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November 1, 2002

Spring Break for Nasdaq on Amex

By Peter Chapman

Also in this article

Auto-Ex With a Twist Planned for Trading

The American Stock Exchange said it will allow automatic executions against it quotes in Nasdaq securities starting next spring - sometimes.

The move is in response to the barrage of criticism the Amex has received from Nasdaq market makers since it began trading Nasdaq shares in August. Dealers say Amex specialists have an advantage over them because the Amex only offers order delivery functionality.

In contrast, Nasdaq market makers must supply automatic executions against their quotes via SuperSOES. Market makers, wanting to access an Amex quote electronically, must route orders to the specialist over the Amex's PER system, or some other order delivery mechanism. Once the order arrives at the post, an execution can take as long as 15 seconds because it is exposed to the crowd.

Market makers want the Amex to provide automatic executions against the orders on the specialists' books. Nasdaq, in fact, demanded that Amex link up to SuperSOES.

The Amex is ok with auto-ex but only insofar as it does not hurt specialists. Brett Redfearn, an Amex senior vice president, speaking at the annual Security Traders Association conference in Boca Raton, last month, said the new Amex automation functionality - slated for introduction around April - will not be like SuperSOES. Orders would not execute automatically every time.

"We have brokers in the crowd trying to execute against us," he explained. "It seems like that would cause the book to freeze temporarily."

Freezing the book would prevent the problem of both a Nasdaq trader and a crowd broker simultaneously accessing the same order. If both were to claim the trade, the specialist would be liable to the loser for the stock or the cash. In freezing the book, the specialist is free to award the trade to a broker at his post.

Automatic executions have become a pressing issue. With the Amex racking up volume gains in Nasdaq securities, market makers cannot ignore the venue.

"Many times our obligations are driven by your marketplace," said conference attendee Arthur Pacheco, a senior managing director at Bear Stearns, addressing a panel that included Redfearn. "We must be able to compete with you or access you."

Dealers Protests

The nation's third largest stock exchange began trading Nasdaq shares in August despite Nasdaq dealers' attempts to block the move. The Securities and Exchange Commission approved it, ignoring traders' pleas to forbid the integration of the Amex's slow-moving open outcry model into the rapid-fire electronic Nasdaq world.

The Amex is now one of four exchanges trading Nasdaq securities under the Unlisted Trading Privileges (UTP) Plan and the only one to do so in a face-to-face auction environment. It now trades 57 names and plans to ramp up to some 120 by the end of the year. Its most prominent name to date is Cisco, the large cap tech stock.

Top Twenty

When Cisco debuted on Oct. 10, Performance Capital Group, the Amex specialist charged with managing Cisco trades, handled about one-and-a-half million shares. That was a small chunk of the 140 million shares traded that day, but the volume places Amex among Cisco's top twenty trading venues.