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November 1, 2001

Besieged Dealers Search for Profits

By Steven Adler

Dealers hurt by the bear market and decimal pricing, must find creative ways to restore normal profits, one trading executive warns.

"Sellside firms will have to get better at reading the tea leaves," said Mark Madoff, an equity trading director at Bernard L. Madoff Investment Securities. "Dealers will have to put greater value on deciding which way the stock price is heading."

Madoff, which trades the 200 most active Nasdaq names, doesn't see a more commission-oriented system as the best response to narrowed spreads.

However, E. E. "Buzzy" Geduld, chairman of Nasdaq wholesaler Herzog Heine Geduld, thinks it is inevitable that an agency arrangement will materialize.

Ben Marsh, managing director of equity trading at Adams Harkness Hill, also sees agency relationships becoming popular. Marsh, like others, thinks that the leadership has to come from the large institutional firms setting the agenda.

Madoff preaches vigilance. "It used to be that you could tell the direction a stock was headed from looking at the quote only," he said. "Now, you have to look at a lot more."

Nasdaq spreads, which averaged 15 cents a share in Aug. 2000, fell to five cents by April 2001. That's when decimalization was completed and SuperSOES was launched.

While some dealers are nervous, others may have reason to cheer. "Spreads remain dramatically below their pre-decimal levels," said Nasdaq deputy economist Frank Hatheway. "In providing faster executions and price discovery, SuperSOES is taking out the narrow inside more quickly yet SuperSOES has resulted in no increase in effective spreads. That represents the direct cost to investors."