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September 30, 2001

SuperSOES ReliefFor Market Makers?

By Gregory Bresiger

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  • SuperSOES ReliefFor Market Makers?
  • Page 2

Market makers, complain ing about the SuperSOES system and competition from ECNs, may be about to receive some help. Their liquidity display requirements may soon be changed.

Nasdaq officials are pushing to ease reserve requirement rules, which are not a factor for competing ECNs. The proposed Nasdaq rule change would decrease market makers' reserve size requirements in the SuperSOES automatic execution system, a system that is currently a big money loser for market makers, according to one expert on U.S. market structure.

"Market makers would still have problems even after the change. But this would make the system a bit friendlier for market makers. They would continue to lose money on SuperSOES, but somewhat less," according to market structure expert Benn Steil, a senior fellow with the Council on Foreign Relations in New York.

The reserve requirement is designed to help trading firms disguise the amount of shares of a stock they are willing to buy or sell. The proposed rule change, which was scheduled to be filed with the SEC as Traders Magazine went to press, would decrease the size of stock shares they must publicly show.

Currently, those using the SuperSOES reserve must display a minimum size of 1,000 shares. However, that minimum number would be dropped to 100 shares under the proposal, which originated with Nasdaq's Quality of Markets Committee.

"We expect this will provide more liquidity, especially in thinly-traded stocks, because there will be fewer shares that will need to be displayed," said a Nasdaq official, who declined to be named.

The official said the rule change was not prompted just by the complaints of market makers, noting that the committee has been working on the change since earlier this year before part of the SuperSOES system was implemented.

The Nasdaq official emphasized the measure has strong support, including the backing of ECN representatives.

"The Quality of Markets Committee gave the rule a near unanimous approval and they have ECN representation," the Nasdaq official added. "We got a lot of good feedback from ECNs."

Fewer Shares

Reducing the reserve requirement, Nasdaq officials hope, would mean fewer shares would have to be shown at the inside bid or offer. The reserve requirement is currently available to ECNs without having to display 1,000 shares.

"It will mean that there will appear a little less liquidity than there actually is," said Kevin Foley, chief executive of Bloomberg Tradebook. Although Foley says he is not working against the rule change, he added that, "I, for one, would prefer a market where there is more liquidity on display."

Foley says ECNs will generally not be hurt by the reserve size requirement as long as they have "good order routing systems and the fancy technology to find liquidity for their customers."

"We certainly won't be hurt by this," he added.

One Nasdaq market maker said the rule change would help his customers. "So often when one has to show one's hands on a 1,000 share trade, it tips people off that we're going to make a much bigger trade," said the market maker, who declined to be named.