SEC CHIEF WARNS OF PRICE
PROBLEMS
1 EXCHANGE FAILED TO PROPERLY SHOW
SOME LIMIT ORDERS
By Bill Barnhart
Tribune Markets Columnist
March 17, 2000
On the heaviest day ever in New York Stock Exchange
trading, the head of the Securities and Exchange
Commission warned Thursday that investors are not
always being shown the best prices when they buy and
sell.
Arthur Levitt said that one stock exchange, which he
declined to name, had failed to properly display one in six
of the so-called limit orders coming to the exchange from
investors. He said the practice is under investigation.
Limit orders, which have become increasingly popular
among individual investors, are orders to buy or sell
securities at a specific price, as opposed to an order to
buy or sell at the prevailing market price.
"In far too many cases, limit orders are being mishandled
by market intermediaries," Levitt said. "I am deeply
troubled by this apparent disregard for customer orders
and systematic competition."
SEC sources indicated that the stock exchange with lax
enforcement of limit order display rules was one of the
four regional exchanges.
Paul O'Kelly, executive vice president at the Chicago
Stock Exchange, said his exchange was not the target of
the SEC probe. "I can tell you with certainty it isn't us," he
said. The other regional exchanges are in Boston,
Philadelphia and San Francisco.
Levitt said the SEC would issue a report in the next 45
days probing market compliance with limit order display
rules in equity and options markets.
In a speech at the Northwestern University School of
Law in Chicago, Levitt called on the nation's stock
exchanges, securities dealers and electronic
communication networks to open their books of limit
orders fully to the public. All orders to buy and sell, not
just orders at the prevailing best price, should be revealed,
he said.
Levitt urged all dealers and exchanges receiving limit
orders to fashion a system in which orders would be
quickly displayed publicly.
In the worst case, a dealer or exchange specialist hides a
limit order that improves on the prevailing price in an
attempt to trade ahead of the order. Such practices were
the subject of sweeping SEC regulatory action in 1997.
"Given the plain importance of limit orders to investor
confidence and market efficiency, you would expect that
ensuring their visibility would be an unyielding imperative
of our marketplace," Levitt said. "But information
gathered this past year by SEC examiners indicates just
the opposite."
Levitt said the SEC's pending requirement that stock
exchange quote prices in decimals rather than fractions
based on one-eighth of a dollar magnify the need for fully
open limit order books. The change in price quotations is
scheduled to begin July 3.
On a related theme, Levitt called on the securities
industry to create better links across proliferating stock
exchanges, dealer networks and electronic
communication networks.
He said the current system linking markets in
exchange-listed stocks and the SelectNet network of
Nasdaq stocks were not performing adequately.
"With today's unprecedented volumes and new demands,
it's the obligation of every market institution to commit
their resources first to technology--before marketing
campaigns or dealer benefits," he said.
chicagotribune.com
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