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April 1, 2001

Traders Trash Manning In Decimal Environment

By Peter Chapman

Traders are angry at Nasdaq because they contend it is forcing them to trade at a loss when filling certain customer orders for stocks quoted in decimals.

Nasdaq's Manning Rules dictate that they pay more than the customer's limit when filling buy orders and accept less when filling sell orders, they complained at a recent Town Hall Meeting in New York sponsored by the Security Traders Association of New York.

The problem arises when market makers receive customer limit orders priced three or more places beyond the decimal point. Nasdaq does not allow the posting of quotes more than two places beyond the decimal point. In addition, for Manning purposes, it considers three or more digit customer limit orders roundable up to two digits if buy orders and down if sell orders.

So, if a customer gives a market maker an order to buy stock at a limit price of $24.995 per share, for example, the price is deemed to be $25.00. The market maker would be required to buy stock in the market for as much as $25.00 if he could. If he does, he loses $0.005 per share when he fills the customer leg. If he doesn't fill the customer leg he violates Manning.

Under Manning, or the Limit Order Protection Rule, a market maker must fill customer orders before his own if they are priced the same or better than the dealer's.

"You're not allowing the customer to display his order at .995," an irate Aldo Parcesepe, head of the Nasdaq desk at Bear Stearns, yelled at Nasdaq executives. "So why are you applying the Manning Rules?" Traders would like Nasdaq to permit quoting in more than two decimal points, according to a source.

Nasdaq's Dan Franks, senior vice president for market operations, told the crowd that Nasdaq's Quality of Markets Committee is examining the issue.