July 9, 1998

Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re:NASD Proposal for New Primary Market Maker Standards
File No: SR-NASD-98-26

Dear Mr. Katz:

We are writing to express our serious concerns about the NASD’s proposal for new Primary Market Maker standards, and to offer the SEC and NASD our assistance in developing an appropriate alternative.

As a general matter, while we support the NASD’s goal of promoting liquidity and competition, we are concerned that the definition of liquidity embodied in the NASD’s proposed PMM standards fails to recognize many of the valuable liquidity services market makers provide to investors. In this respect, we believe that the NASD’s definition is far too limited in that it does not acknowledge the important role market makers play in providing immediacy to investor orders, standing ready to trade at the published quotes in all market conditions and providing enhanced liquidity to orders that exceed the aggregate size available at the inside market. Indeed, we note that many market making firms which provide substantial liquidity to the market each day in thousands of issues would not qualify as PMMs in a significant number of issues under the NASD’s proposed liquidity standard. Ultimately, we believe that the NASD’s proposal would force these market makers to reduce the valuable services they currently provide to customers and correspondents.

In view of the significant negative implications of the proposed PMM standards for market liquidity and investor executions, we have initiated a high-level dialog with the NASD on this issue. In our discussions, NASD staff have acknowledged our concerns and have indicated a willingness to reconsider the definition of liquidity reflected in the current proposal. To assist the NASD in this regard, we have developed a set of principles and objectives (set out in the attached Statement of Principles) that we believe are critical to an accurate, effective, and equitable assessment of a market maker’s contribution to market liquidity. These principles and objectives reflect considerable thought and input from firms with a significant stake in the liquidity and efficiency of Nasdaq as to the kind of liquidity standard that would best serve the interests of customers and the marketplace. To date, 111 firms representing a cross-section of Nasdaq market makers, order entry firms and ECNs have endorsed the Statement of Principles.

One point in particular bears emphasizing: because the ability to sell short is critical to a market maker’s ability to provide liquidity and control its risk, the SEC and NASD must be careful to ensure that all market makers providing meaningful liquidity to the market are able to qualify as PMMs. We believe strongly that any PMM standard should be driven by objective criteria of liquidity provision rather than arbitrary thresholds as to how many market makers should qualify for short sale relief.

In closing, we appreciate the opportunity to provide guidance on this important issue and offer to make ourselves available to the SEC and NASD as they work to develop an alternative formula that better recognizes the strengths of different types of market participants and the services they provide to customers.

Sincerely,

/s/ Lon Gorman Charles Schwab & Co., Inc.	/s/ Walter Raquet Knight Securities, L.P.
/s/ E.E. Geduld Herzog Heine Geduld	/s/ Bernard Madoff Bernard L. Madoff Investment Securities
/s/ Peter C. Cohan Pershing Trading Company, L.P.	/s/ Thomas Neumann Sherwood Securities Corp.

Attachments: Statement of Principles

List of Firms Endorsing the Statement of Principles

NASDAQ PRIMARY MARKET MAKER STANDARDS

STATEMENT OF PRINCIPLES

To assist the NASD in its consideration of new PMM standards, we have developed the following principles and objectives that we believe are critical to an accurate, effective, and equitable assessment of a market maker’s contribution to market liquidity.

• The NASD’s standard of liquidity should be based on whatever form or forms of market making activity best serve customers.

• Because the ability to sell short is crucial to a market maker’s ability to provide liquidity and control its risk, the NASD must be careful to ensure that all market makers providing meaningful liquidity to the market are able to qualify as PMMs.

• Any standard of market maker liquidity should be based on objective criteria rather than arbitrary thresholds. In other words, all market makers who satisfy an agreed definition of liquidity should qualify as PMMs, regardless of how many or how few that might be.

• In the interest of ensuring against unfair discrimination, the NASD’s standard should avoid arbitrary distinctions between retail and institutional oriented firms; trades with internal customers versus trades with external customers; and positions held for longer or shorter periods of time.

• Recognizing that market makers executing customer orders do not always determine the time and market conditions in which they execute orders, any standard of liquidity should be based on factors within the market maker’s control.

• Any standard should be easy to measure and monitor and should be based on data readily and internally available to the firms themselves.

• Any factors included within the agreed liquidity standard should be based on actual trading data rather than potentially inaccurate approximations (e.g., execution time versus report time).

• Any proposed definition should recognize the value of situations in which market makers outsize the market (e.g., executing orders at the inside market price even though the size of the customer’s order exceeds the size available at the inside market).

• Any proposed definition of liquidity should recognize the value of situations in which market makers provide continuous automated execution at the inside market, especially during volatile market conditions.

• Any standard of liquidity should avoid penalizing market makers for crossing customer orders, protecting limit orders, and displaying limit orders in ECNs.

• Any standard of market maker liquidity should be economically neutral. (Any proposal that incents market makers to hold positions longer defies basic economics and creates negative incentives: market makers who lay off positions sooner than later are less exposed to market risk and are thus inclined to charge lower prices in the form of narrower spreads.)

• Recognizing that even firms with a demonstrated commitment to providing investors with liquidity may not satisfy a PMM standard all the time in all securities, the NASD should consider establishing a threshold under which firms that qualify as PMMs in the vast majority of securities in which they make markets would qualify as PMMs in all securities.

The following 111 firms have endorsed the Statement of Principles:

Greg Taylor

Addison Securities

Michael Brennan

Advanced Clearing, Inc.

Albert L. Menard

Affina Brokerage Services, Inc.

Robert Krebs

American Express Security Services Inc.

Michael Brennan

Ameritrade, Inc.

David Laurent

Andover

James P. Horgan

Andrew Peck Associates, Inc.

Jerry Putnam

Archipelago LLC

Sidney Horowitz

Axiom Capital Management

W.T. Spane

BHC Securities, Inc.

Frank J. LaSalla

BHF Securities Corp.

Aldo Parcesepe

Bear Stearns

Bernard Madoff

Bernard L. Madoff Investment Securities

Kevin Peck

Bidwell & Company

Robert Peters

Birchtree Financial Services Inc.

Kevin Foley

Bloomberg Tradebook

Kimi E. Jingy

The Boston Group

David Nutkis

Brill Securities, Inc.

Tony Madonia

Broker Dealer Financial Services Corp.

Stephen P. Washburn

Brookstreet Securities

George A. Brown

Noreen Gallogher

Brown & Company

Kenneth P. Ducey

BT Brokerage Corporation

Rodney E. Trautvetter

Burke, Christensen & Lewis Securities

H. J. Burns

Bush Burns Securities, Inc.

Jeffrey Unger

Canterbury Capital Services, Inc.

Lon Gorman

Charles Schwab & Co., Inc.

Jules Mangin

CIBC/Wood Gundy Inc.

Dick Herbert

Citation Financial Group, LP

Bud Gremel

City Securities Corp.

David Coburn

Coburn & Meredith

Robert Carr Jr.

Stephen E. Shevli

Commerce Brokerage Services Inc

Robert Skowrenski

Commerzbank Capital Markets

Colletta L. Dorado

Corporate Securities Group, Inc.

Donald Cowles

Cowles, Sabol & Co. Inc.

Ruth Rupperi

Cutter & Co.

L. Bruce Medsen

D.A. Davidson

William Lewke

Direct Access Brokerage

Diego Lopez

Dirks & Co.

Anthony Pontecorvo

Donald & Co. Securities, Inc.

Steven Rueb

Dorsey & Co.

Arthur Tollendini

Dreyfus Brokerage

Christopher Moran

du Pasquier & Co.

Steve Hetlinger

E*Trade Securities

John Paul DeVito

Eastbrokers North America, Inc.

Bart Green, Sr.

Edward Jones

David Staudinger

Fano Securities

Giandomenico (John) Rende

Field Logan & Co.

Chee Eng

First Colonial Securities Group

Geoff Havre

First Financial Equity Corp.

Gresham Cooney

First Liberty

George A. Johnson

Fiserv Correspondent Svcs, Inc.

Chris Thompson

Freedom Investments, Inc.

Robert Goldberg

Goldis Financial Group Inc.

Nancy Sangster

Haywood Securities, Inc.

E.E. Geduld

Herzog Heine Geduld

Robert M. Collins

Holt & Collins

Reg Pitts

InterFirst Capital Corp.

Lewis Semones

Interstate Johnson Lane Corp.

Frank Somma

Investex Securities

Chris Grant

Investment Designers Inc.

Tim Sullivan

Investment Technology Group, Inc.

Josh Levine

Island ECN

Arthur J. Kearney

John J. Kinnard & Co.

Collette Dorado

J.W. Charles Clearing Corp.

Douglas Kaiser

Joseph Charles & Assoc., Inc.

Tim Moore

JP Turner & Co. (Argent)

Coletta L. Dorado

JW Charles Clearing Corp.

Jed Kaplan

Kaplan & Co. Securiteis

Tom Brucia

Kirlin Securities

Walter Raquet

Knight Securities, L.P.

Dennis A. Green

Legg Mason

Wayne Mitchell

Levesque Beaubien Geoffroin, Inc.

Cindy Besek

May Financial Corp.

Len Mayer

Mayer & Schweitzer, Inc.

Thomas Bruderman

Merit Capital Associates, Inc.

Diane Ratte

Midland Walwyn

Matt De Salvo

Morgan Stanley & Co. Incorporated

William Marchand

Moors & Cabot

Kevin J. Kelly

Muriel Siebert & Co., Inc.

John Tarleton

Nathan & Lewis Sec., Inc.

Tim Hurley

PCH Securities, Inc.

Harold Peremel

Peremel & Company

Peter C. Cohan

Pershing Trading Co., L.P.

Richard Anderson

Primevest Financial Services

Ronald Kraska

R.J. Forbes Group, Inc.

Jack Eizikovitz

R.P.Assignee Corp.c/o ICTI

R. David Santoro

Raymond James & Assoc., Inc.

Carol Scott

RBC Dominion Securities

Brendan Lynch

Republic New York Securities

Mary F. Dupske

RPR Correspondent Services

Patrick Driven

Schneider Securities, Inc.

Rodger O. Riney

Scottsdale Securities, Inc.

SEI Investments Distribution Co.

Mark J. Held

Thomas Neumann

Sherwood Securities Corp.

William D. Felder

Southwest Securities, Inc.

Mike Pisano

Starr Securities

Rob Cofer

Stifel, Nicolaus & Co., Inc.

Gerald Feldman

Stockcross, Inc.

Arthur Pacheco

Strike Technologies, Inc.

Brian Hyndman

The Brass Utility LLC

Darrel Jorstao

Thomson Kernaghan & Co.

Denny Anderson

Van Kasper & Company

Rany Watson

Volume Investor

Paul Richards

Wachovia Investments, Inc.

Sean Kelleher

Wall Street Access

Alan Lederfeind

Wall Street Discount

Edward Defelice, Jr.

Wall Street Equities

John Chapel

Waterhouse Securities

Paul Fitzgerald

WBM, LLC c/o Josephthal & Co. Inc.

Gary Wedbush

Wedbush Morgan Securities Inc.

Alan Miller

Winchester Investment