca Raton, Glauber put the criticism in a new light: Admitting its flaws while signaling a possible better shake for traders from NASD Regulation.

Glauber said that NASD Regulation could make the enforcement procedures more acceptable. "It is the nature of our rules that make it hard to comply," he said.

Nasdaq traders say a change of mission is overdue at NASD Regulation. A trader, who spoke on the condition of anonymity, said the biggest problem he has with the examiners is that, despite your innocence, they often assume you are guilty.

"They assume that you are a bad guy," he said. "On a first time offense, it should be just a warning, not a fine." He added, "the fines are also onerous."

The trader cited an instance where his firm was fined $5,000 for neglecting to have on display an SIPC sticker.

"The examiner told me it's only $5,000, that's our lowest fine," he said, "I told him [the examiner], that it's my $5,000. I haven't harmed anybody or stolen from anybody. I just didn't have technically what they [NASD Regulation] wanted at that moment in time. They don't know how to make an exception."

The current environment is putting unprecedented stress on trading desks. That makes compliance with rules enacted by the Securities and Exchange Commission more difficult.

"There are so many new rules coming down the pipeline and so many new technological advancements as well to deal with [at the same time]," said Howard Haykin, a New York-based securities compliance consultant. "Every time there is a new rule, firms have to reprogram their systems. That's difficult."

Some desks are swamped with customer limit order display obligations that must be satisfied. The rise in Nasdaq share volume and the advances in online technology add pressure. That has contributed to chaos in the ten minutes before the morning opening, and the phenomena of locked and crossed markets (A market is locked when the bid and offer are equal; crossed when the bid is higher than the offering price, the opposite of a normal market.)

To that end, the NASD introduced a "trade or move" rule that requires a locking or crossing market maker to stand ready to buy or sell 5,000 shares to unlock or uncross the market. The market maker must notify the locked or crossed party via a SelectNet message.