The Securities and Exchange Commission

[thepennyking]

A beefed-up NASD short-selling rule designed to make
the market more efficient may very well have the opposite affect - at least
temporarily.
That's because technological changes haven't been made that would allow NASD
and non-NASD members to exchange the necessary information that puts them in
compliance with the new short sale rules.
The result: Non-NASD members looking to do short sales could be spending a
lot of time on the phone with NASD market makers confirming that they have, as
required under the new rule, taken steps to locate shares before entering in a
short sale transaction.
This has the potential of affecting a large base of traders. Non-NASD
members include the New York Stock exchange, the American Stock Exchange,
regional exchanges, specialists firms and most foreign brokers.
NASD strengthened its existing affirmative determination rule late last
year, expanding the rule to cover non-NASD members. The new NASD rule is
schedule to take effect on April 1.
But as it stands, BRASS, an electronic trade execution system widely used by
market markers and trading firms in the U.S., has yet to make necessary
changes to its software to address NASD's affirmative determination rule.
BRASS is owned by SunGard (SDS).
SunGard has been telling clients that it will take two to three months for
its order management system to be able to handle a new step required by NASD
in short sale trades by non-members.
Tom King, president of SunGard Trading Systems, said Friday that his company
provided its clients with an alternative to process those orders. King said
the alternative may not be "as streamlined as they would prefer" but that it
will allow clients to process short sale orders from non-NASD members while
SunGard works on implementing technical changes to its trading system. King
wasn't able to comment on how long it would take his company to implement
technical changes needed to deal with NASD's new short sale rule. King said
only a very small amount of orders would be affected.
BRASS is the predominant Nasdaq market making trading system and also
support trade execution and order management on NYSE, AMEX and Nasdaq.
A short seller typically borrows stock from a broker to sell it into the
market, betting that the share price will fall so that he can buy the stock
back at a lower price and pocket the difference.
Under the rule, brokers and dealers engaged in a short sale transaction must
make sure that shares can be delivered by settlement date, three days later.
The new NASD affirmative determination rule doesn't cover non- members,
instead it effectively makes it the responsibility of NASD members to make
sure that their trading counterparts have taken steps to locate the shares
necessary to timely settle a transaction before completing a short sale.
Andrew #####, director of business development and international trading at
Canaccord Capital Corp. in Vancouver said that the difficulties of executing
short sales would significantly reduce short selling from Canada.
"Because of the lack of a system solution to pass the locate information to
market makers, we'll have to pass the information on a manual basis. This will
result in placing an order over the phone," Jaffy said.
NASD last month delayed implementation of its broader affirmative
determination rule, which was originally scheduled to take effect on Feb. 20,
to provide its members with additional time to make technological changes to
their systems to comply with the new requirement.
Some members "needed time to reprogram their systems in order to create this
interim step before accepting orders," Steve Luparello, executive vice
president of Market Regulation at NASD told Dow Jones Newswires on Feb. 18. A
spokeswoman for the NASD said Friday that no members had "indicated to us that
they won't be ready."
SunGard is not a NASD member.
Market makers engaged in bone fide market making activities will continue to
be exempt under NASD new affirmative determination rule.

(Carol S. Remond is one of four "In The Money" columnists who take a
sophisticated look at the value of companies and their securities and explore
unique trading strategies.)

-By Carol S. Remond; Dow Jones Newswires; 201 938 2074;
[e-mail]

(END) Dow Jones Newswires
03-26-04 1622ET