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May 31, 2003

The Great Train Robbery?

By John A. Byrne Editor

Market makers may still have legal grounds to stop the full separation of Nasdaq from the NASD, its planned stock exchange application and IPO. Nasdaq would pocket a massive hoarde from this public offering, spread the cash among stakeholders and bid farewell - no hard feelings - to a network of market makers. Nasdaq would be set free from the National Assocation of Securities Dealers. Nasdaq, removed from its market makers, could then compete directly with them. And Nasdaq could use its gold to embellish SuperMontage, acquire its most serious ECN competitors and even reconstitute the OTC market. The folks who've plotted this scheme will be compensated. According to its 2002 proxy statement, Nasdaq's former chairman and CEO Frank Zarb, holds stock and options worth around $13 million. Another top executive holds stock and options worth about $5 million. The numbers are used here, not to begrudge these executives this pot of gold, but to illustrate one of the primary impulses still driving this offering. In other words, there is no clear evidence that market makers as a professional group - the historic backbone of Nasdaq - will benefit materially. On the contrary, an IPO could be the deathblow to the market maker system as we know it today.

How much more pain can market makers take? Many non-dealers are now snickering at this question. But the success of many entities was handed to some firms on a silver platter: the order handling rules, for instance, forced dealers to transport limit orders to ECNs because Nasdaq did not have technology to quickly respond. When SuperMontage arrived, it was a little too late to recover this limit order business. For clearly competitive reasons, the New York Stock Exchange is opposed to the Nasdaq exchange application. The Big Board objects because Nasdaq's current model suggests it could become a sort of decentralized listed rival based on price-time priority. It would, presumably, gain wider access to the ITS. A transformed Nasdaq could probably take a significant part of Big Board's business. NYSE fears about Nasdaq dealers in this new market may be premature. The dealers may struggle even more to survive. [As a related aside, the cover story by Peter Chapman examines a niche area of the OTC market, the Pink Sheets. The special feature by Gregory Bresiger, looks closer at the latest brawl between the NYSE and Nasdaq.]

A Nasdaq official recently told Traders Magazine of one former market maker's effort to succeed Wick Simmons at Nasdaq. He greeted Artie Pacheco's manifesto with skepticism. Artie envisages returning Nasdaq to its traditional roots. "Well, his plans are exactly the wrong direction in which Nasdaq is going," the Nasdaq official said. So you see, Nasdaq is abandoning its market maker members. But there are hopeful signs. The new Nasdaq CEO and President, Robert Greifeld, is schooled in the value of market makers. And besides, market makers may have legal grounds to stop or interrupt this IPO scheming because, frankly speaking, it's a travesty of justice.

John A. Byrne