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April 30, 2004

Unemployed Trader Trashes Reg NMS

By Gregory Bresiger

Many of the SEC market reforms of the 1990s went too far and hurt the trading industry. Now the regulators' proposals for trading changes - Regulation NMS - will "sow the seeds for a new series of future regulatory crises," according to Richard Tullo, an unemployed 36-year old New York-based former market maker. "Regulation NMS is like offering a bandage to a hemophiliac," Tullo wrote. He also says the reforms of the 1990s, such as decimalization, caused the loss of many market maker jobs. Tullo worked for CIBC and Cowan & Co., among others over a 12-year period.

"I have begrudgingly become something of an industry activist because I now have the opportunity to speak out," said Tullo, whose last job was as an execution trader for a hedge fund. "Many people who speak out in this industry pay a big price."

In a comment letter to the SEC and in an interview, he complains that the Reg NMS proposed trade-through provisions would reverse the SEC's previously stated requirement that traders "exercise reasonable care" to obtain the best price.

Reg NMS, will "expand the regulatory subsidy that the ECN oligarchy currently enjoys," Tullo wrote. "It is very likely large market making firms and ECNs will offer economic incentives or rebates to their customers, institutional and retail alike, to encourage opting out. It is also equally likely the fund management companies and electronic brokerages will keep the rebates while mutual fund investors pay the price in the form of inferior equity prices." Tullo would like to return to the business. He said he "still loves market making although a lot of the value has been taken out of it."