Richard Repetto
Traders Magazine Online News

Why Do Exchanges Own Multiple Licenses? It's Not Hard To See, Look at the SEC

In this recent research note, Sandler O'Neill + Partners, L.P. Principal Richard Repetto examines why the public exchange operators hold multiple licenses and that rationale behind this phenomenon.

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December 1, 2004

More Curbs on Trading Ahead

By Gregory Bresiger

A rule change proposed by the NASD to extend the Manning Rule is still pending with the Securities and Exchange Commission. The nominal parent of Nasdaq is asking that the rule, which generally bars a firm from trading ahead, be extended to customer market orders. "As such," according to the filing, "NASD is proposing that a member be prohibited from trading for its proprietary account on the same side of the market as a customer market order, if that customer market order has not been executed fully and promptly." The rule would cover trading in any Nasdaq or exchange listed security.

The proposed rule stipulates what is required if a member has multiple orders on both sides of the market that have not been promptly executed: "The member must have a written methodology in place describing the way in which the member will cross or otherwise execute such orders that is reasonable..."

One trader endorses the rule extension. "It protects the investor and that is essential to our industry," said Nick Ponzio, president of Hill Thompson Magid. However, he added that held market orders may not be the most effective when trading in illiquid securities. "These securities are particularly subject to market impact. When we are trading illiquid securities, we should have leeway to skillfully work the order in a way that provides best execution for the client," he said.

Indeed, the rule contains a few exemptions, one of which covers proprietary trades "that are part of an execution, on a riskless principal basis, of another order from a customer (whether its own customer or the customer of another member)."