Exchanges Leave Controversial Trade-Through Reform To SEC
--Raul Gallegos
National exchanges have failed to compromise on how to reform the controversial trade-through rule and have left it to the Securities and Exchange Commission to decide how to change it, if at all. Members of the Intermarket Trading System (ITS) committee, which is in charge of upholding the trade-through restrictions, have been sending each other reform proposals for the better part of this year but nothing has stuck, said a senior exchange executive who participates in the committee. The SEC will now have to determine whether to change the rule or eliminate it altogether.
The trade-through rule forces traders in all markets to give up orders if a better price for them is offered in a competing exchange. Critics contend that this restriction prevents all-electronic markets, who execute trades faster but occasionally at sub-par prices, from competing with brick-and-mortar exchanges, particularly the New York Stock Exchange. The obscure rule has now attracted enough attention from the media and lawmakers, who are putting pressure on regulators to reform it. Lobbyists from exchanges and electronic markets have been pushing their agendas trying to capitalize on the latest exchange scandals.
"The ITS plan is a valuable market system, and is in need of further enhancement," said George Mann, general counsel for the Boston Stock Exchange and head of the ITS committee. "I don't believe the trade-through should be eliminated but a de-minimis exemption" should be used, he said. Earlier this year, the Big Board, the BSE and the American Stock Exchange proposed to allow for 500-share orders to be executed 2 cents away from the best price across all securities, but the proposal never went anywhere, a committee insider said.
During the last ITS committee meeting last October, and in the absence of agreement on the future of the trade-through, officials from all exchanges agreed to write a new rule stipulating that every market will have to satisfy orders sitting at other exchanges whenever they execute an investor's order at a better price. Markets have been doing this for a long time to satisfy investors whose better-priced orders have been ignored, but nothing had been officially laid down in writing, an ITS committee member said. |
