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February 1, 2002

Nasdaq Pros Skeptical About Explicit Fees

By Peter Chapman

Net trading in Nasdaq is slowly disappearing, but some on the buyside are worried about what comes next.

That was apparent at the annual convention of the Security Traders Association of Chicago. At a panel discussion, a trio of industry heavyweights argued that explicit fees and agency trading are the future. Executives from Goldman Sachs, Putnam Investments and Nasdaq pitched, but not every buyside trader caught.

The sticking point? Many worry their brokers will claim to be working on an agency basis for commission or commission-equivalent, but pocket a spread as well. "How do you verify?" asked a buyside trader. "I can just see it as an audit issue," she added.

Nasdaq's head of transaction services, Bruce Turner, advised trust. "You have to believe that if the broker tells you he did it as agent, then he did it as agent," Turner said. "If there's a conspiracy out there, the auditors will catch it."

Brian Levine, a Goldman senior market maker, noted his firm had completely ended net trading as of Jan. 2. "Clients are uncomfortable with the possibility they are trading with a fee while we're taking the spread as well," he conceded. "That's very important. That's one reason we moved to explicit fees exclusively."

Still not convinced, the buyside trader had two suggestions. One, the broker states its capacity-agency, riskless principal or principal-on the trade report. Or, two, the broker attaches an identifier to the time and sales data of every trade. "We verify time and sales on the New York Stock Exchange all the time," the buyside trader said. "It's not as clear in the Nasdaq market."