Nasdaq's Ketchum Comments on 'Chaos' Created by Unlinked Amex
Sun, 13 Oct 2002, 8:27pm EDT
Boca Raton, Florida, Oct. 12 (Bloomberg) -- Nasdaq Stock
Market Inc. President Richard Ketchum comments on problems he sees
in U.S. equity markets, including inconsistent links between them
and different regulatory obligations between exchanges and
electronic communication networks.
Ketchum, speaking to stock traders at the Security Trader
Association annual meeting in Boca Raton, Florida, says Nasdaq
plans raise those issues at Securities and Exchange Commission
hearings on market structure Oct. 29 and Nov. 11.
Ketchum on links between markets:
``The accessibility of a market is central to its actual
ability to serve its customers, and the need to address this issue
brings me to my first principle: Markets must be linked -- but in
a manner that does not degrade the trading environment.''
``That an unlinked market like the Amex creates chaos that
can injure investors I think is clear. Unlinked markets that are
otherwise not immediately accessible inevitably result in scores
of locked and crossed markets, trade-throughs and unfilled
customer limit orders.''
``The effect of locked and crossed markets is especially
insidious. The result is to freeze the execution of retail orders
while the laborious task of accessing a quote in the unlinked
market is achieved.''
Locked markets occur when the bid, or the price at which a
dealer or specialist in one market is willing to buy a stock, is
the same as the offer, or the price at which a dealer or
specialist in another market is willing to sell a stock. Crossed
markets occur when the offer, or price to sell, is higher than the
bid. A `trade-through' occurs when a specialist or dealer fills an
order at a price inferior the best quoted price.
``In a time when we are looking to rekindle investors faith
in equity markets, this is quite simply nuts.''
On the kind of link the American Stock Exchange and ECNs
should have:
``The Nasdaq market is characterized by open competitive
environment for both market makers and ECNs, where orders and
quotes are immediately accessible. Any linkage with any market
must not'' put a drag on that speed and efficiency.''
``The best way to achieve that result would be for other
markets, like the Chicago Stock Exchange, to participate in
SuperMontage, where all orders and quotes can be consolidated and
immediately executed against. But if a market chooses to opt out
of SuperMontage, than any link to that market must provide a near
instantaneous, automated execution.''
If a ``competitor is unlinked, or linked with a manual
interface, the certainty that characterizes Nasdaq executions is
destroyed. That is neither progress nor fair competition.''
SuperMontage, Nasdaq's new trading system, combines orders,
allowing investors to see aggregate supply and demand at more than
one price. SuperMontage also provides automatic electronic trade
execution.
In auction markets, such as the American Stock Exchange,
orders are sent to the trading floor, where a specialist picks
them up and handles execution. The order, sent in response to
prices quoted by the specialist, is not automatically filled by a
computer.
On best execution, a law requiring traders to provide the
``best execution'' possible by buying or selling a stock at the
best price available at the time:
``Best execution must take into consideration the
accessibility of a new market.''
``If a firm has to access a better displayed price in a
market that chooses not to provide automated access, it must put
everything on hold for tens of seconds, if not minutes, to try to
access a price that may have already disappeared,'' said Ketchum
``This might be fine if a firm had only one order to handle.''
``The reality is (firms) must handle tens if not hundreds of
orders in that time frame.''
``We cannot freeze markets forever to search for a better
price.''
On different fees and regulatory obligations for large stock
markets and exchanges compared those for ECNs:
``Competition among market makers and ECNs or among exchanges
and Nasdaq and automated trading systems can only be fair if there
is a level playing field for fees and regulatorily imposed
requirements.''
``Best execution law generally requires market participants
to use market execution systems to access an ECN that is
displaying the best price (even) when they have no customer
relationship with that ECN.''
``But the ECN is free to charge access fees way above what
they charge their'' customers for the same thing. The NASD
``operates both order and transaction audit trail for Nasdaq, and
uses the data to detect trading practices that might violates the
law.
``For the system to be fair, a competing market must perform
the same functions with the same care.''
``This is not the time to spawn competition through
regulatory arbitrage.
``If there is one thing we can't afford, it to encourage
markets to avoid regulatory costs or worse, to encourage firms, to
seek to better control a market, to better control their
regulators.''
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