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May 31, 2003

Arca and Nasdaq Clash on Short Selling

By Gregory Bresiger

Archipelago's ArcaEx exchange should be required to adopt a short sale rule since Nasdaq must live with this rule. That's the position of Nasdaq officials, who recently spoke with the Securities and Exchange Commission.

However, an Archipelago official dismissed the complaint. "I think this is, once again, Nasdaq, reacting to competition from Archipelago. Frankly, they're losing business and are having trouble competing for issuers," said Janet Angstadt, an Archipelago counsel. Angstadt stressed that Nasdaq had recently made no formal request to the Securities and Exchange Commission. Still, in April, Nasdaq's general counsel, Edward Knight, in a petition, wrote that, "all exchanges that trade Nasdaq stocks must have rules to regulate short sales."

Angstadt said Arca adopted rules when the exchange was approved and that Nasdaq had ample chance to comment. A trading executive who frequently uses ECNs, John Wally' Sullivan, ceo of Boston-based Pulse Trading, argues that the debate should go beyond Nasdaq versus Archipelago. "I believe that it's time to address whether we even need a short sale rule anymore," Sullivan said.

John Wheeler, manager of equity trading for American Century, agrees with Sullivan. "In today's environment, shorts can create synthetic shorts with options making an uptick rule unnecessary," he said. Wheeler also noted that, with the advent of electronic trading, "a 20 cent bid that is an uptick and qualifies one second, could easily be a downtick and therefore be unable to be hit by the shortseller in the next second." Wheeler added that, "in the purest sense, if a stock is headed down, let it." The Securities and Exchange Commission declined comment.