The Securities and Exchange Commission yesterday approved a doubling of the number of over-the-counter stocks eligible for trading on the electronically linked National Market System (NMS).
At the same time it put out for public comment requests from the Boston Stock Exchange to trade options and the Midwest Exchange to trade 25 over-the-counter stocks. And the commissioners directed the staff to draft a proposal requiring OTC market makers to disclose to customers the amount of mark-up they take on stocks sold from their inventories.
The increase in NMS stocks, which was opposed by the New York and American Stock Exchanges, is another step along the road toward a true nationwide market, as decreed by Congress in 1975. The legislators ordered that the SEC eliminate barriers impeding competition between the OTC market makers and the exchanges.
SEC chairman John S. R. Shad labeled the National Market System, inaugurated in April 1982, "a major success story." Some 1,104 stocks, out of a total of 4,700 traded over the counter, are now part of NMS. The number of those eligible will be increased to 2,268. Brokers are required to report every NMS stock sale within 90 seconds to Nasdaq, the automated quotation system, instead of just the final bid and asked prices and volume.
The simultaneous availability of competitive offers served to narrow spreads and helped increase the popularity of the OTC market. Between 1980 and 1983 NASD volume as a percentage of New York Stock Exchange trades rose from 59 to 74 percent. This summer 36 percent of all shares traded on the exchanges and over the counter was handled by NASD; 52 percent by the NYSE, and 3 percent by the Amex.
Yesterday the SEC rejected allegations by executives of the Big Board and the Amex that its approval of some stocks to be part of the National Market Sytem implied a government guarantee of quality and therefore constituted unfair competition. Commissioner Charles Cox observed that the exchanges could use the NMS designation as well, because it is not a trademark, but they have chosen not to.
There was never a doubt that the commissioners would approve an NMS increase, but the question was the degree. A formal staff proposal would have given the NASD about 65 percent of what it requested. But there were also extemporaneous suggestions by other staff members to let NASD include all last reported stocks as part of the National Market System or to rescind the rule entirely and get the SEC out of the business of designating eligibility.
In the end the commission voted 3-2 for the NASD proposal. To be listed under NMS, newer companies including even those making an initial public offering would need net income of $300,000, 350,000 publicly held shares worth at least $2 million, a $3 minimum bid price and two market makers. Older, established companies would require net worth of $8 million, 800,000 publicly held shares worth $8 million, two market makers and four years of incorporation. The SEC rejected any minimum on the number or dollar volume of shares traded.