Big Nasdaq Dealer Seeks To Stall Rules Change Herzog, Heine, Geduld Inc. Wants To Delay Sec-Ordered Changes That Dramatically Would Alter Handling Of Customer Orders

A major Nasdaq dealer is trying to convince Congress to delay controversial rules by the U.S. Securities and Exchange Commission that would dramatically alter handling of customer orders on the nation’s second-largest stock market.

Herzog, Heine, Geduld Inc. has hired a former Republican counsel of the House Commerce Committee, Stephen Blumenthal, to lobby for an amendment that would require the SEC to conduct an in-depth analysis of how the rules would affect competition and ease of trading on Nasdaq, a spokeswoman for the firm said.

The amendment is proposed to a bill that would streamline the role of state securities regulators in overseeing mutual funds.

Last September, the SEC released a farreaching set of proposals which would give customer orders greater prominence on Nasdaq, the nation’s second largest stock market. A key proposal would require customer limit orders to be included in the stock prices quoted by Nasdaq dealers. Such a change could reduce the gap between the buy and sell prices on Nasdaq, which would lower trading costs for investors but also would erode dealers’ profits.

A limit order is an investor’s request to buy or sell stocks at a specific price, not just the going market price. Another proposal would prevent Nasdaq dealers from offering a better price on a private computerized trading network for a stock it’s also publicly quoting on Nasdaq.

The SEC is close to concluding its own investigation of Nasdaq. Brokerage firms and academics have sharply criticized the SEC’s proposed order handling rules, saying they could reduce their profits and lead other dealers to withdraw from the market, thereby making it more difficult to trade.

Blumenthal, who drafted the original version of the House bill, is trying to convince his former employer, House Commerce Chairman Thomas Bliley, R-Va., to attach the Nasdaq amendment to the securities bill. House and Senate staff met Monday to work out differences in preparation for a formal conference committee meeting on the legislation.

The SEC’s proposed Nasdaq rules were not the focus of any testimony during the public hearings or floor debates in either the House or Senate.

A Bliley spokesman, Rodney Hoppey, said the chairman hadn’t decided as of Friday whether he would support the amendment pushed by Herzog, which reportedly has the support of other Nasdaq dealers.

But Bliley sent a second letter to SEC Chairman Arthur Levitt last week, expressing concern that the SEC hadn’t performed a thorough economic, cost-benefit and market impact analysis of its pending rule on Nasdaq order handling. Bliley asked the SEC to respond to 11 detailed questions on the proposed rules.

The proposed rules are part of the SEC’s investigation of improper dealings on the Nasdaq market. Earlier this month, 24 major Nasdaq dealers, including Herzog, Heine, Geduld, settled a Justice Department investigation of Nasdaq in which they agreed to step up monitoring of traders to prevent collusion in the quoting of stock prices. The firms didn’t admit or deny wrongdoing in the settlement.

An SEC spokeswoman wasn’t immediately available for comment.