(212) 524-0484


April 24, 1998

Mr. Jonathan G. Katz


Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Re: NASD Proposed Rule Changes

File No. SR-NASD-98-21

Dear Mr. Katz:

The Institutional Committee of the Security Traders Association appreciates the opportunity to comment on the NASD’s proposed rules change to permit Market Makers to quote actual size by reducing the minimum quotation size for all Nasdaq securities to one normal trading unit. The Committee comprises twenty buy-side traders who head the trading desks of some of the largest mutual fund complexes, private investment management firms, public and corporate pension funds in North America, and the Committee’s comments will be directed to those aspects of the proposed rule change that particularly impact the trading we carry out for our clients.

The Committee strongly supports the NASD’s "Actual Size" proposal, and has supported the NASD as it has made other rules changes that reflected the implementation of the Commission’s Order Handling Rules in January 1997 1 . The Committee does not believe that market makers should be forced to deploy their capital for an artificial, predetermined share size that does not reflect their trading interest or that of their customers.

With the Limit Order Display Rule now in effect, artificial minimum quote size requirements for market makers are unnecessary. The display of customer limit orders, and their resulting ability to drive the inside quote, allows market participants a much more meaningful gauge of true liquidity available in the market. Nasdaq is no longer a pure dealer market; with the advent of the Order Handling Rules it has moved toward a more order-driven market. The Committee believes there is a distinct difference between a quote and an order. The quality of the Nasdaq market is enhanced when actual orders, rather than mandated quotes, are displayed for all to see.

The Committee also believes that the Actual Size rule is a critical component of the NASD’s proposal to create an integrated order delivery and execution system and an electronic central limit order book. 2 Holding market makers to predetermined quote sizes could severely hamper the NASD’s ability to move forward with this new initiative.

The two pilot programs conducted by the NASD and the subsequent study of those programs by the NASD’s Economic Research Department showed no statistically significant evidence that the quality of the market has deteriorated for those stocks participating in the pilot. The studies also point out that the ability of investors to execute trades through the SOES system was not impaired for those stocks. If the quality of the market is maintained, the Committee firmly believes that Nasdaq should not be the only equity market that forces market makers to deploy their capital to create artificial liquidity.

The Committee appreciates the opportunity to express its views on the proposed Actual Size rule. Should the Commission so choose, Committee members would be happy to make themselves available for further discussion of these comments.


Holly A. Stark


cc: Richard R. Lindsey, Director

Division of Market Regulation

Richard G. Ketchum, President

National Association of Securities Dealers


-[1]- See Committee letter, December 24, 1996, to the SEC discussing the NASDís proposed rules changes relating to the implementation of the SECís order handling rules.

-[2]- Release No. 34-39718 (March 4, 1998).