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January 3, 2006

Manning Gets A Makeover

By Peter Chapman

The NASD's 10-year-old rule preventing Nasdaq market makers from trading ahead of customer limit orders has become more stringent.

Starting next month, market makers holding customer limit orders must pass on the price differential between the limit order and the price they receive if they choose to trade ahead of the order.

"If you trade at a price equal to or better on the same side of the market," Richard Wallace, the NASD's chief counsel announced at a recent gathering of traders, "you have to give a protected order the same price."

As it stands today, market makers who choose to trade ahead of a customer's limit order for their own accounts are only obligated to fill that order at its limit price.

Under the NASD's new interpretation, if they choose to trade ahead and execute at a price superior to the customer's limit order they must pass on that differential to the customer.

Manning states that dealers may not trade for their own accounts ahead of customer limit orders unless they subsequently fill the order.

The SEC received no comment letters regarding the NASD's new interpretation.

The contentious Manning rule was fought vigorously by Nasdaq market makers for 11 years before it finally became a regulation in1995.

Its namesake, William Manning, is a co-founder of the $9 billion money management firm Manning & Napier Advisors in Rochester, N.Y.