Death of SOES?
SEC Approves Rule Cutting Nasdaq's Minimum Quote Size by 90%
7/16/98 12:57
SEC Approves Rule Cutting Nasdaq's Minimum Quote Size by 90%
Washington, July 16 (Bloomberg) -- The U.S. Securities and
Exchange Commission approved a rule that would reduce by 90
percent the minimum number of shares that dealers on the Nasdaq
Stock Market must quote for any trade.
The rule, which could go into effect as early as next week,
gives dealers more flexibility in an attempt to encourage them to
post quotes for more stocks -- increasing competition and ease of
trading on Nasdaq. Dealers, also known as market-makers, use
their own capital to buy and sell stocks for investors when no
immediate matching order is available.
The rule would reduce to 100 shares, from 1,000 shares, the
minimum quote size, or the number of shares a dealer must be
willing to buy or sell at the quoted prices. The plan, known as
the ''actual size rule,'' was proposed by the National
Association of Securities Dealers, which runs Nasdaq.
''The actual size rule should give market-makers more
flexibility to manage their risk,'' the commission said in its 45-
page order. It ''likely will produce more accurate and
informative quotations, increase competition, and encourage
market-makers to maintain competitive prices.''
The rule would affect the proprietary quotes posted by
dealers trading from their own personal accounts, which make up
more than half of all Nasdaq transactions. Proprietary quotes
affect all investors and dealers because they often set the best
available price in the market.
The proposal emerged from a year-long pilot project
involving first 50 and then 150 of the largest Nasdaq stocks. The
pilot found that most dealers continued to make quotes of 1,000
shares or more, without harm to liquidity or trading spreads. The
new rule would affect all 6,000 stocks that trade on the nation's
second largest stock market, though it wouldn't affect their
prices.
''This makes sense because it allows people to show what the
real interest in an order is, rather than an artificial volume,''
said SEC Commissioner Isaac Hunt. ''It's good for Nasdaq.''
The plan has been vigorously opposed by small order-entry
firms, or ''day traders,'' who try to make quick profits by
placing rapid-fire trades when prices fluctuate. The firms, also
known as ''SOES activists'' because of their heavy use of
Nasdaq's Small Order Execution System, have said it isn't
economical for them to place 100-share orders because of the
transaction costs involved.
Order-entry firms that had opposed the proposal were muted
today in their criticism, noting that many of them already
adapted by cutting their use of the SOES system since the pilot
project began.
''I'm very disappointed, but most firms already stopped
trading on SOES,'' said Jim Lee, co-owner of Momentum Securities
in Houston and president of the Electronic Traders Association, a
group of 45 day-trading firms.
Many of these firms now are trading Nasdaq stocks on
Nasdaq's SelectNet system or on private electronic trading
systems such as Reuters Group Plc's Instinet or Bloomberg LP's
Bloomberg Tradebook, Lee said. Bloomberg LP is the parent company
of Bloomberg News.
Chris Block, the chief executive of Block Trading in
Houston, another day-trading firm, voiced support for the rule
proposal. ''You shouldn't have to bid more than the actual size
if you don't want to buy that much,'' he said.
Large brokerages have voiced support for the proposal,
saying they had been tied up by current requirements to execute
the numerous 1,000-share orders placed by SOES traders. The SOES
electronic system automatically executes some small stock orders
at a market-maker's quoted prices.
The SOES system, already shrinking, appears short-lived. It
would be consolidated with Nasdaq's largest trading system,
SelectNet, under an NASD proposal now under consideration by the
SEC. The plan has drawn widespread support from brokerages and
investors.
--Neil Roland in Washington (202) 624-1868/bd
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