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Robert Sales
Robert Sales
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Nasdaq ECNs Weigh in on NASD's Request to Postpone Decimalization

there is some disagreement about whether the NASD is justified in asking for an extension for its conversion to decimals.

Now that the NASD has asked the SEC for permission to delay until 2001 the Nasdaq Stock Market's conversion from fractions to decimals, members of the exchange are chiming in with their two cents about the NASD's request. Not surprisingly, there is some disagreement about whether the NASD is justified in asking for an extension--especially among Nasdaq's electronic communication network (ECN) participants.

In a letter he sent to SEC Chairman Arthur Levitt in early March, NASD Chairman Frank Zarb proposed that the commission postpone its mandate for the securities industry to migrate to decimals by July 3. Put simply, the NASD stated that Nasdaq's systems would not be ready for potential post-decimalization explosions in volume and quote traffic by that date.

But Mark Yegge, chief executive officer of the NexTrade, says that the ECN--which is currently a broker/dealer member of NASD--is "upset" that the Nasdaq is not sticking to the SEC's mandated conversion date for decimals. Yegge, who says that NexTrade's systems are now decimal ready, doesn't understand why Nasdaq can't meet the SEC's date.

"Nasdaq might not be ready for it, but they've certainly had plenty of time to plan for it…
We all understood that decimalization was coming. It wasn't something that the SEC told us this year," he says. "We are ready. We have a switch available to us that allows to just convert to decimalization. We've been preparing for it for a couple of years and we feel that Nasdaq should be ready also."

A Nasdaq spokesperson retorts that part of the problem is that the exchange is already under siege. Nasdaq's average daily share volume, he notes, has jumped from 790 million in 1998 to 1.7 billion in February 2000; moreover, during that same period, average daily quote traffic at the exchange has skyrocketed 278%, from 1.025 million to 3.87 million.

Moreover, the spokesperson says that IQMS--the system Nasdaq has been developing in preparation for the conversion to decimals--failed recent tests the exchange performed. Most significantly, he says that the system has not yet proven itself capable of handling huge upswings in volume and/or quote traffic.

"We were not convinced by the results of the tests that the new system, IQMS, could handle that…. and we don't want to say 'Well, jeez, we think decimalization will work," the spokesperson says. However, he declines to specify either the types of tests Nasdaq performed or the troubles the exchange encountered.

Still, despite the lack of details Nasdaq has made available on those tests, its parent's decision to call for a postponement has drawn its fair share of supporters. For example, one source familiar with the Brut ECN says that it makes no sense to move forward with decimalization if Nasdaq's technology can't yet handle an explosion in quotes.

This source notes that when Nasdaq switched its minimum price increment for stocks from 1/8 to 1/16, its "message traffic increased by something like four-fold." What's more, he says, if the exchange converts to decimals, quote traffic could potentially increase ten-fold. "Once the message traffic exceeds your ability to process the information, what's the value of that?" the source asks rhetorically.

While the SEC has yet to tip its hand on Nasdaq's postponement proposal, it seems likely that the commission will yield to industry pressure to delay its implementation date for decimalization. Earlier this month, the SEC pushed back the date by which the securities industry collectively had to submit a plan for phasing in decimal prices. That date was switched from March 13 to April 14. Moreover, as part of that order, the SEC also extended until April 28 the date by which self-regulatory stock markets must submit the rule changes they intended to implement to accommodate decimalization.

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