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November 1, 2003

No Popular Support For ID Pilot Program

By Peter Chapman

A Nasdaq pilot program permitting members the use of a second trading acronym is off to a slow start.

Not many Nasdaq players are representing quotes in SuperMontage under a second market participant I.D. The reason is confusion over the rules governing the program. Firms generally like the idea of having the use of two acronyms, but are seeking clarification from regulators over their use.

The four-month pilot was slated to end November 1, but will likely be extended, according to Nasdaq.

The thrust of the program is to allow a desk - other than a firm's market making desk - to represent quotes under the firm's name. A firm's portfolio desk, for example, could represent a customer on an agency basis without sending the order to the Nasdaq desk. The Nasdaq desk could continue to use its MPID solely on a principal basis.

One problem, sources tell Traders Magazine, arises if the portfolio desk trades with the market making desk on SuperMontage. Under SEC rules, brokerages aren't allowed to act in both a principal and agency capacity at the same time. Another problem occurs if both desks are quoting at the same price and, for instance, the portfolio desk gets hit, but market making does not. If market making is representing a retail order, does it have an obligation to "protect" its client - to claim the fill for itself?

The head of Nasdaq trading at one dealer says he has a solution to the principal-agent conflict. First, establish a Chinese Wall between the market making desk and all other desks so that dealers are not privy to the others' order flow. Second, prohibit market makers from using the second acronym.