Hoping to increase the transparency and execution quality of a marketplace long shrouded in controversy and scandal, the Securities and Exchange Commission (SEC) implemented several new rules in the over-the-counter equity market known as Nasdaq. Although the changes have been in the works for several years, last year's Justice Department price-fixing case against 24 major Nasdaq market makers pushed the SEC to act this January. Apparently unrepentant about the disrepute surrounding their market, leading firms are already grumbling about the new rules.
Some dealers dislike the rules, the costs of the technology and training involved in implementing them, and they predict a far different future for their business. "It changes the structure of the marketplace," says John Herzog, chairman and CEO of Herzog, Heine, Geduld, the biggest single Nasdaq market maker, who believes there will be a retreat and consolidation of Nasdaq traders, and eventually a movement to charge fees. The firm makes markets in 4,500 of the Nasdaq's 6,000 stocks and has already spent between $3 million and $4 million to upgrade its technology to accommodate the new order-handling rules. Herzog argues that the SEC is trying to turn a negotiated market into an auction one, more similar to the specialist system at the New York Stock Exchange.