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Spoofing, Surveillance and Supervision

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January 2, 2007

NASD Mulls an Overhaul of Manning Rule

By Peter Chapman

The NASD may let broker-dealers with market-making operations ignore its Manning Rule when sending their retail orders elsewhere.

The development comes as more trading houses are routing out their retail flow by using smart routing technology.

When using these systems to steer an order to the venue offering the best execution, firms are finding it difficult to comply with Manning, they tell the NASD.

Broker-dealers are currently more inclined to route out their retail flow than trade against it if they are unable to improve the quality of other dealers' fills.

"Firms have made some very compelling arguments, that they are finding it difficult to provide their customers with best execution," Tom Gira, the NASD's head of market regulation, said recently,

"That's because their [SEC Rule 605 execution] statistics aren't as good as the five statistics where they want to direct their order flow," he said.

Under the NASD's Manning interpretation (Rule 2110-2), market makers are not allowed to trade ahead of customer limit orders. That means they cannot trade at prices equal to or better than the customer's limit without first executing that order.

Some broker-dealers, though, would like to be able to segregate their retail flow and route it out without requiring involvement and Manning protection from their dealer desks.

"Years ago," Gira told a group of traders at the Security Traders Association's annual conference, last month, "you never would have heard of market makers sending their order flow away. We're in a different environment today."

The NASD plans to broach the issue with the Securities and Exchange Commission, Gira said.