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February 16, 2007

OTC Market Makers Get More OATS, New Rules

By Peter Chapman

The NASD is expanding its rules for front-running in the OTC market.

The regulator plans to repeal its Rule 6541, which prohibits market makers from trading ahead of customer limit orders in OTC Bulletin Board securities.

Simultaneously, the NASD will extend the application of its Manning Rule to all over-the-counter equities. Manning, or NASD Interpretative Material (IM) 2110-2, currently applies to trading ahead of customer orders for exchange-listed securities.

The upshot is that Manning-pending approval from the Securities and Exchange Commission-will now cover OTCBB and Pink Sheets securities.

Some aspects of Manning are more stringent than those of Rule 6541 it replaces. Under 6541, for instance, traders must fill their customers' limit orders within five minutes to avoid being charged with trading ahead.

Under Manning, they have only one minute. Also under 6541, market makers can trade ahead of customer orders if the customer agrees and the order is greater than 10,000 shares or $20,000. Under Manning, the order must be greater than 10,000 shares or $100,000.