Several regulators and much of the securities industry aren't doing enough to warn investors about online trading, says one government agency that is studying the issue.

The Securities and Exchange Commission, the National Association of Securities Dealers and, most of all, broker dealers are among those that must do more to prevent investors who trade online from hurting themselves. That's according to a recent report of United States General Accounting Office.

The regulators and the brokerages are failing to provide investors with adequate warnings at Web sites, the GAO said. A big oversight, the GAO said, was the failure to adhere to a NASD rule that requires disclosure of margin regulations to investors who are online traders. The GAO report found about one third of brokerages were not meeting this standard. The report calls for the SEC to "ensure conspicuous plain English disclosure of margin risk."

More laws and regulations are not needed to protect the integrity of market data information, according to Securities Industry Association President Mark Lackritz. Testifying recently before a Congressional subcommittee, Lackritz argued that market information is now transparent.

That development, he added, "has facilitated the growth of an entire industry of market data vendors that add analytic information and news services to basic market information and sell it to market participants and others."

Individual investors, he argued, now have access to information that was previously only available to financial professionals.

Lackritz told a Congressional subcommittee that "granting new property rights in database protection legislation, no matter how well intentioned, will vest control of market information into the hands of a single source monopolies in the securities industry."

The Securities and Exchange Commission is studying the issue and is expecting a report from its market data advisory panel sometime this month. The securities industry – especially trading firms – has much at stake on this issue. It is estimated that both Nasdaq and the Big Board garner some $100 million in yearly market data revenue. But both organizations have contended that these funds are needed to offset the costs of self-regulation and the costs of market data collection.

Futures contracts based on single securities and narrow-based indices – so called securities futures products or SFPs – will be considered both securities and futures contracts under a proposed new law.

This proposal comes from the Commodities Futures Commission (CFTC), which is writing new rules based on the Commodity Futures Modernization Act (CFMA) of 2000.

The CFTC has adopted the first step of final rules on futures contracts. The group that wants to trade SFPs will have to register with both the SEC and the CFTC.

Trading Anew

In order to facilitate the trading of these new financial products, which had been prohibited for almost two decades, the CFMA directs both agencies to change their rules to permit an entity that is already registered with one agency to "notice register" with the other agency, without unreasonable restraints or requirements, for the limited purpose of trading SFPs.

*Nasdaq London International Financial Futures and Options Exchange Markets (NqLX) appointed Robert Fitzsimmons acting chief executive. He is president and chief operating officer of NqLX. David Harris was named general counsel for NqLX. He was previously counsel to the chairman and chief executive of the National Association of Securities Dealers and the Nasdaq Stock Market.

*Bob Padala joined Prudential Securities in New York as a managing director and co-head of equity trading. He was previously with Credit Suisse First Boston.

*Don Meccia joined William O'Neil & Co. in Los Angeles in the firm's institutional services department. He was previously with BNY ESI & Co. in San Francisco.

*Williams Capital Group in New York hired Betsy J. Hoffman as vice president, senior sales trader. She was previously with First Albany Corp.

*Ohio Bureau of Workers Compensation in Columbus, Ohio, hired Keith Zolkowski as a buy side trader. He was previously with First Fiduciary.

*Dennis M. Murray was elected to the board of governors of the Board of Trade Clearing Corporation (BOTCC) in Chicago. He is vice president, regional director of operations at J.P. Morgan Futures in New York. Michael C. Dawley was named vice chairman of the BOTCC. He is vice president of futures operations at Goldman, Sachs & Co. in New York.

*Credit Suisse First Boston in New York hired Gary G. Lynch as its general counsel. He was previously a partner at the law firm of Davis Polk & Wardell and was formerly director of enforcement at the Securities and Exchange.

*Kevin Willsey, previously with Goldman Sachs, joined J.P. Morgan Chase in New York as co-head of equity capital markets.

*Bridge Trading Company in St. Louis, MO., named a new executive team to manage the firm's operations: Scott Marsh, previously senior vice president, OTC trading, was named managing director; Richard Paulson, formerly senior vice president and chief financial officer; was made executive vice president and chief operating officer; and John Sintzel, previously senior vice president, listed trading, was named executive vice president. Zachary Snow, who was executive vice president of Bridge Information Systems, was tapped as interim president and chief executive, pending the closing of the sale of Bridge Trading to Reuters.

*The Board of Governors of the Philadelphia Stock Exchange renewed Meyer "Sandy" Frucher's three-year contract as chairman and chief executive.

*Edward J. Johnsen joined the law firm of Katten Muchin Zavis in Chicago as a partner in the firm's financial services practice group. He was previously director and head of equities compliance at Deutsche Banc Alex. Brown.

*Jefferies & Company in New York hired Brian O'Dowd and Mike Silver as position traders. Both were previously with Knight Securities.

*The Securities and Exchange Commission named Rosalind R. Tyson acting regional director of the Pacific regional office. She was previously associate regional director for regulation in the Pacific regional office. Stephen M. Cutler was appointed acting director of the division of enforcement. Cutler, who was previously the division's deputy director, succeeds Richard Walker.

*Merrill Lynch named E. Stanley O'Neal as president and chief operating officer. He was previously president of the firm's U.S. Private Client Group. Joseph W. Prueher, former U.S. Ambassador to the People's Republic of China and a retired Navy Admiral, was elected to the firm's board of directors.

*Lehman Brothers in Tokyo appointed Yashwant Bajaj as global head of the

firm's Japanese cash equity sales group. He was previously a senior vice president in Lehman's equity division in Tokyo. The firm also hired Ashley Kent, from ING Barings, as head of it's Japanese cash equity sales team for it's London office.

The Big Board-Nasdaq rivalry is becoming even nastier.

Nasdaq's claim of smaller spreads and better executions than on the Big Board was based on a study using flawed methodology, according to NYSE officials, who have just fired the latest volley in the battle of studies.

Nasdaq's study measured spreads and execution standards in a nine-day period of April, say Big Board officials, who have just released their own study on best execution and decimalization.

"Quoted spreads measured in dollars were narrower on the Nasdaq during the period of the study," according to the NYSE, "but this finding is greatly reduced or reversed when the spreads are expressed as a percent of share price, a better price comparison for many purposes."

Effective spreads, NYSE officials contended in their study, are a better measure than quoted spreads. Another reason why the Nasdaq study is skewed, they added, is that the NYSE tends to execute more large trades. NYSE traders are more sensitive than their Nasdaq counterparts to the potential market impact associated with their trades.

"In short," NYSE officials conclude, "while we do not advocate drawing firm conclusions from nine days of data selected from the immediate aftermath of Nasdaq decimalization, the data actually tends to favor the NYSE."

That conclusion was rejected by Nasdaq officials. Mike Edleson, Nasdaq's chief economist, said, "that I would be fired if I tried to put a study together like that."

Traditionally, Nasdaq spreads have been bigger than those on the NYSE, he said. "But the truth is that today our spreads, whether you want to use quoted or effective, are generally better than those on the New York Stock Exchange."

The march of progress means the end of about 150 jobs on the New York Stock Exchange.

The remaining 150 stock market reporters – who once wrote all orders in pencil but today the only orders they generally take down are for lunch – are going to be phased out over the next few months.

Orders are now entered through automation, so over the last few years, stock market reporters "had nothing to do," said Richard Grasso, the chairman of the exchange.

Stock market reporters are veterans, a living part of the exchange's history. Service ranges from 17 to 45 years, according to a spokesman.

There were 300 stock market reporters at the beginning of the 1990s, but slowly they have been phased out as they retired or moved on to other jobs. The last 150 reporters will be offered a severance package, the spokesman said. The severance formula calls for a year of regular salary plus two weeks pay for each year of service. Those who want to continue to work will be offered the position of senior floor trainee, which is a messenger job.

The end for the reporters comes as the NYSE introduces its open-order book. That's an electronic system that allows outsiders to see the most recent price for a share as well as all pending bids and offers, which would be updated every ten seconds or sooner.

Jefferies & Co. has decided to wait out the storm in the dealer markets.

The institutional market maker is hoping for bid-ask spreads to recover before resurrecting its ambitious plan to make markets in 3,000 Nasdaq stocks, according to the firm's president John Shaw.

Jefferies, in fact, is freezing its Nasdaq roster at 1,600 names. That's because, it says, decimalization has narrowed spreads so much that trading carries more risk but less reward.

Jefferies' traders are told not to trade much in the current market environment unless it is to fill customers orders. "We're encouraging people to be flat at all times," Shaw said. Previously, a trader might go long 5,000 to 10,000 shares in 10 or 12 names, wait for one or two to take off, then flatten the rest and ride the upswing.

"Now, you can't do that," Shaw said. "You don't get enough movement in the stocks." Spreads have shrunk, but volume and volatility have not increased. Traders must take on larger positions to make the same profits. "It's a much more dangerous game," Shaw said.

Jefferies began its ramp-up in January 2000 when it traded just 600 issues. It wants to be in the top 3,000 Nasdaq stocks to satisfy customers that trade baskets, which mirror such indices as the Russell 2000.

Shaw is cautiously optimistic that spreads will widen in the near term. "With SuperSOES, you might see spreads return a little," he said. "I don't mean in the top 120 names or so, but in the names where agency doesn't really work and you need spreads to get liquidity."

The top Nasdaq stocks are expected to trade on an agency, rather than principal basis. Traders will represent customer orders as brokers rather than fill them as dealers using their capital.

Charles Schwab is reportedly in talks to buy Jefferies for its institutional network. The market making giant would likely disband Jefferies' Nasdaq operation, sources speculate, as it already runs the second largest Nasdaq desk on the Street.

The firm had no comment. However, a source close to Jefferies said management has always said it wants the firm to remain independent.

Penny ticks have pushed rebates and liquidity guarantees on Nasdaq trades lower at two of Wall Street's top Nasdaq wholesalers.

As April's cut in the minimum trading increment from six-and-a-quarter cents to a penny has increasesd the risk for dealers, Knight Trading Group and Bernard L. Madoff Investment Securities have reduced the size of their rebates for orders and are executing fewer shares at the inside.

Penny increments, mandated by Nasdaq under decimalization, have led to a reduction in the number of shares quoted at the inside. The lack of depth means market makers must frequently unwind their positions at prices less favorable than when they were created. Consequently, the value of the client orders that create the positions is diminished.

"As depth has dropped to below 300 shares and the effective spread is as little as a penny, an order has a different trading value," explained Knight chief executive Ken Pasternak. Shares at the inside have declined across the industry from an average of 1,100 before April to 300 today, Pasternak noted.

Knight has even gone so far as to eliminate rebates to one group of clients and charge another group – active traders, such as day traders and program traders – a half-penny per share to execute orders.

Still, Knight has no plans to cut rebates to its core client base of online discounters, Pasternak said. "We don't believe their economic profile nor the marketplace is ready for that," he said.

Mark Madoff, a co-director of trading at Madoff, says the family-run firm has no intention of charging any of its customers a fee. Madoff is sticking with the rebate and liquidity guarantee policy it instituted two years ago.

Philip R. Berber made his millions building and then selling CyberCorp., a direct access brokerage system.

Now the wealthy Irishman has had enough. He netted $200 million in the sale of the half-billion dollar landmark product. And half of his $200 million will be used to fight global poverty.

Berber and his wife, Donna, who make their home in Austin, Texas, are not the type that go to the usual round of posh cocktail parties these days.

They can be found at work on their foundation, A Glimmer of Hope, a magnanimous non-profit outfit that promotes poverty eradication projects in Ethopia, Ireland and in Donna Berber's native U.K.

The foundation's most recent initiative: a $3.6 million dollar national aid package in Ethiopia, which is distributed across eight regions.

The funding covers projects on HIV/AIDs, water, education, training, and health. About $1 million has been set aside for a model village in Ethiopia's Dembi Dollo.

"If we can show over the next few years that our approaches and projects work in a village like Dembi Dollo – and it becomes self-sustainable for the long term – then perhaps the approach could be applied to every village in Ethopia, maybe Africa," said Philip Berber. "Utopia in Ethopia is when they don't need us any more."

Berber sold his CyperCorp. for roughly $488 million about two years ago to Charles Schwab Corp. at the height of the online trading boom.

Old-timers may remember these days in the stock- trading world: no national best bid and offer; no efficient way to reach between markets; and markets that were crossed.'

Amazingly this description still covers stock option trading today. More amazingly, this is actually a vast improvement over the options market that existed about two years ago.

Back then, most options were traded on just one exchange, leaving investors subject to both the price available on that exchange and the vast differences in technology that exchanges had to offer.

While investors could see the price of an exchange's bid and offer in each options series, the options tape' – the Options Price Reporting Authority, or OPRA – did not show the size of quotes.

With customer trading fees dwarfing market maker fees, customers subsidized market makers through both high fees and non-competitive spreads.

When the International Securities Exchange announced in November 1998 that it would begin trading in early 2000, the effect was dramatic. It spurred rapid change.

First, the Chicago Board Options Exchange opened the door to multiple trading in the summer of 1999. By the end of that summer, the American, Pacific and Philadelphia Exchanges had all followed. Competition reduced spreads and drove exchange fees for customer orders to zero.

When the ISE opened in May 2000, it provided its members with quotes and displayed size and an efficient all-electronic trading platform. Within months, customer fees fell well below zero. Each of the five exchanges received Securities and Exchange Commission approval to institute formal payment for order flow programs. Finally, this January, OPRA began carrying quotation sizes for all five exchanges.

Having entered the equities equivalent of the 1970's, the options exchanges now are designing efficient intermarket facilities. Actually, this took some prodding from the SEC, which issued an order requiring the exchanges to submit a plan for linking the markets by January of 2000. The ISE, CBOE and Amex jointly submitted a plan in which exchange members continue to choose the market to which their orders are sent.

Once an exchange receives an order, specialists and market makers that choose not to trade at the inside national market could use the linkage to send the order away. In contrast, the Phlx and PCX each submitted different versions of a plan based on strict price/time priority, where a central switch' automatically would route an order to the market that was first in time at the inside price.

Last year the SEC approved the ISE/CBOE/Amex plan. The SEC simultaneously adopted a trade-through disclosure rule,' requiring broker dealers to disclose trade-throughs to their customers, but exempting from the rule orders sent to linked markets.

With the SEC having rejected strict price/time priority, (and facing the burdens of the trade-through disclosure rule), the Phlx and PCX joined the approved linkage. The exchanges then hired the Options Clearing Corporation to build the linkage. The implementation is scheduled for 2002.

Not willing to wait for the full linkage to be built, the ISE and the CBOE also established a bilateral interim' linkage. This linkage is up and running. Market makers on each exchange can use the automated execution facilities of the other exchange when they are holding an unexecuted customer order. This interim' linkage takes advantage of existing order-routing facilities and hints at the benefits of a full linkage.

Completing their journey from medieval times, the five options exchanges have agreed in principle to an NBBO. Again, this was not entirely voluntary. In settling an SEC and Department of Justice antitrust investigation, the four floor-based exchanges agreed to revise the plan governing OPRA to remove certain provisions that the SEC and DOJ found anti-competitive. As part of this process, the exchanges have agreed to disseminate an NBBO. But nothing comes easy, like all else in the options arena.

While the ISE, CBOE and Amex have come in with a common approach to calculating the NBBO, the Phlx and PCX again have each submitted their own NBBO formulations. Once more the SEC will need to play referee to declare a winner.

As often is the case in the securities markets, the options exchanges are limping along, with SEC prodding, to enhance transparency and increase efficiency in their markets. The steps that the exchanges have taken in the last two years are remarkable. The remaining steps are no less daunting.

Michael Simon is senior vice president and general counsel of the International Securities Exchange, the electronic options exchange.