NASD to Propose Rules to Curb IPO Volatility on Nasdaq 12/15/98 17:38
(Repeats to add dropped word in paragraph 9)
Washington, Dec. 15 (Bloomberg) -- The National Association
of Securities Dealers plans to propose a rule that would give
broker-dealers as long as 30 minutes to set quotes on initial
public offerings before trading begins, NASD President Rick
Ketchum said.
The proposal, which would extend the current five-minute
period before trading, seeks to quell the volatility of some IPOs
by making the prices more reflective of market supply and demand.
Six Internet company IPOs have at least doubled in price recently
during early trading before tumbling in later Nasdaq trades.
''This would improve the ability of brokers to price the
orders correctly and give investors a warning that enables them
to adjust or cancel their orders,'' Ketchum said.
Ketchum's comments followed a meeting yesterday between NASD
officials and representatives of 10 brokerages, including Merrill
Lynch & Co., Goldman, Sachs & Co., and Morgan Stanley Dean Witter
& Co. The ad hoc meeting was convened by Bernard Madoff, a New
York broker-dealer who heads the Securities Industry
Association's trading committee, to address the volatility in
Internet IPOs.
Ketchum said he would submit the proposals for approval this
week to the NASD board's executive committee, and try to forward
them to the U.S. Securities and Exchange Commission by the end of
the month.
The NASD, which runs the Nasdaq Stock Market, also plans to
propose a rule to allow more pre-trading price discussions
between the underwriting firm that's managing the offering and
the broker-dealers who trade the stock, Ketchum said.
Rapid Price Movements
The recent volatility in Internet-related stocks has been
driven by the unusual volume of online trades by individual
investors, many of whom lost money because of the rapid price
movements and trading delays. Some investors who placed ''buy''
orders encountered delays in having their orders executed as
dealers tried to sort out intense investor demand for these
stocks.
In one IPO, shares of Theglobe.com soared from an initial
offering price of 9 to as much as 97 when they debuted last
month, before dropping to 63 1/2 by the end of the first day of
trading. The stock of the Web ''community'' rose 1 1/8 today to
31 3/4.
The main NASD proposal would allow two 15-minute periods, if
necessary, for broker-dealers to sort out the pre-trading demand
for IPO shares.
Many dealers have complained that the current five-minute
rule doesn't give them enough time to determine the true price of
the opening. Some Internet IPOs have started trading in
''locked'' or 'crossed'' markets, where the buying prices are
as high or higher than the best selling prices.
Under the NASD proposal, if the stock was still locked or
crossed after the first 15-minute period, the pre-trading
interval would be extended for another 15 minutes.
'Want to Cancel?'
''This would give brokers more time to get back to their
clients to say, 'That stock you thought would open at 20 is
trading at 40. Do you want to cancel or adjust your order?' ''
Madoff said.
The proposal to allow more communication between dealers and
the underwriter that's managing an offering, Madoff said, would
require the SEC to clarify guidelines adopted after the
commission's 1996 price-fixing settlement with the NASD.
That agreement, in which the NASD was censured for ignoring
price collusion among Nasdaq dealers, led to limitations on price
discussions among broker-dealers.
The NASD will ask the SEC to speed its normal procedures
either by shortening the period for public comment on the
proposal, or by allowing the association to start a pilot program
during the public comment period, Ketchum said.
''The SEC is concerned about the IPO problem, and positive
about us trying to make quick adjustments,'' Ketchum said.
The NASD's proposals would supplement actions taken by
several retail brokerages to limit the types of orders they allow
for IPOs. Ameritrade Holding Corp. said it wouldn't accept pre-
trading orders without a price limit, and Donaldson, Lufkin &
Jenrette Inc.'s DLJ Direct started prohibiting these orders for
some volatile offerings. National Discount Brokers Group Inc. has
been calling customers back who place orders on volatile IPOs.
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