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April 1, 2003

Nasdaq's Bulletin Board Strategy

By Peter Chapman

Also in this article

SuperMontage Lite' Is Ready For OTC Primetime

SuperMontage is coming to the OTCBB. Nasdaq plans to move market makers in over-the-counter securities - stocks not traded on Nasdaq - into its new trading platform. It is part of a plan to replace its sprawling OTC Bulletin Board with a new listed marketplace called BBX.

The switch will take dealers from a world of telephonic trading into one of automatic executions and electronic order delivery.

The BBX, or Bulletin Board Exchange, is set to debut next January and within six months completely replace the 13-year-old OTCBB.

There are 3,700 securities traded by OTCBB market makers. But only about 1,100 are expected to gain a listing on the BBX, where listing standards and costs will be higher.

The remaining 2,600 securities will likely drop onto the Pink Sheets, an electronic quotation service for dealers.

The idea of getting OTC dealers off their telephones and onto an electronic trading platform has been discussed for years. The talk became a clamor during the chaotic conditions of the OTC bull market of 1999. Orders went unfilled. Dealers were unable to process a deluge over the phone.

Nasdaq's original plan was to deploy an order delivery system much like SelectNet. It even contracted with IndigoMarkets, a joint venture between Nasdaq and India's SSI Technologies, to build it. However, late last year it changed course.

SuperMontage came into favor, Nasdaq execs say, for two reasons. Dealers wanted it and testing for Nasdaq trading was going well. So, in January, Nasdaq submitted, along with its BBX proposal, another proposal to the Securities and Exchange Commission to move trading to SuperMontage.

"They don't want to pick up the phone anymore," said Staci Warden, director of the BBX. "They want it to be electronic."

If so, how electronic? Is the OTCBB ready for auto-ex? Or is order-delivery sufficient? Traders in Nasdaq securities moved gradually into an auto-ex world. After being barred from the telephone in the mid-90s, they migrated to the SelectNet order delivery system.

Under SelectNet, dealers sent messages to each other proposing trades. SelectNet sped things up, but the game was still, in principal, a negotiated one.

Nasdaq dealers were able to use SelectNet for a few years before dealing with automatic executions against their quotes. That came with SuperSOES and then SuperMontage. OTC traders will be asked to jump into the complex world of SuperMontage overnight. So far, opinions are mixed.

"Anything that automates the market and makes for faster executions is a good thing," said Nick Ponzio, chief executive of Hill Thompson & Magid, one of about 30 dealing firms that contol most OTCBB trading. "Some of the stocks that trade in this universe, though, need to be negotiated."

Stocks that trade often and in sizable amounts will benefit from auto-ex, but those that don't will not, Ponzio believes.

A Rival System

To be fair, auto-ex is not completely foreign to the OTCBB. An alternative trading system, GlobeNet (GNET), owned by Archipelago Holdings, allows dealers to trade with each other electronically and anonymously. The system is a relatively minor player in the OTCBB though.