Commentary

Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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February 1, 2002

At Deadline

By John A. Byrne

Explicit

*Two of the biggest players in the institutional Nasdaq market are now transacting business exclusively with explicit fees. Since January 2, Goldman Sachs said it has ceased trading with its buyside customers on a net basis. Putnam Investments also said it ceased trading with its brokers on a net basis. Goldman charges its customers while Putnam is paying its brokers a per-share fee. That's in addition to the price at which the brokers buy or sell stock.

The step by the two firms marks the first time a top Nasdaq market maker or institution has switched completely to trading with explicit fees. Most trading has been conducted on a net basis in which the broker's compensation is embedded in the stock price. However, the industry, as a whole, is moving to the Goldman and Putnam model. The change was triggered by Nasdaq market makers hurt by last year's conversion to trading in penny increments. Penny ticks led to smaller spreads and cut into dealer profitability.

Enron

*Enron, the controversial Houston-based energy trading company, has been delisted from the New York Stock Exchange to the Pink Sheets. "It's been a great company to make money on for market makers," said Pink Sheets Chief Executive Officer Cromwell Coulson about the first days of trading Enron on the Pink Sheets. He said Enron's average spread was initially about 5/10th of a cent and has now declined slightly to 4/10th of a cent.

"Anytime there is a lot of volatility and volume, there's opportunities to make money," he added. When the scandal broke, about 50 million shares of Enron were traded daily on the Pink Sheets. Recently, it declined to 10 million shares. Enron is trading on the Pink Sheets for between 38.1 and 38.5 cents, Coulson said.

Bandit

*The original SOES bandit, Datek Online, was fined $6.3 million by the Securities and Exchange Commission for illegally trading through Nasdaq's Small Order Execution System during the 1990s. The SEC found the e-broker's former day trading unit, Datek Securities, guilty of trading for its own account through SOES. The system was originally intended for customer orders with a maximum size of 1,000 shares. The fine follows a judgement five years ago by NASD Regulation against Datek for breaking up large trades into the smaller SOES lots.

At the time, Datek founder and outspoken Nasdaq critic, Sheldon Maschler, was fined $675,000 and temporarily barred from the industry. The penalties are trifles compared to the riches reaped by Maschler and his protege, computer whiz-kid Jeffrey Citron, whose net worth was once tabulated at over $600 million. Datek was the largest of the so-called SOES bandits, a phrase coined by Nasdaq dealers furious with the group's rapid-fire trading through SOES.

Hudson

*Goldman Sachs is moving its equity, sales and trading operations from New York City across the Hudson River to Jersey City, integrating them with its Spear, Leeds & Kellogg subsidiary, according to an internal memo. Goldman, in a public statement, emphasized that it will retain some offices in the Big Apple's financial district.

"We intend to maintain our headquarters in lower Manhattan, where they've been since 1869," said a Goldman Sachs spokeswoman. However, Goldman's new office in Jersey City will accommodate 5,000 workers. The State of New Jersey aggressively courted Goldman. It is providing the firm with a ten year, $164 million grant.