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April 16, 2007

A Pioneer Remembered

By Peter Chapman

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In February 1971, the workaday lives of hundreds of over-the-counter market makers were permanently transformed. That was when the National Association of Securities Dealers started requiring dealers to publish their quotes on a brand-new computer system continuously throughout the day.

The change cast a giant floodlight on the murky world of OTC dealing by driving dealers' wholesale quotes out into the open. Previously, the only price information the general public had about thousands of OTC companies were the retail quotes published once a day in the newspaper.

The system, of course, was Nasdaq, or the National Association of Securities Dealers Automated Quotations. It was the creation of Gordon Macklin, then the new president of the NASD and a 20-year veteran of the securities industry.

Macklin, a Cleveland native who in 1975 would become Nasdaq's first president, died in January at the age of 78 at his home in Vero Beach, Fla. He was considered a giant of the industry in his day, respected by both regulators and traders. Macklin was president of Nasdaq from 1975 until 1987, and headed the NASD from 1970 until 1987.

As Nasdaq's leader for its first 17 years, Macklin expanded the fledgling system from a quotation and trade reporting medium, not unlike today's rudimentary Alternative Display Facility (ADF), into a full-blown inter-dealer trading system. Volume exploded during this period, soaring from 2 billion shares to 38 billion shares per year.

In 2000, Traders Magazine Executive Editor Peter Chapman conducted one of the last interviews with Macklin for a story on the history of Nasdaq. We publish for the first time an edited version of the interview here.

TM: In 1971, did you foresee the Nasdaq system becoming the all-purpose trading facility it is today?

Macklin: Nasdaq came on line as sort of an automated Pink Sheets, a quote utility. But the expectation was that it would take on new features. There are many different ways to build a system. We chose to build it in a modular fashion, so that you take one step at a time. If they'd put in a full-blown system back in 1971, I don't think we would have had any subscribers. We really evolved in the way the customers-the owners and the clients-took us. We went from retail quotes to wholesale quotes. We went from wider spreads to narrower spreads.

TM: The first iteration of Nasdaq didn't require actual wholesale quotes. You struck a compromise between retail and wholesale quotes?

Macklin: In order to build a system that would be accepted by the users at the time, it was planned and built-with the SEC's concurrence-with certain features that protected the dealers' profits. It didn't protect them per se, but it made it easier to profit. Before Nasdaq, what they printed in the newspaper were the retail quotes. So, for example, on a $20 stock they would take a quarter [of a dollar] off the bid and add a quarter to the offering price. That was the public quote. So you'd get 211/4 to 221/2. Frankly, that was the custom.

TM: So it would've been a big leap to go to full-blown wholesale quotes.