TCS Daily

Super Confidence Builder

By James K. Glassman - August 21, 2002 12:00 AM

The test of a good system is not whether failures occur but whether they are remedied with speed and certainty. Despite the hysteria generated by media and politicians, the U.S. securities-trading system has clearly met that test.

Since a series of corporate accounting scandals began last fall with the disclosure that Enron Corp., with the help of auditors from Arthur Andersen, had deceived shareholders about its true financial health, the response has been swift and powerful - from investors, from government and from financial exchanges.

In a brutal display of market discipline, investors obliterated the prices of shares in Enron, WorldCom and other companies that doctored their books. Scores of corporations fired Arthur Andersen, and the accounting firm quickly disintegrated. Government regulators toughened oversight, and Congress and the President enacted new accounting rules and criminal-fraud laws.

But the exchanges, which are largely self-regulated, received less attention.

Consider the Nasdaq, the world's largest stock market, with nearly 4,000 listed companies, ranging from giants like Microsoft Corp., with a market capitalization of more than one-quarter of a trillion dollars, to small firms with values of only a few million.

In July, Nasdaq's board approved more than two dozen new corporate-governance rules to increase accountability and transparency, and immediately sent them to the Securities & Exchange Commission. Among the new requirements:

  • A majority of a company's board members must be independent (meaning that, among other things, that they cannot be large shareholders, executives, relatives of executives, employees of the outside auditing firm, or recipients of payments for services other than board membership).

  • Executive compensation must be approved by an independent committee or by a majority of independent directors.

  • A company's audit committee must have sole authority to hire and fire outside auditors.

  • All insider transactions in company stock must be disclosed within two business days.

While these measures, and similar ones taken by the New York Stock Exchange, are important, Nasdaq, long before the Enron scandal, was working to launch an impressive new trading system called SuperMontage that will boost the confidence of investors by showing them the true real-time status of orders to buy and sell stock. The U.S. securities system is the most open and fair in the world, but more exposure is needed, and SuperMontage will dramatically pull back the curtains.

As far as an investor can tell, an order to buy, say, 100 shares of IBM stock disappears into a black hole at the NYSE and comes out a while later, magically, as a purchase. Already, Nasdaq trading is swifter and more transparent, but the new system is a quantum leap - or, as Hardwick ("Wick") Simmons, Nasdaq's CEO, told me, it's the "killer app."

He's right. A montage is a single image that incorporates other images. SuperMontage is a system that both displays orders to buy and sell stocks and that executes trades; it's fast and loaded with data. There's no black hole here. To the contrary, SuperMontage will provide "aggregate interest five price levels deep."

In other words, an investor who is considering, for example, the purchase of shares in Starbucks, can call his broker, who can then look at SuperMontage and find a listing of shares being offered for sale and purchase at different prices surrounding the most recent trade - along with the number of shares offered at each price. This valuable information - clues to the supply and demand of Starbucks shares - is then passed along to the investor, who takes it into account in his decision to buy.

In fact, even if investors and brokers don't use the new data, the very existence of such a transparent trading system - like the very existence of 10-K filings at the SEC - will go a long way toward improving investor confidence. Indeed, SuperMontage is a greater confidence-builder than company filings because it is real-time data, not an accountant's interpretation of data.

SuperMontage is critical to protecting investors, brokers and companies. It could eventually force less transparent and less rapid systems - say, the NYSE "specialist" system, with its secret books of orders, controlled by individuals on the floor - to modernize and meet the needs of the post-Enron era.

Nasdaq has SuperMontage tested and ready to roll. (You can see a sample montage page on the website at But approval from the SEC is needed, and it has been slow in coming - mainly because the SEC itself was not fully stocked with commissioners and because Nasdaq's competitors may be trying to gum up the works.

The SEC meets Aug. 26, and SuperMontage is expected to be on the agenda. The commission should act immediately to approve the system. SuperMontage will be a strong antidote to the Enron blues, injecting excitement, technical virtuosity and candor into a market that needs more of all three.



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