NASD Keeps One Step Ahead Of Brady Panel

Although the SEC has been slowly chipping away at barriers separating the auction and dealer securities markets, the National Market System mandated by Congress in 1975 still remains elusive. However, what legislators and regulators have failed to achieve during the last decade or so may yet be created by the exchanges and NASD in the wake of the stock market collapse.

The public outcry about the breakdown of the market making structure in both the auction and dealer environments is putting political pressure on the self-regulatory organizations to make reforms. If the exchanges and NASD don't come up with ideas about how to strengthen their markets, Congress and the SEC will do it for them. NASD, for its part, isn't waiting for the recommendations of the panel led by Nicholas Brady, chairman of Dillon, Read and Co., that was formed by President Reagan to study the stock market crash. Responding to a blitz of negative publicity about broker/dealers not answering their telephones the week of October 19th, NASD is moving to increase the responsibility of market makers.

Because NASD's proposals may reduce profits for some broker/dealers by forcing them to hold their ground under the fire of falling markets, they would surely have been opposed by many firms under normal circumstances.

However, most traders understand the market's credibility is at stake and that they could lose valuable inventory should companies list on exchanges because of complaints from individual and institutional investors who had difficulty trading OTC stocks the week of Black Monday.

What NASD is trying to develop is a marketplace that brings together the commitment of the specialist with the competition of multiple market makers. The idea isn't new; it's also the goal of the Chicago Board Options Exchange's plan to designate primary market makers for newly listed contracts.

Although NASD has stopped short of establishing for market makers the specialists' obligation to always buy when others want to sell, it is clear the dealer market is moving a few steps closer to the auction market.

Under NASD's proposals, a firm that withdraws bid/ask quotes in a given stock could be suspended from making markets in that issue for up to 30 days. The current penalty for withdrawing from a market is two days.

Broker/dealers that display locked -- bid same as offer -- or crossed -- bid higher than offer -- markets would be subject to execution at those price.

During the week of October 19th, it was impossible to electronically fill orders in some OTC stocks because locked and crossed markets disqualified them from NASDAQ's Small Order Execution System and several other automatic execution services.

Under the package of reforms proposed by NASD, members would be required to participate in SOES and to join a clearing corporation. For many NASDAQ issues, mandatory participation in SOES would raise to 1,000 from 100 the number of shares a broker/dealer must be willing to buy or sell at prices displayed on the screen.

By contrast, many market makers in the 100 most active issues traded on the London Stock Exchange's SEAQ system display quotes for up to 99,900 shares, although share prices are generally lower in the U.K. than in the U.S. NASD President Joseph Hardiman says it is likely a tiered system of order size limits will be developed for SOES, based on a firm's size and the liquidity of the stock. This will require some systems retooling, says Randy Sampietro, vice president, systems engineering, at NASDAQ Inc.

Broker/dealers will have 30 days to comment on the NASD's proposals before they are sent to the SEC for approval. NASD sources say it is likely the reforms will go into effect in 1988.

November 9th TST article on "Arb Map" software developed by Woodside Group misstated plans of Fundamental Brokers Institutional Associates. FBIA says it is evaluating Arb Map software, not "planning" to offer it, nor is it developing array of such tools. Contrary to story, FBIA says it hasn't recently withheld permission from Bloomberg Inc. to deliver inside price feeds. Article's reference to software availability at selected sites refers to beta test sites, not to FBIA policy on distribution of value-added software.