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January 30, 2008

Specialist Rules Eased at NYSE

By Peter Chapman

The New York Stock Exchange, on the same day Lehman Brothers announced its takeover of Van der Moolen Specialists USA, won approval from the Securities and Exchange Commission to streamline its regulatory process for new specialists.

Behind the abrupt move, the NYSE said in a filing, was the abandonment of their stocks by two of the NYSE's seven specialists, the possibility that others could do the same and the need to make it easier for certain newcomers to become specialists.

NYSE Regulation now has the authority to grant a broker-dealer a temporary exemption from rules requiring it to cordon off a new specialist organization from its other trading operations.

Under NYSE Rule 98, broker-dealers that operate upstairs trading or floor-broker operations must house their specialist units within a separate broker-dealer.

Rule 98 establishes barriers between specialists and their upstairs colleagues to prevent collusion between the two.

The NYSE claims the dictates of Rule 98 have the "potential to impede the approval process for a prospective specialist firm." The exemption still requires the specialist to maintain an arm's-length relationship with other related entities within the broker-dealer.

Late last year, two of the exchanges' seven specialist firms-Van der Moolen and SIG Specialists-gave up their stocks. Van der Moolen traded 416 stocks. SIG, a unit of Susquehanna International Group, traded 147. The NYSE allocated SIG's stocks to Kellogg Specialist Group.

On December 4, Lehman announced it would buy certain assets of Van der Moolen Holdings, allowing it to establish a market-making operation on the NYSE floor.

Lehman also runs a large upstairs trading operation.

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