Senator Hillary Rodham Clinton (D- N.Y.) delayed the passage of Section 31(a) tax reform, which recently cleared its final hurdle in the Senate and was signed into law by President George W. Bush.

Clinton placed a hold on the reform bill to call attention to a tax relief bill that was pending in the Senate, according to a spokeswoman. However, she later lifted the legislative hold and the spokeswoman says the Senator, who ultimately voted for the tax reform, "strongly supported" the Section 31(a) bill, HR 1088.

The spokeswoman for Clinton said the senator took the hold off the Section 31(a)bill after calls from the securities industry and unions. But she added that the hold helped the passage of a bill to extend tax relief to the victims of the World Trade Center attack.

U.S. Treasury

Section 31(a), a part of the securities law that dates back to the 1930s, was designed to fund the costs of securities regulations. But it has been putting much more in the coffers of the United States Treasury than needed [see chart].

Reform of the transaction tax was possible this session of Congress, despite failing in the previous two Congresses. This time supporters of the tax cut were able to generate bi-partisan support by hammering the theme that most households in America now hold stock.

For example, about half of American households with income of between $35,000 and $50,000 owned mutual funds in the year 2000, according to the SIA. That's about twice the number of households that had funds in 1988.

Supporters of Section 31(a) reform probably won their battle this time because they argued that middle-class people are more likely to be hurt by the tax than the securities firms that sell them financial products. For example, former SEC Chairman Arthur Levitt, in testimony before Congress in February 2000, estimated that investors paid 82 percent of the Nasdaq securities fees, while market makers paid 18 percent. The story was about the same on the Big Board. At the NYSE, Levitt estimated that investors paid 87 percent of the fees, while market makers paid 13 percent.

But for trading firms the Section 31(a) reduction does amount to a significant saving. One dealer, Bernard L. Madoff Investment Securities, will likely save between $1 million and $3 million annually, according to Mark Madoff, director of listed trading for the New York-based firm.

The signing of the reform bill by President Bush in the White House was attended recently by Capitol Hill heavyweights and industry leaders, including John Giesea, president and chief executive of the Security Traders Association.

The Nasdaq Stock Market may soon see a massive expansion in soft-dollar services offered by dealers. That follows the SEC's approval of eligible riskless principal transactions, which are acceptable in commission' business for research and brokerage services. It is a radical step for Nasdaq.

The soft-dollar industry is the province of agency transactions, a form of business that seems ready to expand on Nasdaq since the introduction of decimal pricing. Until recently, Nasdaq was driven by principal trading, in which dealers made money on spreads. Soft dollars were an insignificant factor. This spread, or net-based trading, however, is no longer a profitable arrangement for many dealers, many of which are suffering through shrinking margins.

Charging Commissions

Now more Nasdaq dealers are adjusting to decimal trading – charging a commission-equivalent,' or a form of commission on trades that are handled on a type of principal basis. It might be semantics, but this practice allows a dealer not to risk the firm's capital. So Nasdaq may now see more soft-dollar programs entering the industry, some pros say. (Soft dollars are huge on the listed markets, which are driven in large part by agency transactions.)

As part of the move toward a new agency environment, the National Association of Securities Dealers modified its trade reporting rules for certain riskless principal transactions. It requires "riskless principal transactions, in which both legs are executed at the same price, to be reported once, in the same manner as an agency transaction, exclusive of any markup, markdown, commission equivalent, or other fee," the SEC noted in a release.

The Securities and Exchange Commission, pressed by Nasdaq, made commission dollars generated by these transactions eligible for soft-dollar services. "Nasdaq urged us to interpret the Section 28(e) safe harbor [of the Securities Exchange Act of 1934] to apply not just to research and brokerage services obtained in relation to commissions on agency transactions, but also to such services obtained in relation to fully and separately disclosed fees on certain riskless principal transactions," the SEC noted in the release.

For money managers who transact orders with dealers on Nasdaq, the SEC says the new arrangements fulfill the goals of the Section 28(e) safe harbor. The SEC notes: "A money manager relying on the safe harbor must determine in good faith that the amount of commission' is reasonable in relation to the value of research and brokerage services received. This requirement presupposes that a commission paid by the managed account is quantifiable in a verifiable way and is fully disclosed to the money manager."

Fees on traditional riskless principal transactions, which are not eligible for soft dollars, can include an "undisclosed fee," which disguises a dealer's profit.

Credit Suisse First Boston took millions of dollars in inflated commissions from customers and has been censured and fined a massive $100 million, according to NASD Regulation. CSFB took the commissions in exchange for providing clients with allocations of much in demand IPOs, regulators said.

"This conduct was a blatant disregard of NASD rules and a serious breach of a firm's responsibility not to exploit its position as an underwriter. CSFB's behavior undermines the integrity of the capital-raising process," according to Mary Shapiro, president of NASD Regulation.

Regulators said, after a 10-month investigation between May and June 2000, they determined that the commission/IPO practice was widespread. Clients generally paid CSFB six cents a share for executing an agency trade. In the case of the illegal IPO purchases, commissions ranged from $1 to $3.15 per share, regulators said.

"For example," said NASD Regulation, "during the last quarter of 1999, over 3,000 trades were done at these excessive commission rates and hundreds of them were executed with a commission rate of $1 per share or more. Customers paid brokerage commissions of over 12 percent of the principal amount of the trade and numerous accounts provided CSFB with unlawful payments of hundreds of thousands of dollars in a single day as part of these profit-sharing arrangements," according to NASD Regulation. CSFB, which neither denied nor admitted the charges, agreed to a settlement with the regulators. It includes the hiring of an independent consultant.

*Cantor Fitzgerald in New York hired Richard Tipaldi, Joe Callaci, and Jeff Casciano as equity traders. Tipaldi and Callaci were previously with Fleet Trading while Casciano came from Knight Trading Group. Bill Birney, formerly with Knight Trading, Bill Crow, from NDB Capital Markets, and Tom Kackle, previously with ABN AMRO, joined as sales traders. Jim Thompson, from Bear Stearns, joined as a market maker.

*David Strandberg joined Archipelago ECN in Chicago as director of issuer services. He was previously with Nasdaq.

*Jeff Gamble joined Jones & Associates in Portsmouth, N.H., as a sales trader. He was previously with Raymond James.

*Hill Thompson Magid hired Frank Vallone as vice president of broker dealer services from Schwab Capital Markets; Michael Ehrlich, an alumni of Knight Securities' trading desk, joined as a market maker; while a trio of Gruntal market makers Mark Yutko, Aldo Pantaleone and George Cabrera also joined in the same capacity. Nasdaq legend Lee Bulleri, who will be based in Chicago, also joined Hill Thompson from NDB Capital Markets, along with Cindy Abbott and Lynn Hagglund.

*The Chicago Stock Exchange named A.D. Frazier chairman and chief executive. He was previously president. Frazier succeeds Lee M. Mitchell, who will remain on the exchange's board of directors. Chief operating officer, Paul B. O'Kelly, was appointed to the additional post of president.

*GMST World Markets in Lake Mary, Fla. hired Michael G. Roughton, as a senior vice president for institutional and broker dealer trading. Roughton, who will be based in Philadelphia, was formerly head of institutional sales at Knight Securities. Matthew C. Dunphy joined from Princeton Securities as a Nasdaq trader and will focus on ADRs.

*John B. Tesoro was promoted to head of equity trading at Adams, Harkness & Hill in Boston. He was previously director of institutional sales. Joseph S. Ranieri, a managing director at the firm, was named head of OTC trading. Ranieri, succeeds Benjamin A. Marsh, who assumed a senior sales trader position.

*BrokerageAmerica in New York hired Bora Sultan as senior vice president, strategic business development and execution quality. He was previously with Fidelity Investments.

*Kathleen B. Yates was appointed chief operating officer and president of MarketWatch.com, a San Francisco-based financial news and information provider. Yates was previously with Knight Ridder and Women.com.

*Mike McCauley, a senior equity trader at Fidelity Management, joined PulseTrading in Boston as president.

*Bill Sanford joined NYSE direct access firm Galway Securities Corporation

as director of sales and marketing. Sanford had been in charge of all floor operations at the NYSE for Janney Montgomery Scott as its first vice president.

*Joe Turk, a vice president in correspondent services at U.S. Clearing, moved to Fiserv Securities in Philadelphia as a vice president, also in clearing services.

*Tim Zaleski joined Wm. V. Frankel in Jersey City as a sales trader. He served in that same role with National Securities in New York.

*Canaccord Capital in Vancouver promoted Karen Colledge to vice president and manager of U.S. equity agency trading. She was previously a vice president and sales trader. Colledge reports to Andrew Jappy.

*Bill Harts, the former Salomon Smith Barney managing director of strategic business development, joined Nasdaq as an executive vice president of corporate strategy. He will report to Wick Simmons, chairman and ceo of Nasdaq.

*John Oddie was named CEO of SecFinex, a Web-based trading system for securities lending. He replaces Peter Irons who served as chief executive since the firm was launched in 2000.

*Bear Stearns named Andrew Shortland head of international equity trading. He was previously a senior managing director in the firm's New York office.

*Credit Suisse First Boston hired Eileen Murray from Morgan Stanley as managing director and head of global technology and operations. She will also serve on the firm's executive board and divisional committee reporting to chief executive John Mack.

Net trading in Nasdaq is slowly disappearing, but some on the buyside are worried about what comes next.

That was apparent at the annual convention of the Security Traders Association of Chicago. At a panel discussion, a trio of industry heavyweights argued that explicit fees and agency trading are the future. Executives from Goldman Sachs, Putnam Investments and Nasdaq pitched, but not every buyside trader caught.

The sticking point? Many worry their brokers will claim to be working on an agency basis for commission or commission-equivalent, but pocket a spread as well. "How do you verify?" asked a buyside trader. "I can just see it as an audit issue," she added.

Nasdaq's head of transaction services, Bruce Turner, advised trust. "You have to believe that if the broker tells you he did it as agent, then he did it as agent," Turner said. "If there's a conspiracy out there, the auditors will catch it."

Brian Levine, a Goldman senior market maker, noted his firm had completely ended net trading as of Jan. 2. "Clients are uncomfortable with the possibility they are trading with a fee while we're taking the spread as well," he conceded. "That's very important. That's one reason we moved to explicit fees exclusively."

Still not convinced, the buyside trader had two suggestions. One, the broker states its capacity-agency, riskless principal or principal-on the trade report. Or, two, the broker attaches an identifier to the time and sales data of every trade. "We verify time and sales on the New York Stock Exchange all the time," the buyside trader said. "It's not as clear in the Nasdaq market."

Every possible option remains in play for the future of the American Stock Exchange, the second largest stock exchange in the United States.

"An IPO, a membership buyout, a merger with another exchange are all among the possibilities as well as many others," according to Bob Rendine, a spokesman for the Amex. "Nothing is the favorite at this point."

The comment comes in the wake of the announcement by the National Association of Securities Dealers that it sold its remaining stake in Nasdaq, some 33.7 million shares, which were valued at $440 million. That represented a little bit more than a quarter of Nasdaq's equity, although the NASD will continue to hold some Nasdaq warrants. NASD officials have conceded that "it makes sense" for the Amex to go its own way.

When Amex finally moves on to its next phase, it will mark the end of an era for the NASD: It will mean that the nation's largest self-regulatory organization will have finally exited the trading business. The Amex spokesman said the decision on which option will be selected will probably come by the end of the year.

The new SEC rule that forces trading firms to provide customers with statistics on execution quality has lit a fire under two of the nation's largest brokerages.

In one analysis of Rule 11Ac1-5 Nasdaq statistics prepared by Market Systems Inc., discounters Charles Schwab and Fidelity are shown in a negative light compared to full-service rivals, Merrill Lynch and Salomon Smith Barney.

Schwab executives disputed the results. "It's an old saw that if you torture statistics long enough you can make them say anything you want," said Charles R. Schwab and David S. Pottruck, co-chief executives of Charles Schwab, to a letter in The Wall Street Journal. The furious Schwab execs, responding to an earlier story in a Heard on the Street' column that carried the analysis, noted, "Trade-execution costs represent just a part of overall investor expenses."

"Indeed, many online discount-brokerage firms offer far lower trading commissions than those at full-service rivals, which should be factored into deciding which brokerage firm to trade at," the letter added.

At a conference in Chicago hosted by data analysis firm Market Systems, where The Wall Street Journal article was reprised, some panelists said interpreting and responding to the data on execution quality demanded care. The mechanics of measuring execution quality are "not necessarily always cut and dry," said Andrew David, chairman of Rock Island Securities. "It's like counting chads in Florida."

Broker dealers are staking out their positions in the wake of new disclosure rules from the Securities and Exchange Commission. "The game begins today," Sean McHugh, a vice president of equity compliance at Goldman Sachs, told attendees at a best execution conference in Chicago hosted by data analysis firm Market Systems. "That's what we've told our market centers. There's no such thing as captive order flow anymore."

Goldman now makes its order routing decisions based on new execution quality statistics supplied by market centers under Rule 11Ac1-5. It does so partly because it must comply with sister rule 11Ac1-6 and inform its retail customers of order destinations. Market centers, in turn, are scrambling to position themselves in the new environment. "We explain our [11Ac1-5] statistics in a way that illustrates our comparative advantage," said Paul Wigdor, Pershing Trading Company's general counsel. Pershing said it advises customers to focus on their own execution data rather than the aggregate figures.

Pershing is also trumpeting the superiority of its reported numbers over those of a chief rival, the New York Stock Exchange. Pershing's specialists at the Boston and Cincinnati stock exchanges boast their executions occur at effective spreads' – a key metric – slimmer than those on the Big Board. The Big Board is also telling customers to focus on their own execution data rather than the aggregate numbers. Paul Bennett, the exchange's chief economist, cautioned: "There's more to best execution than just these numbers."

Sandler O'Neill has restarted its Nasdaq desk. It had been shut down for four months following the destruction of its offices at the World Trade Center. Trading has begun at the firm's new midtown Manhattan headquarters.

Prior to the attack, Sandler, which specializes in the securities of small- and mid-sized financial companies, traded about 300 names. It hopes to regain that level by the end of the year. An 18-person research department is covering about 140 names with plans to reach 200 by the end of the year.

Since the attack, the investment bank has hired 44 people, bringing its headcount to 149. It lost 66 of 171 employees in the attack. About 130 worked in the south tower of the World Trade Center.

In the year through August 2001, Sandler traded between 27 million and 34 million shares per month, according to Nasdaq. It generally ranked among the top 100 Nasdaq dealers.

Sandler often ranked as the top trader in many of its stocks. In August, for example, it was the ax in Huntington Bancshares with a 10 percent share; Roslyn Bancshares with a 20 percent share; and Dime Community Bancshares also with a 20 percent share.

M. H. Meyerson, a beleaguered wholesaler, received some more bad news in recent weeks from the National Association of Securities Dealers.

In arbitration, the regulator found Meyerson liable for $5 million in damages for the unauthorized transfer of shares in Whitehall Enterprises, a Bulletin Board stock. (By contrast, top wholesaler Knight Securities, was ordered recently to pay $1.5 millon by NASD Regulation, though for decidedly different market violations.) The shares transferred by Meyerson had been left in its custody by the claimant, CVI Group.

Meyerson, which trades about 4,000 Nasdaq SmallCap and over-the-counter issues, denied the charges and appealed the ruling to the Superior Court of New Jersey. It intends to pay no money until the court settles the matter, it said in a statement.

Nevertheless, Meyerson warned its investors that failure to win an appeal or settle with CVI could have "a materially adverse impact on the company." Total assets stood at $15 million at the end of October, down from $36 million in January. During the same nine-month period, the firm lost a whopping $10 million.

That's largely because its trading profits plunged to $11 million from $57 million a year earlier. In December, management blamed the poor results on slack trading volume and said it was trying to raise additional capital from a private placement of preferred stock. It was also pinning its hopes on the possibility of charging a fee for some of its transaction services.

News of the award cut Meyerson's stock price nearly in half to 38 cents. During the heyday of the Internet craze, it had reached $12. CEO Martin Meyerson, 70, took the biggest blow. He owns 28 percent of the company.