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June 30, 2002

Market Fragmentation Is Bad

By Gregory Bresiger

Competition between market makers and ECNs for order flow is fine. But when competition becomes "regulatory arbitrage," then markets can be damaged as participants try to find the easiest market regulator, warns Robert Glauber, chairman and chief executive of the NASD.

In recent comments, he warned that there will be more intense competition among the Big Board, Nasdaq and ECNs for order flow.

"Competition, as such," Glauber said, "is a good thing. Fragmentation is not. It is even more clearly a negative thing when it encourages or leads to regulatory arbitrage."

Glauber said that competition based on liquidity, efficiency and depth of market were good things. But, when it is based on finding the easiest regulator, that causes more scandals.

The NASD chief executive argues that some firms, as regulators battle for power and authority over markets, could be tempted to go to the easiest place to operate. That could cause more scandals and a lack of confidence in markets, he warned.