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May 31, 2003

NYSE Takes Nasdaq Case to Congress: Big Board Tells Lawmakers to Reject Nasdaq Exchange

By Gregory Bresiger

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  • NYSE Takes Nasdaq Case to Congress: Big Board Tells Lawmakers to Reject Nasdaq Exchange

The battle over Nasdaq's future - whether the regulators should finally give approval to its exchange application - is not over.

At least that's what one of its major competitors is telling lawmakers. NYSE officials recently sent a blistering letter to a member of Congress about Nasdaq's seemingly interminable exchange application, which is now some two years old.

There is no indication the application process will end anytime soon. "The commission is considering the matter," an SEC spokesman said. There is also no indication that the heated debate is close to finished.

"Nasdaq's proposed exchange rules violate the existing law," Big Board's counsel recently wrote. These rules would "overturn fundamental, long-standing safeguards that protect investors," he added.

Big Board officials also charge that Nasdaq's history of regulatory problems will mean that - giving it the legal privileges of an exchange - the individual investor will be hurt. They also suggest that there will be scandals as there were in the 1990s. Nasdaq sent its own letter to Congress charging that NYSE's contentions are without any basis. The NYSE is fearful of competition, Nasdaq officials assert.

The charge and counter charge has re-opened a bevy of issues. These divisive issues include Nasdaq's business model, whether for profit-exchanges violate the substance of the 1930s securities laws and if approving the application will allow other markets to make the same metamorphosis by simply citing the Nasdaq approval.

"Nasdaq," said veteran Bear Stearns trading executive Aldo Parcesepe, a critic of the application, "should be a utility and nothing else. I don't understand how it can be a central collection point and then step forward now and be a competitor. It doesn't make sense," he added.

Parcesepe's complaints echo those of some other traders who believe that Nasdaq, as a former regulator and onetime child of the National Association of Securities Dealers, will have unique advantages as a for-profit exchange. The issue continues to divide the trading profession.

"I have no problems with Nasdaq reorganizing itself as an exchange if they feel that it will allow them to provide a more competitive platform," said Mark Madoff, a trading director for market maker Bernard L. Madoff Investment Securities.

Madoff argues that Nasdaq, as a for-profit exchange, will bring more competition to the marketplace. "And even the suggestion of more competition between markets is a good thing," he added.

Fragmentation

The Big Board letter to Congressman Doug Ose (R-Calif), a rehash of previous letters to the SEC, nevertheless raises some other contentious matters on the minds of traders. NYSE Big Board Counsel Richard Bernard wrote that Nasdaq's exchange application, as presently constituted, will further fragment the market and will hurt the individual investor. He argues that Nasdaq's market structure was conducive to conflicts of interest and the dot.com bubble of the 1990s.

"As the stock prices rose and then collapsed in the after-market, Nasdaq dealers went along for the ride, stepping between public orders to pocket the spreads. Derelict directors, ethically-challenged executives and accountants without accountability then destroyed real companies with financial gimmickry, shedding what was left of investor trust and confidence," according to Bernard.