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be sent to one market maker. The subcommittee distinguished between the fact that the "Pathetic" message was sent on SelectNet, while the other two comments were made over the telephone. The NASD staff indicated that this fact was not a meaningful basis for distinction, but failed to convince the subcommittee to change its recommendation. After similar discussion at the Market Surveillance Committee the next day, the letter of warning was issued and the other matters dismissed. |
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The So-Called Audit Trail |
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During the course of its investigation, the SEC staff encountered significant difficulties reconstructing trading activity in the Nasdaq market. Broker-dealer order tickets, among the most fundamental of records, were too often unavailable or inconvenient to retrieve. Time stamping was often unreliable for the purposes of determining compliance with applicable rules, such as the firm quote rule and limit order protection rules. At one firm, the time stamping did not include seconds, which particularly frustrated the SEC's ability to reconstruct the market. |
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A further difficulty was the inadequate documentation of telephone orders received at OTC trading desks. As noted above, order tickets, if they were available at all, were not always reliably time-stamped. |
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As a result of the SEC investigation, the NASD has begun to design and implement an audit trail sufficient to reconstruct markets promptly, monitor them effectively, and enforce its rules. |
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Coordinated Activity Among Market Makers |
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The evidence uncovered by the SEC indicated that instead of dealing as competitors at arm's length, certain Nasdaq market makers had coordinated particular trade and quote activities |
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