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April 30, 2003

Gates Are Down On Market Close Orders

By Peter Chapman

Marking the Nasdaq close just got harder.

Nasdaq has sharply reduced the amount of time it allows its members to report their last trade of the day from 90 seconds to two seconds. In addition, if the last reported trade in a given security is away from the inside, Nasdaq will deem the trade to have occurred at either the best bid or offer.

Nasdaq expects its new rules to make it much more difficult for traders and brokers to manipulate a stock's closing price. Dealers handling market-on-close orders for institutions, for example, will sometimes report trades at artificial prices at the last second to preserve profits or reduce losses. Stockbrokers sometimes do the same to help clients avoid margin calls. The practice, known as marking the close, is illegal.

"We are bringing the gate down at two seconds after 4:00 instead of waiting until 4:01:30," said Tom Davin, senior vice president of Nasdaq data products. "This will make it much more difficult for somebody to effect that type of behavior."

The move will produce a closing price that more accurately reflects true market conditions, Nasdaq officials say. The "vast majority" of final trades are already reported to the ACT trade reporting system by 4:00:02, according to Nasdaq. But a single trade reported at 4:01:29 can still represent the day's close.

The day's closing price is an important one for many organizations. Index publishers, such as Standard & Poor's, use it to determine index values. Mutual fund complexes use it to determine their net asset values.