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OPINION: CAT NMS is Out of Options

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May 31, 2003

At Deadline

By Editorial Staff


* Nasdaq and market makers need action by the Securities and Exchange Commission in several critical areas. The regulators should examine ECN access fees; locked and crossed markets and the refusal of certain UTP players to provide automatic executions. That was the analysis of Rick Ketchum, who made those comments recently as he was ending his term as president of Nasdaq. Other important areas that the SEC should study include sub-penny pricing; Nasdaq's inability to share market data revenues with its members; and the listed market's trade through rule, according to Ketchum, speaking at a conference on institutional trading at New York's Baruch College. A 12-year veteran of Nasdaq, Ketchum will leave this month to become general counsel at Citigroup's corporate and investment banking division.


* Critics of penny pricing now also include the expanded use of subpennies in transactions as a worrisome trend. Sub-pennies - increments measured in fractions of a penny - have been common currency in ECN trading. However, subpennies are proliferating in other markets.

Rick Ketchum, the outgoing Nasdaq president, is critical of this trend. Ketchum, speaking for Nasdaq, said sub-pennies if permitted by regulators, provide an unfair advantage. Sub-penny traders can "step in front of other orders with sub-pennies because systems like Lava will recognize them and put such orders ahead of others," Ketchum told attendees at the Baruch College conference, which was titled, Coping With Institutional Order Flow.


* BrokerageAmerica is doubling the number of securities in which it makes markets from 3,500 to 7,000 over the next 12 months. Its aim is to provide one-stop shopping. "Our goal is to become the single-source provider of Nasdaq market making services to our entire client base," said Drew Sycoff, BrokerageAmerica's chief executive. In the past two years, BrokerageAmerica has expanded its market making from 1,000 securities to 3,500, according to the firm.

BrokerageAmerica ranks fifth among the top five market makers in Nasdaq securities with 1,700 positions, according to Nasdaq data from April. The firm ranks eighth among the top ten market makers in OTCBB issues with 1,252 names registered. With the ramp-up, BrokerageAmerica will also beef up its presence in the specialty bank stock sector. The firm hired two veterans, Steve Bugner and Chris Pitera, from the Spear, Leeds & Kellog unit of Goldman Sachs, to run the bank stock trading desk.


* Morgan Stanley has begun specialist operations for a number of options books at the Pacific Stock Exchange. Morgan Stanley is only beginning with a handful of issues. The firm has hired two traders but as of presstime, it is not clear in which issues it will make markets. According to industry sources, Morgan Stanley is seeking to eventually become a remote specialist by using the PCX's Plus trading system. The latter was only recently approved. Despite its approval, it is not yet clear if firms will be permitted to provide liquidity for options from remote locations. A spokesman for the PCX declined comment.