Nasdaq

The 2^nd quarter of 2000, the SEC became concerned about the lack of order execution information because of the growth of the Market Centers(BM). So the SEC created 2 new rules, changes to the Securities Exchange Act of 1934, SEC Rules 11Ac1-5 & 11Ac1-6.

By requiring greater disclosure, the SEC seeks to increase quote competition, promote price discovery & transparency, and encourage liquid markets that minimize short term price volatility.

Market Centers (BM) must disclose order execution information. Also those that trade National Market System securities are required to produce monthly electronic reports that include uniform statistical measures of execution quality for covered orders. These reports must be made public. The required information must be categorized by: * Security *Order Type (market, marketable limit, inside-the-quote limit, at-the-quote limit, and near-the-quote limit) *Order Size (100-499, 500-1999, 2000-4999 and 5000 or more). The report must contain the following information: *Effective Spreads (the spreads actually paid by the investors) *Execution of Market orders that vary in size compared to public quotes and *Execution of Orders that have price improvement and disimprovement, fill rates, and execution speed.

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the SEC requires that B/Ds disclose non-directed customer order-routing information through quarterly reports. For orders that are externally executed for a B/D, the customer can either choose the market center where the order will be executed, or leave that determination to the B/D (= a non directed order). The reports must disclose the market center to which non-directed orders in covered securities were routed and the nature of any relationship that exists between the market center and the B/D entering the order. Specific relationships that must be disclosed include payment for order flow, internalization, and profit-sharing arrangements. Additionally B/Ds must disclose, when requested by the customer, the market center to which that person’s individual order was routed. However this only covers orders that were routed for execution in the six months prior to the request.

Customers must also be notified in writing, at least annually, that a copy will be provided to them upon request. It is also a requirement of the SEC Rule 11Ac1-6 that order-routing information be posted on an Internet Web site, free of charge and accessible to the public.

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Firms that routed 500 or fewer customer orders in covered securities per month during the preceding calendar quarter are exempt from reporting that quarter.

For example: In the first quarter of 200X (January, February & March) BBHJT Brokerage Services Inc. routed a total of 1228 orders.

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Specialist

Limit or other contingency orders entered away from the market can be left with the specialist, who places it in the "book" for the stock. Specialists can execute these orders for the customers who entered them (acting as an agent) or can buy and sell for their own accounts (acting as a principal). The specialist is the only member allowed to continuously buy and sell stock on a principal basis (make a market). In return for this privilege, the specialist must stand ready to buy when there is excess selling interest, and sell when there is excess buying interest, as part of the responsibility to maintain a "fair and orderly market".

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Unlike Exchanges, a broker dealer does not have to purchase a seat to participate in the OTC markets. When executing transactions for customers, brokerage firms can act in one of two ways. One way is to act as the agent for the buyer or the seller. In this capacity, the firm attempts to locate another investor the (counter-party) to take the other side of the trade. The firm then attempts to arrange the best price for its customer. Once the trade is completed (settled), the brokerage firm receives a commission as the fee for its services. When acting in this manner, the firm is said to act as a broker or agent.

In other cases, the brokerage firm might execute a transaction for a customer by taking the role of the counter-party itself. For example, if a customer wants to buy a security, the firm might sell it to the customer from its own inventory. Likewise, it may buy stock for inventory from a customer who wishes to sell. Since the firm is one of the parties to the transaction, it is acting as a dealer or principal. It is also said to be trading for its proprietary (for its own account).

Since the relationship between the customer and the brokerage firm is quite different in the two capacities, a firm may not act as both a broker and a dealer in the same transaction. That would be a conflict of interest. However, the same firm may act as a broker in some trades and as a dealer in others (hence the term broker-dealer). There are several factors that determine the mode in which a firm operate, including the type of business in which the brokerage firm chooses to engage and the nature of the market in which the transaction occurs.

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Summer  2004