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March 10, 2009

Before the Fall

By Peter Chapman

By this time, however, the approaches of the competitors had moved closer together. The New York began offering rebates, and Madoff began offering price improvement. The exchange paid order senders $1.60 per order if the order came through DOT and was between 100 and 2,099 shares. Madoff, if the customer requested, would stop the trade at the NBBO and then expose the order to the market over ITS for one minute to try and get a better price.

Still, after Congress took a look at the issue, the SEC followed with some disclosure rules. First proposed in October 1993, they became law in 1995. From then on, brokers would have to inform their customers if they were paid for their orders.

Despite the black eye Madoff got from the payment for order flow issue his firm was on a roll. In 1992, BMIS was doing business with 350 NYSE members and trading 9 percent of NYSE-listed volume. The firm employed 40 traders and was processing 20,000 to 25,000 trades per day. In January 1993, BMIS reported net capital of $86.5 million, making it the 70th-largest firm on Wall Street.

The Madoffs' ties to the NASD were as strong as ever. In the early 1990s, Bernie became chairman of the Nasdaq Board of Directors. The title was largely honorary, as Nasdaq was not yet an entity in and of itself, but it did confer certain advantages. In 1993, Bernie was a member of the NASD's strategic planning committee and the international committee. Also, in 1993, Peter Madoff was elected to the NASD's board of governors. Peter also joined Nasdaq's board of directors for at least three years.

While honorary, Bernie's position as Nasdaq chairman did allow him to fight for causes near and dear to him under the cloak of the NASD. He spent much of his time in Washington during those years, becoming a familiar face in the halls of Congress. "You can't underestimate the influence the Madoffs had on the regulators and the legislators," one former trading executive noted. "They worked very hard at it for 30 years. They spent a lot of time and money securing those positions and relationships. You would see a senator or congressman show up at one of our industry things, and they just walked up to him and spoke like old buddies."

One of the battles Bernie chose to fight involved access by Nasdaq dealers to the Intermarket Trading System for the trading of non-19c-3 stocks. Market makers had had a link to the ITS via Nasdaq since 1982, but were only permitted to use it for trading 19c-3 stocks-stocks that had come public after April 1979. Bernie and the NASD wanted the ITS Operating Committee to extend access to all NYSE-listed names.

At this time, BMIS was still one of the few Nasdaq market makers trading listed stocks off-board. Although it could access the ITS from its perch at the Cincinnati, the ability to trade all NYSE stocks from a single operation had obvious appeal. It would eliminate the need to maintain two systems and membership in two organizations.