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January 1, 2002

Rule Shines Light On Nasdaq Dealers

By Peter Chapman

Statistics released by Nasdaq market makers in the first round of best execution reports proved to be a mixed bag, but some desks stood out. Under the Securities and Exchange Commission's Rule 11Ac1-5, all Nasdaq dealers are required to provide their customers with certain standard measures of execution quality each month. The data, designed to assist brokers making routing decisions, will also be used by regulators.

The most watched measure is the effective spread. It is a calculation of the difference between an execution price and the mid-point of the NBBO. Based on small trades made in Nasdaq 100 stocks by the 50 largest dealers last October, most spreads ranged from 1.5 cents to 2.5 cents.

Both Prudential Securities and Bernard L. Madoff Investment Securities stood out with extremely low [good] postings of 0.46 cents and 0.98 cents, respectively. Less impressive numbers came from Crowell Weedon with 4.86 cents, and NDB Capital Markets with 3.28 cents.

Regional shops tended to provide the slowest executions. Crowell Weedon; Miller, Johnson; Morgan Keegan; Wachovia Securities; Ladenburg Thalman and Advest all took, on average, eight seconds to 27 seconds to fill their orders. Big shops such as Bear Stearns and Morgan Stanley tended to group at the low end with one, two or three second executions.

The new figures lead analysts to predict a winnowing of inferior dealers. "This will only accelerate the industry consolidation," said Ted Karn, president of Market Systems Inc., a consultant that focuses on best execution.