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May 31, 2004

OTC Market Makers Striking Back

By John A. Byrne

In an unusual request, the Securities and

Exchange Commission has been urged by advocates of traditional OTC securities trading to approve Nasdaq's application to become a bona-fide national securities exchange. These proponents run the United States Capital Markets (USCM), which sees itself as the embodiment of authentic OTC market making. The group believes Nasdaq is abandoning market makers. The company founders are Nasdaq activist Arthur Pacheco of Bear Stearns and K. Richard Niehoff, the former president and CEO of the Cincinnati Stock Exchange.

USCM has dreams of building a new OTC market for small and emerging companies. It would be "focused on the news of issuers, investors, and broker dealers whose interests coalesce in a pure OTC market structure." But its backing for the Nasdaq exchange application, comes with a condition: Nasdaq must divest itself of the OTC Bulletin Board.

"We conclude that Nasdaq's OTC Bulletin Board is fundamentally an OTC trading facility," the USCM founders wrote to SEC Chairman William Donaldson. If a separation finally succeeds, USCM has another idea: It wants to acquire the OTC Bulletin Board. Pacheco last year organized a group of industry pros and potential financial backers to purchase this freewheeling OTC market. Nasdaq executives have informed Pacheco's group, "that they do not wish to continue discussions with us and the OTCBB is essentially not for sale pending further internal reviews," a source notes. Lately, however, other sources add, USCM has been optimistic about a change of heart.