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January 1, 2003

Traders Plea for Help in DC

By Gregory Bresiger

Job one for the Security Traders Association this year in Washington: Convince both regulators and lawmakers that the climate for market makers has become terrible. Convince lawmakers that it is no coincidence that firms have gone out of business and that even mighty Merrill Lynch has decreased the number of market making stocks. Convince the powers-that-be that Nasdaq market making is still a priority, despite the switch to penny trading, and that it should be put on the top of their agenda.

Alarm Bells

"The recent problems with the capital raising process should concern everyone," said John Giesea, president of the STA. "We're seeing a loss of liquidity on a daily basis."

The STA was busy over the holiday period preparing a white paper that addresses these issues. The paper covers topics such as access fees, which continue to cause complaints among STA members, pay parity for the regulators who oversee the industry, and the overall lack of profitability in the trading industry, especially for smaller firms.

"Providing liquidity should be worth something, especially at a critical time," said one industry source who didn't want to be quoted by name. "We need the lawmakers to understand that," he added.

But a scholar who studies market structure said that many of the complaints of market makers were inappropriate.

"What they're complaining about is that Nasdaq, in the past few years, has become a much more market efficient marketplace, one in which it is now almost impossible for a market maker to engage in front running," said Benn Steil, a fellow who studies market structure with the Council on Foreign Relations.

Steil said there was little that the lawmakers or the SEC could do to reverse the problems of market makers.

"The SEC might be sympathetic to their problems, but there's nothing that the staff could or would recommend to go back to the time when market makers had bigger profits," said Steil. One point he said that the STA is right about is the issue of access fees, which he argues should be removed by Nasdaq, not the SEC. But, on the whole, he said that the STA's efforts will be fruitless.

Nevertheless, priority one for the STA and its allies this year means the regulators must do something about market structure and soon before more market makers go out of business or downsize. STA officials are also expected - in the white paper or in lobbying with lawmakers - to make the case that, in another 9/11 disaster scenario, the problems of market makers may result in some smaller or mid-size companies not being traded at critical times. "It could hurt some promising young companies," Giesea said.

Steil, who said he could imagine a nightmare scenario in which liquidity would be at a premium, still contended that the market makers' warnings were silly. "Market makers aren't going to patriotically charge into the market to save it. They're there to make a profit," he said.

Wake Up Call

But what should the trading industry do? Should it is ease regulations, re-write access rules or pass a law that improves the climate for market making? "First and foremost," said one industry lobbyist, "we want Washington to realize the extent of the problem."