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Market Structure Fiasco

Traders Magazine, June 2001

John A. Byrne

Market fragmentation? It could soon become worse. It is amazing but true that the system of trading stocks in the U.S. markets has served its purpose, rather brilliantly in fact, in all but one respect: The infrastructure for allocating equity capital is a fiasco. The problem may soon be compounded by the introduction of a rather strange creature known as the "residual market." That's what investors must endure so that the unlisted dealer market, known as Nasdaq, receives the imprimatur of the big guns at the Securities and Exchange Commission. Nasdaq is petitioning the SEC to formally become a stock exchange. The residual market, according to the SEC, is a "quotation and transaction reporting facility" that Nasdaq must establish for current issuers that do not join the new Nasdaq stock market. "Under Nasdaq's mandate [for exchange status] they can't abandon those issuers and this is what the SEC is somewhat concerned about," said STA President Lee Korins. In effect, the residual market could become the newest breed of OTC "unlisted" market, joining a plethora of venues that execute customer orders in U.S. territory.

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