SEC Turns Aside Curbs Set By NASD on Market Maker
April 27, 2011
The Securities and Exchange Commission set aside a 2010 National Association of Securities Dealers decision to restrict the market-making activities of Domestic Securities Inc.. Domestic is a Montvale, N.J., brokerage firm with a history of clashing with the NASD over the firm's attempts to interject lower price quotes into the Nasdaq trading system and its use of the Small-Order Execution System, or SOES. Complaints from firms like Domestic about anticompetitive trading practices on Nasdaq contributed to the recently settled investigations by the Justice Department and the Securities and Exchange Commission. The SEC's decision, made public Wednesday, lifts an NASD-imposed restriction limiting Domestic to making markets in only 500 stocks, rather than an unlimited number as Domestic had sought since 2009. (Market makers stand ready to buy and sell Nasdaq stocks.) In overturning the decision, the SEC said the NASD had no apparent regulatory grounds for restricting Domestic to making markets in only 500 stocks. ``Without a connection to a regulatory purpose, such a broad-based limitation on Domestic's ability to function as a market maker in the wholesale dealer market appears to impose a burden on competition,'' the SEC said. ``I feel completely vindicated,'' said Billy Enriquez, one of Domestic's lawyers, who says Domestic filed an appeal of the NASD's restrictions with the SEC on January 27, 2010 The NASD has a history of making things tough for smaller firms, Mr. Enriquez says, especially SOES firms that are widely disliked by other market makers. SOES firms profit in part by making rapidfire, automatic trades in quick-changing markets, which market makers say increase volatility and cost their other customers more money. Documents from the SEC's recent settlement with the NASD over alleged enforcement laxities refer several times to the unfair standards the NASD imposed on smaller firms. Smaller firms were subjected to unreasonable delays in their membership applications and overly restrictive terms for membership, the SEC documents say. The report also refers to a ``concerted effort by the NASD staff to bring disciplinary actions against SOES firms.'' Mr. Enriquez said he expects this SEC action to open the floodgates for appeals by dozens of SOES firms looking to get improper-restriction agreements overturned. An NASD spokesman couldn't be reached for comment.
