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April 30, 2003

Nasdaq's SEC Full Court Press

By Gregory Bresiger

Please do something. And please do it fast.

That's the message in a recent letter sent to the Securities and Exchange Commission. Nasdaq, seeing more of its order flow going to regional exchanges, wants the SEC "to ensure equal surveillance and enforcement" of uniform trading rules.

"The securities industry and the investors that rely upon it are currently facing a regulatory problem: unequal and inadequate regulation by some markets that trade securities listed on Nasdaq," according to an April 11 letter by Nasdaq general counsel Edward Knight, which was sent as Traders Magazine was going to press.

"The problem," Knight continued, "arises from a series of incremental changes in market structure that, taken together, have created an inequality of regulation that if uncorrected could undermine investor confidence in the nation's second largest stock market, at a time of historic investor insecurity."

Nasdaq officials are asking that trading rules be amended. And that would mean, they said, "equal surveillance and enforcement rules."

A high placed Nasdaq official, who would not be quoted by name, contended that his group would consider reducing its audit standards if others are not required to maintain the same standards.

"We have invested tens of millions of dollars in audit systems such as OATS and ACT. We expect that others should have to live up to the same standards as we do. Otherwise, we will have a more expensive cost structure and naturally will lose business," he said.

Nasdaq officials have complained that regional exchanges printing Nasdaq trades do not have nearly the control and auditing standards that they do. The letter, which contained a petition calling for action, mentions that SEC rules in 1996 called for improved auditing rules.

"If a comprehensive order audit trial remains vital to investor protection, as it appeared to be in 1996, then all markets that trade Nasdaq securities must have rules requiring the submission of data comparable to OATS and ACT data," according to Knight.

White Paper

Nasdaq officials, pointing to a White Paper they filed back in January, again asked the commission "to identify the markets that trade Nasdaq securities without approved rules, audit trials, surveillance and examination programs sufficient to protect investors that buy and sell Nasdaq securities on those markets." That means, Nasdaq officials said, other markets without high standards, are "free riding." Nasdaq calls for "aggregating the exchanges' costs of regulation." An exhibit along with the letter sent to the regulators contained an illustration of some of the trading practices of Archipelago's Arca Exchange.

SEC officials declined comment, but officials of Archipelago fired back at Nasdaq. [see story opposite]