March 1, 2004

A Radical Proposal for Nasdaq Market

By Gregory Bresiger

The mother of all market structure changes, part of a package which has been proposed by the Securities and Exchange Commission, is guaranteed to keep a widespread debate alive in the trading industry.

Under the changes, the controversial trade-through rule, which governs intra-market order handling, would be both expanded and weakened.

The SEC wants to extend the rule, which currently applies only to the listed market, to Nasdaq. The proposal calls for a uniform, national trade-through rule.

Despite broadening the rule's coverage, the SEC wants to set limitations on how and when it is applied.

First, market centers would be designated as "fast"- those offering automatic executions - or "slow"- those that don't. Fast markets would not be permitted to trade through fast markets, but could trade through slow markets.

Second, the SEC will allow traders to consider a de minimis exception when trading through slow markets. Depending on the price of the security, traders would be allowed to trade through a slow market if it had the best price by up to five cents per share.

Third, the SEC would permit traders to opt out of any trade through restrictions on a case-by-case basis.

Besides trade through, the SEC also proposed a ban on sub-penny trading; a cap on ECN access fees of one-tenth of a cent per share; allowing Nasdaq market makers to charge access fees; and a change to existing tape revenue sharing arrangements.