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August 31, 2003

Nasdaq's Subpenny Trading Contradictions

By Gregory Bresiger

Nasdaq has filed with the regulators for permission to conduct subpenny trading. This is even though Nasdaq officials have previously said that they believe subpenny trading can cause serious harm for the trading industry.

"They're taking a smart position. They want the ability to do it if the practice becomes widespread," said a Nasdaq trader, who didn't want to be quoted by name, but was acquainted with the proposed rule change and petition.

"The Nasdaq move makes sense because their electronic counterparts don't need a rules change to be able to suddenly do it and outflank them," the trader said. Island, Instinet and Brut are among the ECNs that allow subpenny trading. A trading industry executive speculated that Nasdaq is ready for the SEC to reject its request. "Then they'll be able to say to the SEC that there's an uneven playing field and they should rein in electronic firms doing sub-penny trading," said the executive.

John Heine, a spokesman for the Securities and Exchange Commission, confirmed that the Nasdaq filing has been made.

Nasdaq officials didn't respond to repeated requests for comment. However, Rick Ketchum, who left Nasdaq earlier this year and who had been serving as president, said that subpennies, if approved by regulators, would provide an unfair advantage in various circumstances.

Subpenny traders, said Ketchum at a conference at Baruch College, can "step in front of other orders with sub-pennies because systems like Lava will recognize them and put such orders ahead of others."