UNITED STATES OF AMERICA
                                         Before the
                             SECURITIES AND EXCHANGE COMMISSION

             SECURITIES EXCHANGE ACT OF 1934
             Release No. 34-40900 / January 11, 1999

             ADMINISTRATIVE PROCEEDING
             File No. 3-9803

                                             :
             In the Matter of                :  ORDER INSTITUTING
                                             :  PROCEEDINGS PURSUANT
             CERTAIN MARKET MAKING           :  TO SECTIONS 15(b) AND
             ACTIVITIES ON NASDAQ            :  21C OF THE SECURITIES
                                             :  EXCHANGE ACT OF 1934
                                             :  AND FINDINGS OF THE
                                             :  COMMISSION
             :


                                          I.

                  The Securities and Exchange Commission ("Commission")
             deems it appropriate and in the public interest that public
             administrative proceedings be, and they hereby are,
             instituted pursuant to Sections 15(b)(4), 15(b)(6) and 21C
             of the Securities Exchange Act of 1934 ("Exchange Act")
             against certain individual and entity Respondents identified
             in Attachment A hereto (collectively, the "Respondents").

                                         II.

                  On the basis of this Order, the accompanying Orders as
             to the Respondents, and the Respondents Offers of
             Settlement, the Commission finds[1] the following:

                  A.   Respondents

                  The Respondents are entities registered with the
             Commission as broker-dealers pursuant to Section 15(b) of
             the Exchange Act and individuals who, at relevant times,
             were associated with such entities or their predecessors.
             During the relevant time period, all of the entity
             Respondents or their predecessors were market makers in
             Nasdaq securities.  All of the individual Respondents were
             at relevant times employed at Nasdaq market-making firms as
             traders or assistant traders making markets in Nasdaq
             stocks, institutional or retail salespeople dealing in
             Nasdaq stocks, or supervisors of Nasdaq trading and sales.

                  B.   Other Relevant Entities

                  The Nasdaq Stock Market, Inc. ("Nasdaq") is an
             electronic interdealer quotation system owned and operated
             by the National Association of Securities Dealers, Inc.
             ("NASD"), a national securities association registered with
             the Commission under Section 15A of the Exchange Act.  The
             Nasdaq market is a dealer market, in which a number of
             broker-dealers make markets in the same security and execute
             trades.  Making a market consists of standing ready to buy
             and sell a security at prices and quantities displayed on
             Nasdaqs computerized quotation system which links the
             market makers.  The market makers in Nasdaq are required
             simultaneously to quote two prices: a "bid" price, at which
             they are willing to buy the security, and an "ask" price, at
             which they are willing to sell the security.  The "inside
             bid" is the highest prevailing bid price in a stock at any
             given time, while the "inside ask" is the lowest prevailing
             asked price.[2]  Together, the inside bid and inside ask
             represent the "inside market."  The difference between the
             inside bid and the inside ask is commonly referred to as the
             "spread" or "inside spread."  As noted in the Commissions
             Report Pursuant to Section 21(a) of the Securities Exchange
             Act of 1934 Regarding the NASD and Nasdaq Market, Exchange
             Act Release 37542 (hereinafter referred to as the "21(a)
             Report"), most customer orders during the time period in
             question were executed by market makers at the inside bid or
             ask.[3]  Trades in the Nasdaq market can be executed in a
             variety of ways, including, without limitation, through
             telephone calls to other dealers, the Instinet trading
             system[4], and certain electronic order delivery and
             execution systems owned and operated by Nasdaq (such as
             SOES, SelectNet and ACES).  The time, price and volume of
             most transactions must be reported to Nasdaq, which in turn
             disseminates this information publicly through its
             electronic network.

                   C.  Factual Summary and Legal Analysis

                  On August 8, 1996, the Commission issued the 21(a)
             Report,[5] which described, among other things, coordination
             among market makers of quotations and trades that may have
             advanced or protected their proprietary interests, in a
             manner that may have been contrary to the best interests of
             their customers, and that may have created a false or
             misleading appearance of trading activity in the Nasdaq
             market.  See, 21(a) Report, at Section VI.B.  After the
             issuance of the 21(a) Report, the Commissions investigation
             of market making activities in the Nasdaq market continued,
             and these proceedings result from the continuation of the
             investigation.

                  The investigation uncovered a number of anticompetitive
             and improper practices by Nasdaq market makers during 1994
             which violated certain provisions of the federal securities
             laws.[6]  Nasdaq market making firms and their traders
             coordinated their trading and other activities with other
             market makers to create false or misleading appearances in,
             or otherwise artificially influence, the market for various
             Nasdaq stocks.  This coordination was primarily accomplished
             by one market maker asking another to move its quoted prices
             in order to create a different appearance to the market from
             which the requesting market maker could benefit, and
             violated the antifraud provisions of Section 15(c)(1) of the
             Exchange Act and Rule 15c1-2 thereunder, and the prohibition
             against fictitious quotations provided in Section 15(c)(2)
             of the Exchange Act and Rule 15c2-7 thereunder. [7]  Nasdaq
             market makers also engaged in other violations related to
             their trading of Nasdaq stocks, including failing to provide
             the best execution of customer orders, intentionally
             delaying trade reports, failing to honor their quoted prices
             on Nasdaq, failing to create or maintain required books and
             records and failing reasonably to establish and enforce
             policies and procedures to supervise Nasdaq trading
             personnel with a view to preventing violations of law.
             Market maker misconduct was typically, but not always,
             limited in duration and scope to intraday violations
             relating to particular stocks, but cumulatively had a
             detrimental impact on the fairness and efficient functioning
             of the Nasdaq market.  Most of the conduct described herein
             was intended to increase the market makers trading profits
             or otherwise advance their proprietary interests, often at
             the expense of their customers and other market
             participants.  The following section summarizes the
             violative practices uncovered and discusses the manner in
             which the conduct violated the federal securities laws.

                  1.   The Fraudulent Coordination of Quote Movements

                  The most common form of violative activity uncovered by
             the staffs investigation was the coordinated entry of bid
             and/or ask quotations by market makers into the Nasdaq
             system for the purpose of artificially affecting the price
             of subsequent transactions.  This behavior typically
             consisted of one market maker soliciting the agreement of a
             second market maker to change the Nasdaq quotations
             disseminated by one or both market makers.  Although the
             specific reasons for the coordination of quote movement
             requests varied from transaction to transaction, all
             involved obtaining an unfair trading advantage for the
             participating market makers.  These arrangements, which
             changed the inside spread or harmed customers or other
             market participants, were not disclosed by the market makers
             involved in the scheme to other market participants or the
             Nasdaq market.  Such coordinated activity constituted market
             manipulation in violation of the antifraud provisions of
             Section 15(c)(1) of the Exchange Act and Rule 15c1-2
             thereunder, and the prohibition on the entry of fictitious
             quotations provided in Section 15(c)(2) of the Exchange Act
             and Rule 15c2-7 thereunder.

                  Market makers coordinated quote movements in order to
             create a false or misleading appearance of change in the
             supply or demand for a particular Nasdaq stock.[8]  The
             coordinated quote movements often involved one market maker
             moving one of its quotations to or from the inside quotes in
             order to change the number of market makers at the inside
             quote, which other market participants could reasonably
             perceive as an apparent change in the level of buying or
             selling interest.  For example, a market maker needing to
             buy stock because of a customer order to purchase stock, or
             a short inventory position, would ask another market maker
             to move his quote downwards to join the inside ask.[9]  The
             purpose of the requested quote movement was to signal a
             downward price trend and the apparent addition of supply at
             the inside ask, thus misleading potential sellers on Nasdaq
             or Instinet into reducing their price expectations.[10]
             After the quote movement, the requesting market maker would
             purchase stock on Nasdaq or Instinet at a reduced price, at
             the expense of the seller.[11]  The same strategy was also
             employed when the requesting market maker held a customer
             sell order, or had a long position in its inventory account.
             In such instances, the request was usually for the other
             market maker to join the inside bid, in order to signal an
             upward movement in price.[12]  In some instances, market
             makers entered large orders to buy stock on Instinet that
             created the appearance of rising demand for the stock, in
             connection with requesting a quote move from another market
             maker, in order to induce other market participants to buy
             the stock on the Nasdaq market (or vice versa to induce
             other market participants to sell).

                  At times, market makers also asked other market makers
             to move their quotes in a manner designed to create a new
             inside bid or ask price for a particular security in order
             to allow the requesting market maker to execute existing or
             anticipated customer orders at the new price levels, which
             benefitted the requesting market maker and disadvantaged its
             customer(s).  In some instances where a customer had
             submitted a market order to buy stock, a trader would ask a
             lone market maker on the inside ask to move its ask
             quotation upwards.  This quote movement created a higher
             inside ask, and the requesting market maker would then sell
             stock to its customer at the new, higher price.[13]
             Additionally, institutional investors frequently transacted
             at prices between the inside bid and ask by a process of
             negotiation with market makers.  Both institutional
             investors and market makers viewed the prices quoted at the
             inside spread as benchmarks for these negotiations, and the
             movement of the inside quotes upwards or downwards tended to
             move the ultimate transaction price in the direction of the
             quote move.  Thus, changes in the inside quotes allowed
             market makers in some instances to influence the price even
             with respect to negotiated trades that were executed between
             the inside spread.

                  The undisclosed collaboration among market makers was
             detrimental to the interests of investors.  By coordinating
             quote movements to move the quoted price of a stock up or
             down, traders facilitated trades at prices that were more
             favorable for the market makers, often at the expense of
             their customers or other market participants.    Where
             customer orders were executed at prices detrimental to the
             customers, the coordinated misconduct also breached market
             makers obligation to provide best execution and deal fairly
             with their customers.[14]  The undisclosed arrangements to
             move quotations also distorted the appearance of supply and
             demand in the Nasdaq market, potentially undermining
             investor confidence and the integrity of widely disseminated
             trading and market data.

                  2.   Undisclosed Arrangements to Coordinate Quotations

                  Undisclosed arrangements to coordinate quotations are
             prohibited by Commission rule, even in those cases where
             such conduct does not have a manipulative impact, such as a
             change in the inside market, or harm to a customer or other
             market participant.  Section 15(c)(2) of the Exchange Act
             prohibits a broker or dealer from effecting any transaction
             or inducing or attempting to induce the purchase or sale of
             any security in the over-the-counter market by, inter alia,
             use of fictitious quotations.[15]  Exchange Act Rule 15c2-7
             defines the term "fictitious quotation" to include any
             arrangement between two market makers in furtherance of
             which a quotation is entered, and requires disclosure of the
             arrangement and of the identities of the market makers
             participating in the arrangement.[16]  Rule 15c2-7 is
             designed to promote market transparency by ensuring the
             disclosure of, among other things, the identity of the
             actual dealer  behind a dealers quotations.[17]

                  The coordinated entry of Nasdaq quotes for the purpose
             of altering the inside market, painting a deceptive picture
             of market conditions, or inducing another market participant
             into buying or selling at an artificial price constitutes an
             "arrangement" as that term is used in Rule 15c2-7. [18]
             Since there was no disclosure of such arrangements to Nasdaq
             or other market participants, such quotations violated
             Section 15(c)(2) of the Exchange Act and Rule 15c2-7
             thereunder.[19]

                  The investigation also identified a practice whereby
             one market maker would enlist another market maker to
             disseminate a quotation to buy or sell Nasdaq stocks on its
             behalf.  In many such instances, the requesting market maker
             asked the second market maker to join the existing inside
             bid or ask, or create a new inside market, in the hopes of
             buying or selling stock.[20]  When the second market maker
             disseminated its quotations as requested, it and the
             requesting market maker would have been required by the
             express terms of Rule 15c2-7 to disclose the arrangement to
             the market.[21]  Because market makers occupy a central
             position in the Nasdaq market, Rule 15c2-7 requires the
             disclosure of such arrangements among market makers in order
             to inform the market of the true nature of dealer activity
             and thereby enhance market integrity and investor
             confidence.  The concealment of the identity of the real
             market maker disseminating quotes is contrary to the public
             policy goals of Rule 15c2-7 to promote free and open
             markets, and prevent fraud and deception.

                  3.   The Intentional Delaying of  Trade Reports

                  The investigation revealed a number of instances in
             which market makers intentionally delayed reports of
             significant trades to the Nasdaq market.[22]  The purpose of
             delaying these trade reports was to provide the relevant
             trader with an unfair informational and trading advantage
             over other market participants.  The failure to properly
             report trades in such cases violated the antifraud
             provisions of Section 15(c)(1) of the Exchange Act and Rule
             15c1-2 thereunder.[23]

                  The investigation uncovered instances in which certain
             market makers entered into explicit agreements to delay
             reporting significant trades, and other scenarios where
             market makers unilaterally failed to report significant
             trades.  This practice of intentionally delaying trade
             reports typically occurred when a timely report of a
             significant trade could have moved prices in a direction
             adverse to the market maker's interests.  For example, a
             market maker that purchased a large amount from a customer
             selling stock would, either singly or in concert with other
             market makers, deliberately delay reporting the trade.  The
             purpose of holding the trade report was to avoid the natural
             downward price movement that would reasonably be expected to
             result from the report of a large sale of stock by a
             customer.  In order to reduce the long position resulting
             from its purchase from the customer, the relevant market
             maker would then sell stock in the open market at a price
             unaffected by the information contained in the withheld
             trade report.[24]  These market sales were typically
             executed at higher prices than would have been available if
             the customers trade had been properly reported, to the
             detriment of the market as a whole, as well as the parties
             who purchased stock from the market maker.  The delay of
             trade reports under such circumstances was manipulative and
             resulted in market makers obtaining an unfair and unlawful
             informational advantage in the market.

                  4.   Other  Market Maker Misconduct

                  The investigation uncovered other manipulative activity
             which violated certain antifraud provisions of the federal
             securities laws, but did not involve an "arrangement" of the
             type prohibited by Rule 15c2-7.[25]  In certain instances,
             market makers, directly or through a cooperating market
             maker, transacted with other market makers that were on the
             inside bid or inside ask, for the specific purpose of
             altering the prices at the inside market.  In such cases,
             the transacting market maker was usually holding a customer
             order to buy or sell.[26]  The execution of the customer
             order was delayed until the inside quote was moved as a
             result of the transactions.  Then, the market maker with the
             customer order executed the order at the new inside market,
             which was a worse price for the customer.  Such conduct
             improperly benefitted the market maker and harmed the
             interests of its customer.

                  5.   Best Execution Violations

                  The investigation uncovered a number of instances in
             which Nasdaq market makers failed to provide best execution
             for their customers orders.  The duty of best execution has
             generally been defined as the obligation of the broker-
             dealer to seek to obtain the most favorable terms reasonably
             available under the circumstances for a customers
             order.[27]  When a broker-dealer acting with scienter fails
             to seek the most favorable price reasonably available under
             the circumstances for a customer order, the broker has
             failed to meet its obligation of  best execution in
             violation of the antifraud provisions of Section 15(c) of
             the Exchange Act and Rule 15c1-2 thereunder.[28]

                  During the relevant time period, best execution
             violations occurred in a number of different situations.  A
             common denominator in such scenarios was the favoring by the
             market maker of its own interests, or those of a cooperating
             market maker, over the interests of its customers.  First,
             as described in Section II.C.1. above, in many instances,
             market makers coordination of quotations allowed them to
             execute customer orders at artificial prices unfavorable to
             the customer.  In other instances, market makers in the
             process of executing customer orders sometimes suggested to
             cooperating market makers on the inside bid or ask that they
             move away from the inside quote without executing a trade,
             thereby depriving the customer of a more favorable
             execution.[29]   On occasion, market makers did not execute
             or cancelled customer trades at advantageous prices in order
             to maintain good relations with other market makers.[30]
             Market makers also sometimes entered into "print-splitting"
             arrangements with other market makers, by which they agreed
             to share any executions.[31]  If a market maker was holding
             a customer order at the time which was left unfilled as a
             result of the print-splitting arrangement, the failure to
             fill the order as promptly as possible violated its best
             execution obligations.  Other violations occurred when
             market makers sometimes traded with customers at prices
             outside of the inside spread, with no apparent
             justification.  In certain instances, market makers delayed
             the execution of large customer orders in order to trade
             first for their own account at more favorable prices, e.g.,
             by selling stock for their own account first, while delaying
             the execution of a customer sell order, and later purchasing
             the customers stock at market prices that had been
             depressed by the market makers earlier sales for its own
             account.  Finally, market makers sometimes traded with
             cooperating market makers at a particular price without
             filling customer limit orders at the same price,[32] and
             without advance disclosure of and consent by their customers
             to their limit order policies.[33]

                  6.   Failure to Honor Quotations

                  Under the Commissions "firm quote" rule,[34] a market
             maker is required to execute any order presented to it to
             buy or sell a security at a price at least as favorable to
             the buyer or seller as the market maker's published bid or
             offer and up to its published quotation size.[35]  On
             certain occasions, Nasdaq traders failed to honor the
             quotations that they disseminated.  Market makers backed
             away from orders presented to them by firms whose trading
             practices they disliked or for other improper reasons.[36]
             The failure of Nasdaq market makers to honor their
             quotations prevented investors from accessing the best
             advertised price, and reduced liquidity in the market.

                  7.   Failure to Keep Accurate Books and Records

                  In numerous instances, market makers failed to create
             or maintain records of their trading activity as required by
             Commission rule.[37]  Order tickets frequently had
             inaccurate or unrecorded time(s) of execution, inaccurate or
             unrecorded time(s) of entry of a customer order, or failed
             to note all the terms and conditions of an order.  In
             addition, a number of required records were not maintained
             by Nasdaq market makers for the prescribed time period.
             These violations hampered the ability of regulators to
             scrutinize broker-dealer compliance with investor protection
             rules.

                  8.   Failure to Reasonably Supervise Nasdaq Trading

                  Under Section 15(b)(4) of the Exchange Act, the
             Commission may sanction a broker-dealer for failing
             reasonably to supervise a person under its supervision.
             Supervision is an essential function of broker-dealers.  The
             Commission has made it clear that it is critical for
             investor protection that a broker-dealer establish and
             enforce procedures reasonably designed to supervise its
             employees.  In large organizations in particular, it is
             imperative that the system of internal control be adequate
             and effective. A firms failure to establish such procedures
             is symptomatic of a failure to supervise reasonably.

                  The frequency of the violations described herein raised
             serious questions concerning the adequacy of supervision by
             the respondent firms of their Nasdaq traders, and the
             investigation uncovered supervisory deficiencies at numerous
             of the respondent firms.  Most of the respondent firms
             failed reasonably to supervise with a view to preventing or
             detecting these violations, in that they did not have
             adequate policies or procedures in the respects described
             below.  In addition, some respondent firms policies and
             procedures were inadequately documented, promulgated and
             enforced.

                   a.  Inadequate Procedures and Guidelines Concerning
             Quote
             Movements

                  Most of the respondent firms did not prescribe
             procedures or guidelines for their traders or supervisors
             with respect to conversations with other firms about
             quotations, requests or offers to move quotations or the
             coordination of quotations.  A few of the respondent firms
             had limited procedures or guidelines addressing the making
             or receipt of requests to move quotations in certain limited
             circumstances, but in no instance were these procedures or
             guidelines adequate.  The procedures or guidelines that
             existed were sometimes not in writing, which led to
             differing understandings among supervisors and traders as to
             the meaning of the procedures or guidelines.  Those
             procedures and guidelines that were in writing were
             sometimes not disseminated to all personnel engaged in
             trading Nasdaq stocks or supervising such trading.

                   b.  Inadequate Review of Quote Movements

                  In addition, most respondent firms had no procedures or
             guidelines for  reviews by supervisory or compliance
             personnel designed to uncover potentially violative
             coordination or collaboration with respect to quotations.  A
             few firms had limited review procedures pertaining to quote
             movements under certain circumstances, but these procedures
             were inadequate because they did not sufficiently address
             the  potential problems that could arise from a market
             makers entry of quotations.

                   c.  Certain Additional Supervisory Problems

                  In certain respondent firms, the supervisors to whom
             the head Nasdaq trader reported and the Compliance
             Departments had little familiarity with Nasdaq market
             making.  Such respondent firms relied on the head Nasdaq
             trader to perform much or most of the supervisory function,
             and did not require other personnel, either supervisory or
             compliance, to become knowledgeable about the activities of
             the Nasdaq traders.  Rather, they expected that the head
             trader would notify his supervisors of any problems that
             arose.  This supervisory structure was flawed, as the head
             traders of these firms sometimes themselves engaged in
             underlying violations, with no effective oversight by their
             employers.  The lack of effective oversight of the head
             traders was one element in the breakdown of effective
             supervision.  In establishing supervisory and compliance
             systems, a broker-dealer must be mindful of the risks
             inherent in having no effective oversight of head traders,
             since such persons control and often train subordinates, and
             set an example for subordinates.  When head traders
             themselves engage in violative activity, the supervision
             process with respect to the rest of the trading desk is
             effectively undermined.  Broker-dealers must have in place
             policies and procedures reasonably designed to ascertain
             whether or not traders having supervisory authority,
             including head traders and other supervisory traders, are
             themselves in compliance with the law.

                  Another problem uncovered at certain of the respondent
             firms was that compliance resources were inadequate.
             Management of certain of the respondent firms purported to
             have either assigned certain responsibilities to or placed
             substantial reliance on their firms Compliance Departments
             to carry out significant responsibilities, such as
             monitoring and reviewing trading activity.  Involving the
             Compliance Departments in such responsibilities may be
             reasonable when the Compliance Departments are sufficiently
             knowledgeable about the relevant activities and are provided
             with resources adequate to perform these tasks effectively.
             The complexities of the Nasdaq market and trading in Nasdaq
             stocks will often require, at firms with sizeable Nasdaq
             trading departments, a substantial commitment of compliance
             resources.  When the Compliance Departments  resources are
             so limited that it cannot reasonably be expected to perform
             its duties effectively, both the firm and its management may
             bear responsibility for failure to supervise. [38]

                                            III.

                  Each Respondent has submitted an Offer of Settlement
             which, as set forth in the accompanying Orders Making
             Findings and Imposing Sanctions, the Commission has
             determined to accept.

                  By the Commission.


                                                     Jonathan G. Katz
                                                     Secretary

             **FOOTNOTES**

              [1]: The findings herein are solely for the purpose of these
                   proceedings, and all of the respondents did not engage in
                   every type of violative conduct described in this Order
                   Instituting Proceedings.  As set forth in the accompanying
                   Orders Making Findings and Imposing Sanctions, the findings
                   herein are binding on each Respondent only to the extent
                   specified in the applicable accompanying Order.  The findings
                   herein are not binding on any other person in this or any
                   other proceeding.


              [2]: The ask price is also sometimes referred to as the "offer"
                   price.


              [3]: Appendix to the 21(a) Report, p.A-5, text at note 14 (August
                   8, 1996).


              [4]:           Instinet Corporation, a Delaware corporation, is a
                   broker-dealer registered with the Commission pursuant to
                   Section 15(b) of the Exchange Act and a member of the NASD.
                   At all relevant times, Instinet owned and operated a
                   computerized trading system in which Nasdaq stocks, among
                   others, were traded by subscribers to Instinets services.
                   Subscribers to the Instinet system traded electronically by
                   placing orders to buy and sell stock that were displayed
                   anonymously on a video screen to other subscribers, who could
                   electronically transact with those orders.  As discussed in
                   the 21(a) Report, Instinet was heavily used for interdealer
                   trading of Nasdaq securities.  See, 21(a) Report at 18-20.
                   Nothing in this Order is intended to suggest improper or
                   illegal activity by Instinet.


              [5]: Simultaneously with the issuance of the 21(a) Report, the
                   Commission instituted settled administrative proceedings
                   captioned In the Matter of National Association of Securities
                   Dealers, Inc., Exchange Act Release No. 37538 (Aug. 8, 1996),
                   in which, among other things, the Commission imposed remedial
                   sanctions upon the National Association of Securities
                   Dealers, Inc.  In addition, on July 17, 1996, the United
                   States Department of Justice filed a settled civil action
                   against certain Nasdaq market makers which prohibited certain
                   conduct related to market making activities and required
                   certain additional relief. United States v. Alex Brown &
                   Sons, Inc., et al., 96 Civ. 5313 (RWS)(S.D.N.Y. July 17,
                   1996).

              [6]:
                   A principal source of evidence in this investigation were
                   audio tape recordings of the telephone lines of a number of
                   Nasdaq market makers.  The Commission is not, in this Order,
                   requiring that broker-dealers tape record their sales or
                   trading activities, nor is it suggesting that broker-dealers
                   must, as a matter of course, review the tape recordings they
                   elect to make.  However, when an indication of potential
                   wrongdoing comes to the attention of a firm, review of
                   potentially relevant tape recordings may, depending on the
                   circumstances, be a prudent investigative step to take in the
                   reasonable discharge of a firms supervisory obligations.  In
                   addition, firms that choose to tape record should evaluate
                   their existing supervisory systems to determine whether some
                   means of selectively monitoring such tape recordings would be
                   appropriate in light of the firms obligation to reasonably
                   supervise its employees.  As a result of such evaluation, a
                   firm may determine that its policies and procedures allow it
                   to reasonably satisfy its supervisory obligations without
                   selectively monitoring tape recordings.  The Commission will
                   evaluate the adequacy of a broker-dealers supervisory
                   systems in light of all facts and circumstances.

              [7]:
                   15 U.S.C.  78o(c)(1) and (2), and 17 C.F.R.  240.15c1-2
                   and 15c2-7.

              [8]:
                   A tape recorded conversation uncovered in the investigation
                   provides an example of such conduct.  In this conversation,
                   one market maker asked another to move his bid up to create a
                   higher inside bid in order to foster a false impression of
                   increased demand:

                   Trader 1:  Hello.
                   Trader 2:  Can you go 1/2 bid in the [nickname] stock?
                   Trader 1:  [name of stock]?
                   Trader 2:  Yeah.
                   Trader 1:  Im up.
                   Trader 2:  Im trying to make a higher sale.
                   Trader 1:  You got it.
                   Trader 2:  Thanks.

                   This quote move facilitated a sale by Trader 2 to an
                   institutional customer at a higher price.

              [9]:
                   Some traders have testified that they acceded to these
                   requests out of an expectation that the requesting market
                   maker would reciprocate in the future.  In other cases, the
                   requesting market maker executed a trade at terms favorable
                   to the market maker moving its quote, as compensation for the
                   quote change.  Also, some traders received "protection"
                   (i.e., a guarantee against loss) from the requesting market
                   maker, so that they would be reimbursed for any trading
                   losses incurred during the time spent at the inside quotes.

                   In a number of instances, the coordination between
                   cooperating market makers consisted of one volunteering to
                   move its quotes to assist the other in securing a trading
                   advantage.  The accommodative trading relationships that
                   existed among certain traders often led them to understand
                   when and how to coordinate their quotations and trading so as
                   to create an improper trading advantage.


              [10]: A variant of this strategy was to request a market maker
                   already on the inside bid to move down, in order to signal a
                   reduction in demand and a downward movement in price.  In
                   some instances, market makers coordinated quote movements
                   with several market makers.


              [11]: The transactions on Nasdaq were typically executed by
                   telephone.  Transactions also occurred on Instinets
                   electronic trading system.


              [12]: Consistent with the description in note 10, supra, if the
                   other market maker was quoting at the inside ask price, the
                   request typically would be to move ones quotes up from that
                   level, in order to show an apparent reduction in supply.


              [13]: This type of conduct is illustrated by a taped conversation
                   between two market makers, in which one market maker asks the
                   other to raise his ask price, which results in the creation
                   of a higher inside ask, at which the requesting market maker
                   sells stock to a customer which had previously placed an
                   order to buy:

                   Trader 1: [Name of broker-dealer firm].
                   Trader 2:  Hey [expletive deleted], why dont you go up, so
              we can see if we can
              make a 1/2 sale?
                   Trader 1:  Oh, boy, I like the way you think.
                   Trader 2:  Yeah?  [Expletive deleted].

                   After Trader 1 raised his ask price as requested, Trader 2
                   made sales to his customer at the higher inside ask price
                   created by Trader 1s quote movement (using stock he had
                   purchased from Trader 1 at a price $1/8 below the new inside
                   ask).  As a result, both traders benefitted at the expense of
                   Trader 2s customer.

                   The same strategy was also used for customer sell orders.
                   Sometimes, multiple quote movement requests were made if
                   there were more than one dealer on the inside bid or ask.


              [14]: See also, section C.5., infra.

              [15]:
                   15 U.S.C.  78o(c)(2).

              [16]:
                   Rule 15c2-7 applies to Nasdaq quotations.  Exchange Act
                   Release No. 7275 (March 24, 1964) (proposing adoption of Rule
                   15c2-7),  notes that "[a]lthough the discussion in this
                   release relates primarily to the [pink] sheets, the rule is
                   applicable to any inter-dealer-quotation-system in which
                   broker-dealers submitting quotations are identified."
                   Moreover, Rule 15c2-7(c)(1) defines the term "inter-dealer-
                   quotation-system" to "mean any system of general circulation
                   to brokers and dealers which regularly disseminates
                   quotations of identified brokers or dealers. . . ."  This
                   definition encompasses the Nasdaq system.

              [17]:
                   See, Exchange Act Release No. 7381 (August 6, 1964) (adopting
                   Rule 15c2-7).   See also, Exchange Act Release No. 7275,
                   supra, which states, "[T]he wholesale quotations system is
                   important because it tells at any given time and over spans
                   of time what dealer interest exists, the basic price levels
                   at which particular securities are being bought and sold, and
                   the spread between these levels . . .  [T]he depth of dealer
                   interest and the identity of the dealers making a market are
                   extremely pertinent in evaluating the marketability of a
                   particular security." (Emphasis added)


              [18]: A taped conversation uncovered in the investigation is
                   illustrative.  At the time, the firm that employed Traders 1
                   and 3 was quoting 28 1/2 offered for the stock in question:

                   Trader 1:  Hi guy.
                   Trader 2:  Hey, tell him [Trader 3] Im paying 1/2 for 25,000
              [name of stock] if he
              wants to make a print.
                   Trader 1:  Im sorry.  What do you got?
                   Trader 2:  One-half for 25,000 [name of stock] if he wants to
              make a print.
                              [Pause while Trader 3 gets on the line.]
                   Trader 3:  What are you looking for?
                   Trader 2:  Twenty-five.
                   Trader 3:  Are you [expletive deleted] kidding me?
                   Trader 2:  No.  No.  I got .  .  .   Listen.  Listen, dont
              sell me anything.  Move up.
                   Trader 3:  I just [expletive deleted] plugged about six guys.
                   Trader 2:  Did you?
                   Trader 3:  Oh, my god.
                   Trader  2: Get up.  Get up so I can make a higher sale at
              least, all right?
                   Trader 3:  Sure.

                   In this scenario, Trader 2 refrained from insisting that
                   Trader 3 honor his quoted ask price, but instead requested
                   that he move his firms quotes up.  Trader 3 moved his firms
                   quotes up, as requested.  This was intended to facilitate
                   sales by Trader 2 at higher prices.  In this instance, the
                   actual benefit realized by Trader 2 from the quote move is
                   unclear, and the scenario was, for the purposes of this
                   proceeding, treated as a violation of  Rule 15c2-7 and not
                   the antifraud rules.


              [19]: The following taped conversation illustrates how market
                   makers intended such quote movements to mislead:

                   Trader 1: Hey, man.  What's happening?
                   Trader 2: Hey, uh, this [name of stock]?
                   Trader 1: Yeah.
                   Trader 2: You don't mind jockeying around in this thing for
                         me, do you?
                   Trader 1: Not at all.  Do you want me to go up?
                   Trader 2: I'm trying to make a sale on my offering, here.
                   Trader 1: Let me go to the bid.

                   In this scenario, Trader 1 moved his firms quotations so
                   that he was bidding the inside bid price. This was intended
                   to assist Trader 2 to sell at a higher price.  In this
                   instance, the actual benefit realized by Trader 2 from the
                   quote move is unclear, and the scenario was, for the purposes
                   of this proceeding, treated as a violation of  Rule 15c2-7
                   and not the antifraud rules.


              [20]: Typically, the market maker acting as "agent" would go to
                   the inside bid to advertise its interest in buying stock, and
                   go to the inside ask to sell stock.  Such an arrangement is
                   illustrated by the following taped conversation:

                   Trader 1: . . .  Anyway, I got some [name of stock] for sale.
                   Trader 2:        You do?
                   Trader 1:        And I cant go down offered at 3/4s.  Could
              you go down?
                   Trader 2:        Absolutely . . . .  Im . . .
                   Trader 1:  Are you doing anything at all?
                   Trader 2:  Im working for you.
                   Trader 1:  Okay.
                   Trader 2:  Im at 3/4s.  Im good for at least 5, right?
                   Trader 1:  Youre good for 25.
                   Trader 2:  Okay.  No, I mean, sometimes . . .
                   Trader 1:  Right, right, no.
                   Trader 2: Guys want you to move and its not . . . .   I
                   figured you would be for a
                   decent size.
                   Trader 1:  Im the real thing.
                   Trader 2:  I understand.
                   Trader 1:  Im going to follow you down, probably, but Id
              like to see the stock
              down some.
                   Trader 2:  Okay.
                   Trader 1:  Okay.

              [21]:
                   See, Adopting Release for Rule 15c2-7, Exchange Act Release
                   No. 7381, at pp. 8-9, in which the Commission, for
                   illustrative purposes, described certain types of conduct
                   that would be deemed to violate Rule 15c2-7.

              [22]:
                   By NASD rule, all transactions must be reported within ninety
                   seconds.  NASD Marketplace Rule 4632 (1998 Manual).  As noted
                   above in Section II.B., supra, transactional information is
                   disseminated through the Nasdaq system and is widely
                   available to investors.

              [23]:
                   15 U.S.C.  78o(c)(1), and 17 C.F.R.  240.15c1-2.


              [24]:         The following taped conversation is illustrative:

                         Trader 1: Youre as bad as me though.  No problem.
                         Keep on working.  Let me                   know.  I had
                         to buy 15, so. . . .
                         Trader 2: You bought 15?
                         Trader 1:  Yeah.  Im long 15,000.  I havent printed
              it yet because I didnt want to
              see the reaction.

              [25]:
                   Such conduct violated Exchange Act  15(c)(1), and Rule 15c1-
                   2 thereunder.

              [26]:
                   In some cases, the purpose of moving the market was to engage
                   in proprietary trading at advantageous prices, to the
                   detriment of other market participants.

              [27]:
                   See, e.g., Sinclair v. S.E.C., 444 F.2d 399 (2d Cir. 1971);
                   Arleen Hughes, 27 S.E.C. 629, 636 (1948), affd sub nom.
                   Hughes v. S.E.C., 174 F.2d 969 (D.C. Cir. 1949).  This duty
                   applies to market makers transacting as principal with their
                   customers as well as to broker-dealers acting as agents for
                   their customers.  In re Merrill Lynch Securities Litigation,
                   911 F. Supp. 754, 760 (D.N.J. 1995); E.F. Hutton & Co., 49
                   S.E.C. 829, 832 (1988).  Best execution for customer orders
                   is also required by NASD Conduct Rule 2320(a) (1998 Manual)
                   and its predecessor provisions.


              [28]: See, e.g., Thomson & McKinnon, 43 S.E.C. 785 (1968); Arleen
                   Hughes, supra.  See, also, Delaware Management Co., 43 S.E.C.
                   392 (1967); and  Edward Sinclair, 44 S.E.C. 523 (1971).

              [29]:
                   Under the firm quote rule, Exchange Act Rule 11Ac1-1, 17
                   C.F.R.  240.11Ac1-1, a market maker at the inside quote is
                   obligated to execute any order presented to it at that price
                   in an amount up to its published quotation size (usually
                   1,000 shares during the relevant time period), absent the
                   exceptions provided by the rule.


              [30]: The following taped conversation depicts a best execution
                   violation involving the cancellation of an earlier agency
                   sale for the account of a customer at a higher price and the
                   re-execution of that trade at a lower price, to the
                   customers detriment, for the purpose of fostering goodwill
                   between the executing market maker and the purchasing market
                   maker:

                   Trader 1: OK, you bought some from us today at 8 1/8.
                   Trader 2: Yeah.
                   Trader 1: 5,000 shares. . . . And basically you were the only
                         price that was way out
                         of whack for us.  So what I want to do is give you a
                         little gimme over
                         there, but um, hopefully you'll remember us and pay us
                         back some day.
                         But anyway, I want to change the price for you from 8
                         1/8 to 7 3/4.
                   Trader 2: To 7 3/4.
                   Trader 1: Yup.
                   Trader 2: Oh, my goodness.

                   As indicated by the conversation, Trader 1 cancelled the
                   earlier agency sale he had made to Trader 2 at $8 1/8 per
                   share and resold the stock to Trader 2 at $7 3/4 per share,
                   thereby improperly disadvantaging the customer for whom
                   Trader 1 was selling.


              [31]: For example, a market maker that bought 10,000 shares
                   subject to a print-splitting arrangement would subsequently
                   sell half that amount to the other party to the agreement,
                   which would reduce the amount of stock available to fill the
                   customers order.


              [32]: In at least one such instance, a trade between two
              collaborating market makers was
              done as compensation for complying with a request for a quote
              movement.


              [33]: Disclosure to and consent by customers of the firm to its
                   limit order policies would, in any event, have been
                   ineffective after June 29, 1994, when the Commission approved
                   the limit order protection rule known as the first "Manning
                   Rule."  See, Securities Exchange Act Release No. 34279 (June
                   29, 1994).

              [34]:
                   Exchange Act Rule 11Ac1-1, 17 C.F.R.  240.11Ac1-1.

              [35]:
                   A market maker who fails to meet his firm quote rule
                   obligations is said to have "backed away" from its quote.


              [36]: The following taped conversation is illustrative:

                   Trader 1:  Hello.
                   Trader 2:  [Third market maker] was out there with me taking
                              the stock?
                   Trader 1:  [Third market maker] just bid me for 10, I told
              him he was late.  I
              don't want to trade with him.

              [37]:
                   Exchange Act  17(a) and Rules 17a-3 and 17a-4 thereunder, 15
                   U.S.C.  78q(a) and 17 C.F.R.  240.17a-3 and 17a-4.


              [38]: The senior management of a broker-dealer must, in all
                   circumstances, take reasonable steps to provide for effective
                   supervision at all levels of activity under their control.
                   This is particularly important for firms initiating Nasdaq
                   market making operations with no prior experience in this
                   line of business, as was the case with certain of the
                   respondent firms.  New or start up operations pose
                   potentially heightened risks to the firm, because senior
                   management and compliance personnel are often not familiar
                   with them, and particular attention must be paid to the
                   adequacy of supervisory oversight when initiating new
                   activities.

                                     ATTACHMENT A


             Bear Stearns & Co., Inc. and Philip D. Zeifer

             Cantor Fitzgerald & Co.

             S.G. Cowen Securities Corp., Kennedy M. Buckley, David D.
             Dube, Peter M. Gilfillan, John P. Mottes and Richard S.
             Streifler

             CS First Boston Corp.

             Dean Witter Reynolds, Inc.

             Donaldson, Lufkin & Jenrette Securities Corp. and Lawrence
             H. Kurtz

             Gruntal & Co., L.L.C.

             Hambrecht & Quist LLC and Edward L. Albert

             Herzog, Heine, Geduld, Inc., Ronald F. Cullen, Jr. and
             Bradley Zipper

             J.P. Morgan Securities, Inc., Donald A. Dunworth, Mark A.
             Gallagher and David J. Mottes

             Jefferies & Company, Inc.

             Legg Mason Wood Walker, Incorporated

             Lehman Brothers Inc.

             Mayer & Schweitzer, Inc., Robert Burns and Christopher D.
             Colgan

             Merrill Lynch, Pierce, Fenner & Smith Incorporated

             Morgan Stanley & Co., Inc., Peter W. Ferriso, Jr. and Robert
             S. Ranzman

             Olde Discount Corp., Jack G. Monopoli, Frank W. Schwarz,
             III, and John F. Watson, Jr.

             CIBC Oppenheimer Corp. and William G. Clark, Jr.

             PaineWebber Inc., Richard A. Bruno, Peter F. Comas, Robert
             D. Coppola, Gerard Kane, Joseph J. Palma, Arthur A. Raiola,
             Joseph H. Raiola and Reuben G. Taub

             Piper Jaffray Inc. and Stacey R. Rickert

             Prudential Securities Inc., Michael T. Burke, Jr., Joseph G.
             Candela and Robert D. Sprotte

             Raymond James & Associates, Inc., Thomas J. Dudenhoefer and
             Timothy J. Kane

             The Robinson-Humphrey Company, LLC

             Salomon  Smith Barney Inc. (as successor to Salomon Brothers
             Inc)

             Salomon  Smith Barney Inc. (formerly known as Smith Barney
             Inc.), Glenn Y. Blitzer, Barry J. Dusti and George C. Ross,
             Jr.

             Sherwood Securities Corp., Brian J. Deegan, Richard M.
             Marino, Edward G. Schmitz and David M. Zitman

             Spear, Leeds & Kellogg, L.P. (by virtue of the activities of
             its Troster Singer division), Michael J. Ling, James P.
             Morris, John J. Quigley and Eric J. Scherzer

             Tucker Anthony Inc.

             Warburg Dillon Read, LLC, Michael R. Antolini, Steven D.
             Murphy, Joel I. Zweig and David S. Rothman

             William P. Heenan