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March 1, 2003

A Bulletin Board Tech Guru

By Peter Chapman

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The Bulletin Board is broken. Trading by telephone is an anachronism.

Automation is the answer.

That's the message trading technology pioneer Nick Niehoff has been preaching for the past four years. Niehoff is not your run-of-the-mill muckraker. He was a top Nasdaq executive who helped launch the Bulletin Board in 1990. He did so as the founder and division chief of Nasdaq's Trading Services group.

Now called Transaction Services and headed up by Dean Furbush, the group is responsible for marketing systems such as CAES, SuperMontage and SuperSOES. Under Niehoff's watch, the group introduced the Bulletin Board, the ACT reporting mechanism and FIPs, a bond trade reporting system.

Niehoff left Nasdaq in 1993, but didn't stay away from the Bulletin Board. In 1999, he established an ATS for bullies' - Bulletin Board stocks - called WEBiX, which combined ECN-type matching with dealer participation. He also began publicly and privately advocating electronic trading in the unlisted securities.

WEBiX failed, but Niehoff is still plugging away. He was recently retained by Track Data to promote trading in Bulletin Board stocks on the Track ECN.

Niehoff is perhaps best known as the president of the all-electronic Cincinnati Stock Exchange between 1979 and 1990. He is credited with developing that market's current execution system, the NSTS.

In addition to his high-profile assignments, Niehoff also oversaw the construction of Poland's electronic OTC market and developed a system called SBX Nanocap for the trading of nano-cap stocks. These are stocks with market capitalizations of under $50 million.

Peter Chapman, technology editor for Traders Magazine, caught up with Niehoff.

Traders: Why have you turned your attention back to the Bulletin Board?

Niehoff: When I returned from central Europe in the late 1990s the Bulletin Board had exploded in terms of transactions - not only shares, but transactions. The NASD member firms asked me if I could do something to bring the Bulletin Board into a modern environment. We launched the Bulletin Board in 1990. It hadn't been touched in eight years. It is still nothing more than a bulletin board. You look at it. You see the market maker. And you call him. That doesn't work when you're trying to process 30,000 or 40,000 or 50,000 trades per day.

Traders: What challenges did you face?

Niehoff: First, I had to find a quotation methodology in order to widely disseminate the quotes. To do that you must either be an exchange running a securities information processor (SIP) or a member of CTA/CQ. Or you had to be the Nasdaq Stock Market. I had to find one of those.

Traders: What else?

Niehoff: We had to make sure if we put together an automated system that all of the securities would efficiently clear in the Depository Trust and Clearing Corporation. Because we locked in every trade.

Traders: How did it play out?

Niehoff: I went to the logical exchanges including the one I knew very well. I asked how we could present last sales and quotes. That is what exchanges do. But we couldn't figure out regulatorily how that could happen. Securities not listed on exchanges can't be quoted by member firms. They can't report last sale.

Traders: Because Bulletin Board stocks are not listed on an exchange, the Cincinnati could not publish their quotes?