Gramm Visit

Senator Phil Gramm (R-Texas), chairman of the Senate Banking Committee, is planning a "field trip" to the monied canyons of New York this month. Gramm, accompanied by committee members, plans to meet with securities leaders, the committee's spokesperson said. The tentatively scheduled visit would allow the committee to take feedback on pending securities legislation, the spokesperson said.

The most important bill is the Securities Market Enhancement Act (SMEA). Gramm still hopes to craft a bipartisan SMEA, the spokesperson said. "We'll just have to see how many issues the members can keep their eyes on," she said.

The spokesperson added that it is too early to say whether the Senate leadership will have time to work with the House and turn out an updated SMEA bill that President Clinton could sign into law. The congressional calendar for 2000 is filling up. The Senate leadership has several distractions, including their re-election campaigns, and the normally hectic presidential campaign season.

Canadian Merger

TD Securities, the Canadian brokerage owned by Toronto-Dominion Bank, will soon become a more formidable trading firm. The parent is acquiring CT Financial Securities in a deal valued at $7.8 billion Canadian dollars (U.S. $5.4 billion). CT Financial, the parent of CT Securities, operates a trading desk with some nine traders.

The desks at TD Securities and CT Securities will be merged under the current plans. TD Securities, which currently has six traders, would see its headcount more than doubling to 15.

The acquisition will mean a "substantial increase in our client base," said Nick Savona, vice president of international trading at TD Securities' desk in Toronto. Savona, whose desk executes Canadian-listed stock trades for U.S. brokerages, said the firm's new customers will have access to "one of the best research teams on the street."

Amex Lawsuit

Despite the possibility of a lawsuit by members at the American Stock Exchange to block Nasdaq's pending privatization, Richard Ketchum, Nasdaq's president and COO, is unfazed. "They have no legal basis," he told a gathering at a recent STANY-Nasdaq town hall meeting in New York. "It doesn't worry me." Nasdaq's future plans do not include the AMEX. That has angered some AMEX members who are counting on its 1998 merger with Nasdaq to reverse the ongoing decline in their equity listings. Ketchum said plans are proceeding for 130 major trading firms to take a 32 percent stake in Nasdaq and for Nasdaq to formally register as an exchange.

While Nasdaq is careful not to alienate some of its smallest members, it is probably happy to sever ties with thousands of them. "It makes no sense to have 5,500 members with little or no interest in the Nasdaq market," Ketchum said. Ketchum surprised some at the town hall meeting when he said that Nasdaq's supermontage proposal is a crucial component in its applicaton to become an exchange. "I was a little surprised myself," Ketchum said. "But the SEC wants to see some form of centralization in the market."

Instinet Online

Instinet is becoming serious about the retail market. The Reuters Group's subsidiary is planning to launch an online brokerage soon. The new online broker is called Instinet.com, according to a Securities and Exchange Commission filing by Reuters. The move was expected. Instinet previously made clear its intention to build a retail franchise.

Some experts note that the online brokerage market is already crowded. But Instinet, which executes a substantial share of institutional Nasdaq orders captured by electronic communications networks, may be able to capture more liquidity in some Internet stocks popular with online retail traders. The new unit plans to offer stock trading as well as provide mutual fund, credit card and other financial services. Meanwhile, London's Sunday Times reported that Reuters may sell as much as 25 percent of Instinet to the public, in a Nasdaq listed offering.

The controversial application of a stock transaction charge, paid twice on some Nasdaq trades, may be finally heading into oblivion.

But don't bet too much on it.

"Coming into this year, I would have given our chances of having a successful passage of [favorable] legislation at 50/50," said Lee Korins, president of the Security Traders Association, speaking about Section 31 fees at a conference in Chicago.

Traders in general, and Nasdaq market makers in particular, argue that as currently arranged, Section 31 fees are unfair. Some market makers say they pay a disproportionate share of the fees because of the large volume of dealer-to-dealer business on Nasdaq. That was not the intention of the authorizing legislation, which has resulted in a huge windfall for the U.S. Treasury.

In Chicago, Korins raised the odds of legislation this year that would reduce the overall burden of Section 31 fees – so-called after the section in securities law authorizing collection – to "60 percent to 65 percent in [our favor]."

"The next 90 to 120 days are crucial in this effort," said Korins, speaking at the same conference, hosted by the Security Traders Association of Chicago. "If we don't get something passed at least in one of the Houses of Congress in that time, then we are probably dead."

Friends in Washington

Korins is counting on friends in Washington. Lawmakers in Congress, spurred by the STA and other Wall Street groups, are considering introducing separate bills in both houses.

Senator Phil Gramm (R-Texas), chairman of the Senate Banking Committee, is weighing feedback on a bill that would include a cap as well as a reduction on transaction fees. Rep. Vito Fossella (R.- N.Y.), who calls the fees a "hidden tax" paid by market makers and other stock traders, is considering the inclusion of a fee reduction in securities reform legislation he is developing. He has support from Rep. Robert Menendez (D.- N.J.).

Rep. Fossella said he plans to send the House Sub Committee on Finance and Hazardous Materials a draft Securities Markets Enhancement Act (SMEA) this spring.

"The goal is to streamline the securities legislation to ensure free and open markets," Fossella said during a telephone interview. Fossella has been meeting with House colleagues, federal and state regulators, stock traders, and broker dealers, he said, to "take a snapshot" of industry and government concerns.

Section 31 fees, mandated by the Securities Exchange Act of 1934, are currently collected at a rate equal to 1/300 of one percent of the aggregate dollar amount of sales of securities. This formula generated nearly $1.8 billion in revenues in 1998, the last year for which complete figures are available, according to the watchdog group, the National Taxpayers Union.

Yet the Securities and Exchange Commission, whose operations are partially funded by Section 31 fees, got a total appropriation from Congress of $315 million that year. The windfall reflected surging stock volume in the bull market.

Currently, the fee is scheduled to be reduced to 1/800th of one percent on aggregate dollar sales of securities starting in fiscal 2007.

Fossella introduced legislation (H.R. 1256) last year to cap those fees on a graduated scale through 2007. Rep. Rick Lazio (R-N.Y.) introduced a bill (H.R. 2441) that would reduce the levy to 1/500th of one percent. However, neither bill has progressed to a floor vote in the House.

Fossella said reducing the Section 31 fee is consistently among the top suggestions offered by most of his contacts in the industry. He said he agrees with industry activists that aggregate Section 31 fees should be proportioned more closely to the current budget appropriated for the SEC.

SEC regulators have complained that the agency has collected more in fees than Congress gives the SEC every year since 1983.

While the coverage remains in the government's general fund to be dispensed by Congress, the commission's budget has not kept pace with market growth. But Fossella said the SEC's budget and the Section 31 fee reduction are separate debates. "I think you can have those debates simultaneously," he said.

Also up for possible inclusion in the House's SMEA bill are industry proposals to reduce what Fossella called unnecessary regulations imposed by both the federal government and by states. The current regulatory environment is analogous to "running 1960s engines in a 1999 car," Fossella said.

Christi Harlan, communications director at the Senate Banking Committee, said Gramm must finish pending legislation promised last year before moving on a Senate version of SMEA. – with John A. Byrne

Stiffer day trading margin and leverage requirements are expected to face little opposition from industry players.

Some of them welcome the rules, proposed by the New York Stock Exchange and the National Association of Securities Dealers.

"I view the overall proposal as positive and helpful," said Richard Roberts, attorney for the Electronic Traders Association, the umbrella group of day trading firms.

Most players see the rules as necessary investor protections.

"I don't think anybody should be risking the rent money in day trading," said Lee Korins, president and of the Security Traders Association. "If they are, they are in the wrong business. People who come to the stock market and think it's another way to get to Aqueduct [Racetrack]are doomed to failure."

Definitions

In separate actions taken by the Big Board and the NASD boards, day trading was defined as the purchase and sale of the same security on the same day. A "pattern" day trader is defined as one who engages in four or more day trades on a single account within five days. The exchanges' joint proposal would require a pattern day trader to maintain a minimum of $25,000 equity on account at all times, compared with $2,000 for other margin accounts.

The NYSE-NASD proposal also lowers the minimum – from 50- to 25-percent – that a day trader must maintain to borrow on margin; prohibits cross-guarantees that allow one investor to cover another's margin call without actually handing over money; and mandates that margin deposits be held for at least two business days. The last requirement is to ensure the financial stability of such accounts.

At press time, the rule change is pending approval by the Securities and Exchange Commission. However, the agency had not yet released the proposal for public comment.

Criticism

The exchanges' initiative prompted criticism in some quarters. John W. O'Donnell, chief executive of Online Trading Academy.com, in Irvine, Calif., was quoted in The Wall Street Journal saying, "I believe the true intent of the rule change is to help market makers hold on to their monopolistic position over the [bid-ask] spread." O'Donnell could not by reached for elaboration for this story.

While declining to comment on O'Donnell's comment, others involved in the securities industry disagreed with his sentiment. Other industry players, however, generally supported the new regulation.

The ETA's Richard Roberts said the proposed changes "sound fairly positive." He contended, however, that "there's a discriminatory element to them," adding that the proposal appears to impose its requirements only on day traders.

Still, he refused to condemn the proposal, at least until the SEC comment period begins. "I'm not interested in name-calling," added Roberts, who is a former SEC Commissioner. "I'd like to think those days are over."

Robert Padala, managing director and head of Nasdaq trading at Donaldson, Lufkin & Jenrette in New York, also declined to criticize O'Donnell's claim. But he said that since 1997, under the SEC's limit order display rule, any customer can force a market maker to display the customer's limit order (of between 100 and 10,000 shares and totaling less than $200,000 in market value) on its screen within 30 seconds. That effectively trumps any monopoly pricing advantage a market maker might enjoy, he said. The SEC has also been diligent in enforcing the rule, Padala added.

Monumental

"I don't think anyone ever knew that day trading would become this monumental," Padala said. The spread of electronic trading in tandem with a booming stock market has enticed uninformed and ill-prepared would-be investors into the markets, he added. Regulators and exchanges, Padala said, "have to come up with something," but he added, "I'm not sure what they've come up with is exactly right."

Korins suggested another reason that minimal leverage and margin requirements are needed: A flood of poorly-educated novice traders unable to meet their financial commitments could overwhelm the exchanges and even listed companies during a panic. "The system is more important than any one individual trading in the system," Korins said.

Wall Street's plan to switch to decimal pricing this year could be sidelined by lack of preparation.

Rep. Vito Fossella (R-N.Y.), who is pushing the industry to prepare for the switch, said he may ask securities exchanges to extend the deadline for implementing decimal pricing.

He said he will take this step if Wall Street leaders reiterate, during Congressional hearings he has scheduled, concerns on preparation.

Fossella said almost every securities industry pro he has talked with has expressed concern about whether the industry is ready for the conversion from trading in fractions to trading in nickels and cents. He would not identify any of the participants but said that they included officials from stock exchanges and broker dealers and traders.

"When you hear statements like that [expressing concern], I think it's appropriate to bring the major players forward to ask, Hey, is the industry ready or not?'," said Fossella, a member of the House Subcommittee on Finance and Hazardous Materials, during a telephone interview. (He is also the House point man on securities reform legislation. See related story on SMEA, page 8).

Delay Possible

Fossella said he hoped a delay would not be necessary, but "it would be in the range of possibilities. Everything has got to be on the table."

No decision has been made on Fossella's late-December call for decimalization hearings, said Peggy Peterson, communications director for House Finance Subcommittee Chairman Mike Oxley (R-Ohio).

Oxley has long been a champion of decimalization. Peterson pointed out that Oxley and Rep. Edward Markey (D-Mass.) proposed a bill in 1997 directing the Securities and Exchange Commission to examine the issues involved in moving the nation's exchanges to decimal pricing. But the industry subsequently adopted its own plans for decimalization, she noted. The bill was allowed to lapse.

Peterson refused to speculate on what Oxley's committee might do if lack of preparation for decimalization is repeatedly mentioned during hearings.

The Securities and Exchange Commision has instructed Wall Street to begin quoting securities prices in decimals by July 3, 2000. A plan by the Securities Industry Association would allow a five-week period, starting on July 3, for implementing decimal pricing on a pilot program of 30 stocks. These stocks would switch to trading in minimum increments of five cents, or to a minimum increment of a penny, for issues that trade in thirty-seconds or sixty-fourths. The SIA plan calls for all stocks and options to be traded in decimal prices, starting in August.

Dan Michaelis, spokesman for the Securities Industry Association said the trade group "would not recommend going forward with its decimalization plan if we were not ready."

Public Platform

Michaelis said the industry welcomed any congressional hearings as "a good public platform" for investor education on decimalization. Preparations for the Year 2000 computer problem had many securities industry groups working closely, he noted, so exchanges, market-makers, and traders should be ready for the change.

Peterson expressed confidence in the industry: "I think [decimalization] is really going to be a very positive change for American markets and for U.S. consumers."

Fossella said, "Everybody who is going to have a role in the conversion to decimals should have a place" at his proposed congressional hearings.

If industry representatives express confidence that the process can go ahead without undue risk, he said, then the conversion should proceed as planned. "But if there are people who are not ready," he added, "then we need to know who they are, and why they are not ready yet."

Dollars and Cents

For more than two centuries, stocks in the U.S. have been valued in fractional price increments. Today, the minimum price increment is 1/16th of a dollar. The U.S., prodded by Congress, will soon join most of the world's other securities markets, quoting stocks as well as options in decimals. That would mean, for instance, price increments of two decimal prices such as $0.05 or $0.01. (Increments smaller than the standard 1/16th are possible on some electronic communication networks but not on a U. S. stock exchange.)

Conversion Table

1/32 = .03125 5/32 = .15625 9/32 = .28125

1/16 = .0625 3/16 = .1875 5/16 = .3125

3/32 = .09375 7/32 = .21875 11/32 = .34375

1/8 = .125 1/4 = .25 3/8 = .375

<TBL>

Is the New York Stock Exchange's floor- based auction about to be replicated in cyberspace? That's the hope behind the Primex Auction System and its Nasdaq partner.

The new venture expects to do for offboard trading what Bernard L. Madoff Investment Securities did in the early years of the third market – siphon order flow away from the Big Board.

But there's a possible snag: some exchange-floor functions can't be replicated by computers, a visiting economist at the NYSE contends.

"Whether or not people can make a better NYSE with software, they are going to try," said Lawrence Harris, a finance professor at the Marshall School of Business, University of Southern California. Speed and efficiency are important to modern stock markets, Harris added, but so are trust and reputation.

The Nasdaq stock market announced on Dec. 9 that it had signed a letter of intent with Primex Trading N.A. The venture plans to execute listed and Nasdaq orders at prices better than the national best bid or offer, starting this summer. Market makers, order-entry firms, electronic communications networks (ECNs), and others will anonymously submit customer orders into an electronic "crowd" (consisting of brokers, dealers, and sponsored institutions). The backers of Primex include Bernard L. Madoff Investment Securities and Goldman Sachs.

The Nasdaq announcement came on the heels of a December vote by the NYSE board to repeal Rule 390. Rule 390 prohibited NYSE member firms from trading NYSE securities listed before April 26, 1979 away from a traditional listed stock exchange. That directive covered 23 percent of listed stocks, comprising 46 percent of the NYSE's volume, according to a recent statement by Chairman Richard Grasso.

The NYSE was not interested in discussing the impact Primex might have on its listed stocks and trading volumes. "I'm just going to decline to comment," said Ray Pellecchia, spokesman for the exchange. Still, the NYSE is not sitting on the sidelines. The exchange has taken steps to introduce web-based trading systems, including an order book that would provide member-sponsored direct execution for orders of 1,000 shares or less. Roger Madoff, a spokesman for Primex, refused comment, pending completion of the final agreement with Nasdaq.

Nasdaq's alliance with Primex could expand that exchange's opportunities for off-board trading of NYSE-listed securities, Harris said. The NYSE "is not a very fast market," he said, noting that systems like Primex could offer services such as on-demand order cancellation or confirmation that the NYSE is not now well-suited to deliver.

But slowness is not always a bad thing in securities exchanges, Harris insisted. The exchange floor is a liquid market, where participants can do things they might not be able to do elsewhere, he said.

Further, a trader wants information on the market that may not be immediately apparent to a machine. Floor-based exchanges like the NYSE offer advantages of institutional memory, judgement, and human interaction, Harris said. "Those relationships cannot be easily duplicated by computers," he added.

W.R. Hambrecht & Co. in San Francisco nabbed most of the trading pros at Volpe Brown Whelan & Co. before the firm's acquisition by Prudential Securities. All told, 22 pros came over from Volpe Brown, including position traders, institutional traders and sales traders. Several Volpe Brown traders immediately assumed management spots at W.R. Hambrecht. John Caruana was named director of position trading, Gary Cuiper was named director of sales trading while Todd Clark was named director of listed trading.

Patrick Cannon joined Deutsche Asset Management in New York as a director and head of U.S. Equity Indexing. Cannon was previously with Barclays Global Investors, where he was a principal and head of small- cap equities.

Mesirow Financial in Chicago hired Susan Schwartzwald as a vice president in its Investment Services Division. She was previously a vice president at Fidelity Investments in Chicago and is the co-author of "Get Real! A Student's Guide to Money and Other Practical Matters."

John Garvey joined Instinet as senior vice president for global risk management. He was previously a partner in the financial services risk management practice at PricewaterhouseCoopers.

Legg Mason Wood Walker in Baltimore named Thomas P. Mulroy executive vice president and head of equity capital markets, with responsibility for the firm's equity research and equity sales and trading departments.

Stephen M. Miller joined Deutsche Banc Alex. Brown as a managing director and head of equities customer merger risk arbitrage trading. He was previously head trader in the risk arbitrage department at Goldman Sachs & Co.

Hill Thompson Magid & Co. in Jersey City beefed up its trading desk with three new traders: Wayne Clayton from Southeast Research, Robert Runnions from Bear Stearns, and Chris Sarkis, formerly of Paragon Capital. Nick DeMaria joined the firm's broker dealer development department. He previously traded equities at Dean Witter, GFI Group and Knight Securities. All report to Nicholas Ponzio, president of Hill Thompson.

Richard Farrell, a former senior vice president of strategic accounts for Reuters America, joined IXnet, Inc. and IPC Information Systems in New York as managing director, global sales, for both companies.

Thomas Weisel Partners expanded its OTC and listed trading desks with three new hires: Jack Monopoli joined as an OTC trader and Patty Reagan as a listed trader, both are from Volpe Brown Whelan & Co, now called the Prudential Volpe Technology Group. Kevin McEneaney comes on board as a sales trader from Banc of America Securities.

Charlie LaGanga joined Brean Murray & Co. in New York as vice president of the firm's Direct Asset Group. He was previously director of business development at Janney Montgomery Scott.

Terry Goodwin, formerly a head trader at Chase Manhattan Bank in New York, joined Goldman Sachs Asset Management as a head trader and vice president of equity trading.

Spear Leeds & Kellog Capital Markets in Jersey City added five sales traders, previously with Fleet Securities, to its Nasdaq trading desk: Fuji Bianchi, a senior vice president; Jamie Vollaro, a vice president; Dawn Patterson, and Karen and Mary Gurnee, who are sisters.

Fleet Trading in Jersey City added two new OTC traders: Bill Boyle, Jr. from Sharpe Capital and Mike Marcus from Myerson.

Internet Trading Technologies named Russ Lewis as chief operating officer. He was previously the chief information officer at Jefferies & Co.

Thomas Bosshard joined Javelin Technologies as head of European operations. He was previously vice president financial services/product marketing for New Area Networks.

CyBerCorp named Randy Schriewer as chief financial officer. He previously held CFO posts at several technology companies, including Philips Consumer Communications, Foreny Corporation, Conalco and Jerell.

NASD Regulation promoted David M. Fitzgerald to vice president and deputy chief hearing officer and Patrice M. Gliniecki to vice president and deputy general counsel.