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The NASD's Regulatory Deficiencies |
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The SEC staff's investigation of trading on Nasdaq occurred over more than 18 months and included the review of thousands of hours of taped conversations, hundreds of thousands of pages of documents, and the testimony of dozens of market participants and NASD officials and employees. The SEC laid out the evidence and its findings in its 21(a) Report. This historical portrait may at times seem involved, but it is important to set forth so that we do not have to relive these historic economic issues in Nasdaq or other markets. |
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Over time considerable acrimony had developed between the market makers and the SOES firms. For example, the SEC interviews with people at SOES firms disclosed that certain market makers frequently made obscene remarks to SOES traders during telephone calls. Review of SelectNet text messages uncovered other harassing messages directed by market makers at SOES firms, although the use of obscenities on SelectNet is prohibited by the NASD. Also, at the 1991 annual meeting of the Security Traders Association, "SOES Sucks" buttons were distributed to general acclaim. |
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Market makers viewed SOES firms as market professionals who were profiting from rapid-fire trading on a system not designed for such activity. Market makers complained that this activity resulted in their institutional customers receiving inferior prices. For their part, the SOES firms asserted that automatic execution was the best way to complete a trade, because market makers often backed away from the telephone orders placed by SOES firms. Because SOES executions do not require the specific agreement of the market maker to the order, the market makers could not preclude the trading activities of the SOES firms without withdrawing from the market. Market makers turned to the NASD to urge that it limit the impact of SOES. |
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The NASD became creative by passing new rules and interpreting old ones. My firm was a dues-paying member of |
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