nytimes.com.
>>NASD's Quality of Markets committee will consider a proposal this
summer for a single-price opening.<<
By EDWARD WYATT
NEW YORK -- When DrKoop.com announced an $89 million deal
on Tuesday to provide its health-information services to the 17
million subscribers of America Online, investors rushed to trade both
stocks. Those who bought and sold America Online shares in the
opening minutes of trading all got close to the same price, but those who
traded DrKoop.com got prices that varied by as much as $2 a share on
a $35 stock.
The early-morning volatility illustrates not just the power of the Internet
but also the sharp differences in how stocks are traded on the NASDAQ
stock market, which is home to DrKoop.com, and on the New York
Stock Exchange, where America Online shares are listed. Some big
traders and institutional investors say the way NASDAQ opens trading
each day has bred chaos, and they are calling for change.
"The opening of trading on NASDAQ is a complete disaster and has
been for some time," said Michael Cormack, manager of equity trading at
American Century Mutual Funds in Kansas City, Mo. "And NASDAQ
has been very noncommittal about what they will do about it."
Under pressure both from traders and from a raft of upstart competitors,
NASDAQ officials now say their committee of market specialists is
considering something that would have been unthinkable a few years ago:
creating a single-price opening for NASDAQ stocks, guaranteeing that
everyone who wants to trade at the opening gets the same price.
For investors, such a fundamental change in how the market works could
mean more consistent prices for NASDAQ stocks and the end of an
often maddening process that produces big price swings, particularly in
the opening minutes of trading. Online investors who watch the market to
determine if their orders are being executed at the best possible price are
now left to wonder if big price swings are costing them whatever money
they saved in low commissions.
An examination of trading early Tuesday makes clear the concerns. The
strong demand for America Online shares caused the New York Stock
Exchange to delay opening the stock for 10 minutes while the specialist
responsible for maintaining orderly trading in America Online stock tried
to match buy and sell orders to determine the best opening price.
When trading finally began at $119.9375, up 4 percent from the stock's
previous closing price of $115.25, roughly 1.5 million shares changed
hands in the first minute of trading, all at that single price. And over the
next several minutes, hundreds of thousands more shares traded in a
range of less than 25 cents above or below the opening mark.
Trading was not nearly as orderly for investors seeking to buy or sell
shares of DrKoop.com, which, like virtually all NASDAQ stocks,
started trading promptly at 9:30 a.m. Demand for DrKoop.com shares
was evident in the first trade, which came at $35.50, up 50 percent from
the previous close of $23.625. But seconds later DrKoop.com traded
for as much as $1 more than the opening price and, in the first three
minutes, for as much as $1 below the opening.
To be sure, shares of America Online, one of the largest Internet
companies, are far more liquid and less volatile than those of
DrKoop.com, which went public only last month with the imprimatur of
Dr. C. Everett Koop, a former surgeon general of the United States.
Richard Ketchum, president of the National Association of Securities
Dealers, which oversees the NASDAQ market, said he objected to
comparing a small stock like DrKoop.com with a giant like America
Online, even if both are Internet companies. Given DrKoop.com's small
size, Ketchum said, a range of trading such as investors saw at the
opening on Tuesday "is a pretty solid result."
But the general pattern is one that experienced traders say they see every
day in stocks big and small -- one that cuts into the profits of both
individual and institutional investors.
The situation on NASDAQ has been made worse by the rapid growth of
online trading. Customers of firms like Charles Schwab & Co. and
ETrade are more likely than traditional brokerage clients to enter orders
to buy and sell shares while the market is closed, creating a large backlog
of trades waiting to be executed in the market's opening minutes.
Many market professionals also say the problem is an unintended result
of the federal government's investigation several years ago of reputed
collusion among NASDAQ market makers.
One trader for a regional brokerage firm says that when he had a big
order to buy shares of a certain stock, he used to call other trading desks
before the market opened and sound out whether they were likely to be
buying or selling, and in what quantities.
"It would be like a poker game, where you'd go around the table and
everyone would talk about what they'd be bidding, so you'd be vaguely
prepared," he said.
To avoid discussions that might be interpreted as collusion, many
NASDAQ market makers now avoid talking to one another. Today,
NASDAQ trading rooms resemble libraries where every patron is
connected to a computer network, with the dominant sound the hum of
an air-conditioner punctuated by the staccato clicks of dozens of
computer mice.
So many market professionals have pushed for a change, Ketchum said,
that NASD's Quality of Markets committee will consider a proposal this
summer for a single-price opening.
The committee, which is made up of institutional investors, market
makers and representatives of individual investors, has looked at a wide
variety of trading issues, including volatility in Internet stocks, in recent
months. The idea of a single-price opening, while far from a consensus,
has been gathering momentum. If the committee adopts the idea, it will go
to the full NASDAQ board for approval.
NASDAQ officials, who already have their hands full forging joint
ventures with foreign markets and considering whether to extend the
trading day, say they remain reluctant to make such a drastic move about
the opening. Instead, they have proposed a more modest change, one in
technical trading rules, that they say would smooth out the market
opening.
"We have not heard that people are getting wildly different prices off the
opening, nor do we see it from a surveillance standpoint," Ketchum said.
"There have been delays in the timeliness of trades being reported when
there are a large number of trades being handled at the opening. But our
surveillance shows that those shares are trading at the right prices."
Ketchum added that NASDAQ's longstanding objection to a single-price
system was that trading in some stocks would be delayed, rather than
beginning promptly at 9:30. A single-price system, he said, "is great if it
comes up with the right price quickly, but not if it results in substantial
delays when people want to trade."
Critics and competitors say NASDAQ is reluctant to take a more drastic
step because doing so would probably cut into the profits of many of the
brokerage firms that make markets in NASDAQ stocks -- the very firms
that make up the membership of NASD.
"The New York exchange, with its auction-like opening, has a
fundamentally better opening process than NASDAQ," said Douglas
Atkin, president and chief executive of Instinet, which operates an
electronic trading system that competes with both exchanges. "Everyone
benefits when supply and demand meet once and you get one official
opening price."
The rise of many more electronic trading systems like Instinet and
Archipelago, which is 5 percent owned by American Century, is putting
additional pressure on NASDAQ to respond to traders' complaints.
The complaints have been enough to persuade Bernard Madoff
Investment Securities and Knight Securities, two big trading firms, to
guarantee a single price to customers who want to trade at the opening --
a move that might serve as a model for NASDAQ.
The benefit of a guaranteed single opening price is that investors
essentially trade directly with each other, rather than with a market maker
who profits from the spread between the bid, or the purchase price, and
the offer, which is the seller's price.
Bernard Madoff Investment Securities, a New York broker-dealer that
makes a market in the 200 biggest NASDAQ stocks, began offering in
May to execute opening trades at the midpoint of the best bid and offer
prices being quoted by all firms making a market in a stock.
"Customers object to paying the spread on the opening, and they have
asked us why can't there be a single price on the opening like on the
New York Stock Exchange," said Bernard Madoff, president of the firm.
"This is exactly the system that the specialist uses on the floor of the New
York Stock Exchange."
But traders at some competing firms criticize Madoff's system, and one
like it from Knight, saying that to guarantee an opening price, those
market makers simply post higher than normal quotes before the market
opens. That causes the best bid and offer prices to rise and increases the
likelihood that the guaranteeing market maker can trade at a profit from
his own inventory of stocks.
Kenneth Pasternak, chief executive of Knight's parent company,
Knight/Trimark Group, sees nothing wrong with helping customers and
making a profit at the same time.
"If we're going to provide a lot of liquidity at the opening, we're going to
do it at prices that are favorable to us," Pasternak said. "The money we
make in the first 10 minutes of the day is less than the money we make in
any other 10 minutes of the day." If customers think his firm has unfairly
bid up the opening price, he added, they "can set limits or cancel orders."
While NASDAQ considers the possibility of a single-price opening, it is
taking other steps to smooth out the gyrations in the market's opening
minutes. It has already instituted rules for opening trading in initial public
offerings on their first day. And a NASDAQ proposal awaiting approval
by the Securities and Exchange Commission would change some
technical rules that govern the period just before the opening of trading,
when market makers are jostling for position.
Sometimes, a market maker with unusual demand or supply of a stock
will create in that time what is known as a "locked" market, when the
best bid price is equal to the best offer price, or a "crossed" market,
when the best bid is above the best offer.
Under current rules, market makers can create such a market without
being forced to execute a trade at the unusual price. The pending rules
would compel any trader who locks or crosses a market in the 10
minutes before trading begins to trade at that price.
Locked and crossed markets "are the primary problem at the opening,"
Ketchum said, one that should be solved by the new rules.
Ketchum acknowledges that if NASDAQ moves to a single-price
opening, there is some promise in computer systems that match orders
and open a stock at whatever price will allow the most shares to trade.
But he maintains that bigger, more widely held stocks like Intel and
Microsoft usually operate with very small price changes, making them
comparable to anything on the Big Board. And, he said, they always start
trading on time. |
