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July 27, 2005

Transparency-Plus for Bulletin Boards

By Peter Chapman

(Traders Magazine, July 2005) -- Market makers in over-the-counter securities, in a twist, have imposed a rule on themselves.

Most dealers in Bulletin Board and Pink Sheets stocks now to some extent comply with the Securities and Exchange Commission's limit-order display rule.

The eight-year-old rule was drafted for the Nasdaq market and does not apply to the trading of OTC securities. OTC wholesalers, though, have voluntarily adopted it.

"A few of the bulge-bracket firms," explained Gregg Dudzinski, head trader at wholesaler Wm. V. Frankel, "have said, if you want my orders, you have to display them.' We do it for customers that request it."

The move to display limit orders, notwithstanding pressure from order senders, actually started within the dealer community itself. Citigroup Global Markets, which entered the OTC market last year, was first to adopt the controversial practice. Other large dealers such as Brokerage America, Knight Capital Group and UBS Capital Markets soon followed suit.

Citigroup, which has had its share of regulatory troubles in recent years, took the surprising step after it began trading OTC names last year. Behind the move, according to Citigroup execs, was the concern that regulatory scrutiny was only going to increase anyway.

Dealers, by and large, do not like to post customer limit orders. That's because they compete with their own orders, have costs associated with them and produce no revenues.

The SEC's limit order display rule was the centerpiece of its Order-Handling Rules imposed on market makers in the wake of the Nasdaq price-fixing scandal of the 1990s.