Commentary

Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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January 1, 2001

NASD: Please Reduce the Market Maker Penalty

By William Hoffman

The National Association of Securities Dealers has urged the SEC to reduce by half its penalty on market makers that fail to promptly refresh their Nasdaq quotes.

Right now, a market maker that doesn't refresh its quote on a security within five minutes is subject to a 20-business day ban on trading that security. The NASD wants to reduce that period to 10 days.

One trading chief does not think the rule needs fixing. "I would be very reluctant to change the rule as it now stands," said Keith Brickman, head of Nasdaq trading and managing director at Morgan Stanley Dean Witter in New York.

Brickman said allowing market makers "not to respond to SelectNet" does not benefit the market. That's especially the case as Nasdaq seeks to become the best, most efficient market in the world, he added.

"I would just as soon leave [the penalty] as it is for the time being," Brickman added. "I would not make any structural changes in the rule."

Lee Korins, president of the Security Traders Association disagreed. "I certainly don't see that [NASD is] asking for the moon by asking that that penalty be cut to 10 days," he said.

Korins noted, however, that the Securities and Exchange Commission has other issues that take substantial priority over this proposal, "and they may not get around to it in a timely fashion."

NASD Regulation, the enforcement arm of the NASD, referred questions about the proposal to the NASD. NASD spokespersons subsequently declined to comment.

Outdated

In its proposal to the SEC, the NASD pointed out that the 20-day trading suspension was first imposed in 1988, when daily volumes on Nasdaq averaged 122 million shares. Today, daily volumes average 1.6 billion shares.

The penalty was originally instated to deter market makers from withdrawing from the market, the NASD proposal said. Trading suspensions cost market makers transaction revenues, and can damage a firm's reputation.

NASD also requested that the SEC extend the one-hour period during which a market maker may appeal to restore a quote mistakenly removed from the system. The NASD wants to give market makers until 7 p.m. of the same business day to apply for reinstatement.