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September 30, 2002

Big Brother Watches Exchange Specialists

By Peter Chapman

The American Stock Exchange is stepping up surveillance of its equity specialists.

The Amex, often criticized for lacking adequate controls, is putting in place a systematic monitoring and evaluation system intended to weed out poor performers among its dealers. Instead of waiting for customer complaints, it will evaluate specialists every quarter based on seven criteria.

Single Ranking

The numbers will be collected by the exchange's Committee on Floor Member Performance and distilled into a single ranking. Traders will be ranked from "1" to "5", with the best scoring "1" and the worst scoring "5."

The Amex's Allocations Committee will then use the data to determine whether poorly performing specialists should lose their rights to trade certain stocks.

Key factors used to judge the traders are the percentage of volume traded better than the national best bid or offer (NBBO); the percentage of volume traded at the NBBO; the percentage of time the specialist's quote is at the NBBO; and the percentage of market orders executed within 60 seconds.

The results of questionnaires filled out by floor brokers will also be considered. Prior to the implementation of the new methodology, the Amex largely evaluated specialists' executions on an ad hoc basis. Customer complaints often triggered an investigation.

Complaints often arose over fills that occurred in quantities less than advertised in the quote, says one trading pro.