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July 15, 2007

OTCBB Dealers Line Up Against NASD Proposal

By Peter Chapman

Market making firms and their advocates are attacking another proposal by the NASD to make it easier for ECNs to charge access fees in the OTC Bulletin Board market.

Several prominent OTCBB dealers as well as the Security Traders Association and its New York affiliate have petitioned the Securities and Exchange Commission to deny an NASD request to amend its Rule 6540(c).

The changes would make it so that ECNs or ATSs would not have to display access fees in their quotes if the fees did not exceed certain levels.

Under Rule 6540(c), ECNs must publish their access fees, those charges market makers and others must pay to trade on ECNs, in their quotes. Today, no ECN charges a fee, but the fear is that they will under the proposed loosening of the rule.

"The proposal would effectively eliminate NASD Rule 6540(c) altogether," Kevin Murphy, a Citi executive complained to the SEC in a comment letter. "Even access fees less than $0.003 per share can quickly add up to create a substantial fee per trade."

The NASD is proposing to eliminate the requirement to display the fee in a quote if the fee is less than (a) $0.003 per share for stocks trading $1.00 or more or (b) 0.3 percent for stocks trading less than $1.00.

The change could hit dealers in their pocketbooks and lead to rancorous battles between them and the ECNs. That's how it was in the Nasdaq market before the SEC's Regulation NMS capped fees and let market makers charge them as well.

Then as now, dealers complained the policy of letting only ECNs and not market makers - charge access fees was unfair. They also maintained it led to destabilized markets.

This is the second time in the past two years the NASD has tried to alter Rule 6540(c). It first tried to eliminate the rule completely but abandoned that attempt in April.

It first argued rescission of the rule was necessary if it was to eliminate sub-penny quoting in the OTCBB market, a proposal it also recently abandoned.

Now the NASD says Rule 6540(c) conflicts with Rule 2320(g)(2) which bans ECNs from quoting two different prices for the same order one on its internal book and another in the public marketplace. Rule 6540(c) could also force the ECN to make two trade reports of two different prices rather than just one. That is prohibited as well.

Market makers maintain the NASD can solve that problem by addressing Rule 2320(g)(2) directly rather than getting at it through access fees.

The NASD's proposal is not without its supporters. Archipelago Trading Services, operator of the ArcaEdge ECN, believes the proposal will "modernize the OTCBB market."