NASD acts on trade shredding

Feb 6, 2006 @ 12:01 am

By David Hoffman

NEW YORK - NASD in Washington is playing regulatory catch-up.

While the Chicago Board Options Exchange, the New York Stock Exchange and the Philadelphia Stock Exchange already have moved to comply with a Securities and Exchange Commission order to implement rules that prohibit trade shredding, NASD just now is getting around to it.

On Jan. 17, the SEC issued for comment a proposal by NASD that is designed to prohibit members from trade shredding, months after the NYSE first proposed such a rule in September. Trade shredding is splitting customer orders into multiple smaller orders to generate greater commissions.

In some cases, trade shredding has driven up the costs of investing in mutual funds, Jay Neuman, an attorney and partner with law firm Reed Smith LLP in Pittsburgh, wrote in a recent report on the NASD proposal.

"There have been instances where orders for the purchase of mutual fund shares have been broken into smaller pieces, which led to the investor not receiving the benefit of certain break points that would reduce applicable front-end sales loads," he wrote.

It is unknown how many instances there have been, however.

A fund attorney familiar with the practice of trade shredding, who asked not to be identified, said he doesn't think shredding is widespread in the mutual fund world because it already is prohibited by NASD. The proposed NASD rule would expand that to cover the sale of all securities.


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