DRAFT INSTITUTE LETTER ON PROPOSALS TO MODIFY SOES/SELECTNET AND TO ESTABLISH AN AGENCY QUOTE, AND REOPENING OF COMMENT PERIOD ON LIMIT ORDER BOOK

1 See Memoranda to Equity Markets Advisory Committee No. 12-99, dated April 29, 1999, and No. 13-99, dated April 30, 1999. [11001] May 21, 1999 TO: EQUITY MARKETS ADVISORY COMMITTEE No. 17-99 RE: DRAFT INSTITUTE LETTER ON PROPOSALS TO MODIFY SOES/SELECTNET AND TO ESTABLISH AN AGENCY QUOTE, AND REOPENING OF COMMENT PERIOD ON LIMIT ORDER BOOK ______________________________________________________________________________ As we previously informed you,1 the Securities and Exchange Commission (“SEC”) has published for comment proposed rule changes filed by the National Association of Securities Dealers (“NASD”) to modify its Small Order Execution System (“SOES”) and SelectNet system and to permit the separate display of customer orders by market makers through a market maker agency identification symbol (“Agency Quote”). In addition, the SEC has reopened the comment period on Nasdaq’s limit order book filing. The Institute has prepared a draft comment letter (attached) to the SEC strongly supporting the limit order book proposal and the proposed modifications to the SOES and SelectNet systems and expressing its concern that the Agency Quote proposal would modify the existing Nasdaq market in ways less desirable than a limit order book. In particular, the letter states that a limit order book would provide an opportunity to centralize all institutional, retail, and market maker order flow and represents a crucial step in increasing transparency, increasing liquidity, and facilitating best execution in securities traded on the Nasdaq market. The limit order book also would help reduce market fragmentation by providing a central location for the placement of all customer limit orders and is especially important given the increased volatility in the market and the recent initiatives being discussed within the Nasdaq market itself to extend trading hours. The letter also states that the Institute believes the Agency Quote proposal is not an adequate substitute for a Nasdaq limit order book. In particular, the agency quote proposal does not go far enough to improve transparency and would create a two-tiered system with both agency quotes and proprietary quotes being shown in the Nasdaq quote montage for each market maker firm. This situation will further fragment the market and will make it more difficult for institutional investors to make a determination where to place an order. Finally, the letter states that the Institute believes that the proposed modifications to the SOES and SelectNet systems will increase the speed of executions and enhance access to the full depth of a security's trading interest by all market participants. In addition, the proposed modifications may increase a market maker’s ability to manage the receipt and execution of the ever increasing volume of orders experienced in the Nasdaq market. If you have any comments on the Institute’s draft comment letter, please contact the undersigned by phone at (202) 371-5408, by fax (202) 326-5839, or by e-mail at aburstein@ici.org by Wednesday, May 26. Ari Burstein Assistant Counsel Attachment