Terminal Replaces Phone In New NASDAQ OCT System

With NASDAQ's new Order Confirmation Transaction system, over-the- counter securities traders no longer need to worry about market makers not answering their telephones.

Launched earlier this month, OCT allows NASD members to electronically initiate and execute orders of up to 100,000 shares for both their own and customer accounts.

NASDAQ's existing small order execution system is limited to customer orders of 1,000 shares or less in NASDAQ National Market System issues and 500 shares or less in non-NMS securities.

"Today, the telephone is the principal means of entering and executing orders of more than 1,000 shares in the NASDAQ market," says NASD President Joseph Hardiman. "But the limitations of telephone contact, particularly in fast-moving markets as we experienced in October, are clear."

Hardiman says OCT will boost the number of NASDAQ transactions that are automatically executed to between 25-30 percent from the current level of 13 percent.

The introduction of OCT represents another step in NASDAQ's evolution from a telephone to a computerized market. A trader who wants to buy 10,000 shares of Apple Computer Inc. can now transmit this order over his NASDAQ terminal to a designated market maker, who must reject or accept the transaction within two minutes.

Orders that are accepted are reported as compared trades to the initiating firm, NASDAQ, vendors, and the clearing corporation.

By providing an audit trail of the attempts to trade with each OCT participants, SOES will help the NASD evaluate a firm's market making record in specific stocks.

Unlike SOES, OCT is an auto-ex system only when both parties agree on the size and price of a trade. By contrast, participants in SOES are automatically assigned executions.

To improve investor access to OTC issues, the NASD has proposed that SOES participation be mandatory for all its members and that the system continue to operate if markets are crossed (bid same as offer) or locked (bid higher than offer).

While OCT allows traders to circumvent the telephone, it is not a full-fledged negotiating device. If a trader's order is rejected by a market maker, he has no way of knowing whether the price or size should be altered so that the transaction will be accepted.

Charles Neustein, head of OTC trading at Salomon Brothers Inc., says OCT will provide competition for vendors such as Instinet Corp., the Reuters Holdings PLC subsidiary that offers an electronic execution service. Unlike Instinet, which counts institutions, broker/dealers, and exchange specialists among its customers, OCT is limited to NASD members.

OCT shouldn't be confused with ACES, the acronym for the NASD's Advanced Computerized Execution system, or ACT, short for Automated Confirmation Transaction system. The two products were announced by the NASD last fall at the Securities Industry Association's operations conference.