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August 31, 2002

Rocky Start for Nasdaq Trading A Dispute Lingers as Amex Relaunches Program

By Gregory Bresiger

The temporary suspension of trading in Nasdaq stocks at the American Stock Exchange -- a ban eventually lifted by the SEC - may not be the last.

That's what officials at the American Stock Exchange may be facing, following a protest against the program by Knight Trading Group in August. That protest temporarily halted trading in Nasdaq stocks at the Amex after only three days of operations.

Knight Trading Group, in a petition to the Securities and Exchange Commission, claimed that the Amex, which had been granted an approval to trade Nasdaq securities earlier this summer, failed to have the proper electronic linkages.

Amex spokeswoman Kimberly Atwater called the Knight petition, "an abuse of the administrative process." She said Amex had traded nine Nasdaq securities in the three days and recorded some 1.9 million shares without problems. She added that Knight had the opportunity to object before trading began but did not.

The Securities and Exchange Commission, which suspended Nasdaq trading at the Amex, eventually granted approval for a resumption after reviewing Knight's complaint.

Still, Knight said that it was hopeful that the issues it raised with the SEC would be considered as Amex resumed trading. Knight added that, "we are hopeful the commission staff will adjust the UTP plan so as to insure a level playing field in the Nasdaq market for all participants." UTP, or unlisted trading privileges, allows exchanges to trade stocks listed on other markets.

The Amex dispute raised other issues. Critics say that Amex didn't provide best execution in its three days of trading.

"Basically, we're dealing with a legacy system that is not able to attain acceptable electronic standards," said William Harts, executive vice president of corporate strategies for Nasdaq.

Harts said that the SEC certainly wants to "encourage competition, but they do not want to lower the whole trading standards of the market." Harts, noting that Amex neither uses SuperSoes nor SuperMontage, also charged that "Amex is stuck with a 20th century technology."

But Amex officials said that Knight's petition was without foundation. "Knight's arguments," Amex wrote in a letter to the SEC immediately following the Knight petition, "have been thoroughly aired, carefully considered and rejected by the Commission, creating a very strong presumption that the Knight petition will not succeed on the merits. Indeed, the petition is a thinly-veiled attempt by a competitor to stifle competition in trading of Nasdaq securities," according to Michael J. Ryan, executive vice president and general counsel for Amex.

Knight praised the SEC's initial decision to suspend trading. "The existing Amex platform, with its current means of access, cannot effectively interact in a dealer market making environment where execution speed is measured in milloseconds. SuperSoes provides market participants and liquidity providers alike with access to liquidity instantly. This is not a competition issue. This is a fair and orderly market and an execution quality issue," according to Knight.

Amex officials say they will expand the exchange's roster of Nasdaq stocks to 120. Still, industry sources privately said that, even if Amex is able to embark on this kind of program, there is a strong possibility of some sort of continuing problems.