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January 1, 2002

Listed' Stocks for Bulletin Board: Nasdaq Seeks Exchange Status and Automated OTC Market

By Gregory Bresiger

The over-the-counter Bulletin Board - home for some obscure and thinly-traded stocks - would be transformed from a quotation service driven by dealers into a marketplace of listed stocks, under a far-reaching proposal pending with the SEC.

Nasdaq's proposal has two main elements: The establishment of the Bulletin Board Exchange (BBX), which it plans to begin in January 2003, and the continued operation of an Interim Bulletin Board for about a half a year.

"Unlike the current Bulletin Board," Nasdaq wrote in its filing, "Nasdaq will impose listing standards for the BBX. Nasdaq will impose qualitative listing standards largely equivalent to those currently existing on Nasdaq, with modifications to the independent director requirements."

BBX will require issuers to prove the existence of 100 round-lot shareholders and 200,000 shares in the public float. Nasdaq will require public interest standards identical to those currently used in the Nasdaq Small Cap and National Market listings. The corporate governance standards of those markets will also be used, according to the proposal.

"In all cases, the changes proposed are designed to make BBX a liquid, efficient, and orderly trading venue for this unique segment of the market," according to the filing. Nasdaq is also going to launch an automated order and delivery and negotiation system, which will be similar to SelectNet.

"The automated delivery service (ODS) will enable BBX users to communicate electronically with one another to negotiate and confirm the execution of orders. This communication interface will offer an alternative to telephonic communication, which will increase the speed efficiency and quality of execution," according to Nasdaq's filing.

"This is long overdue," according to James Malespina, chairman of the Nasdaq OTC Bulletin Board Committee. "It is a good idea and will provide ease of communication and will greatly speed up trading."

Malespina said the Bulletin Board changes are needed because, during periods of peak trading, firms were often "cut off from one side of the trade. This will decrease the use of the telephone and allow people to better communicate electronically." He said during periods of intense market activity it has been difficult to obtain executions.

One former SEC official, an expert on Nasdaq market structure, said he generally supports the plan, but says the biggest issue of the new Bulletin Board is, "what is going to happen to over-the-counter stocks after Nasdaq becomes an exchange." That issue seems stuck in limbo as Nasdaq pushes to become a registered stock exchange. As a stock exchange, it would become a market for listed stocks, similar to the plan for its smaller Bulletin Board. To that end, Nasdaq requested proposals to create a securities information processor, or SIP, that would consolidate the best quote nationally - the so-called national best bid or offer (NBBO) - in each stock. At the same time, it is under pressure to build an alternative display facility' which could be used by participants who do not want to trade on the new Nasdaq stock exchange.

To smooth the transition to a listed market, Nasdaq officials said that they plan to operate the Interim Bulletin Board and BBX simultaneously for six months from January to June 2003. After that period, the BBX will operate alone as the Interim Bulletin Board ends its operations.