SEC Will Mull Changes To Aid Electronic Rivals Vs. NYSE's Specialists
Tue Feb 24, 8:52 AM ET
By Ken Hoover
The Securities and Exchange Commission (news - web sites) will mull new rules Tuesday designed to give electronic marketplaces a better shot at trading NYSE-listed stocks.
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Senior SEC staff said Monday they will recommend changes to the so-called trade-through rule that critics say gives NYSE specialists a monopoly on listed stocks.
The trade-through rule says a market can't execute a trade at a price inferior to what is offered elsewhere.
It applies only to NYSE-listed stocks and was adopted in 1975 to ensure investors got the best price on trades, regardless of where they were placed. But critics say NYSE specialists are able to hold up trades, then execute them at prices that are no longer the best.
Bait And Switch?
Critics like Nasdaq, Instinet and Archipelago have urged repeal or modification of the rule. They say it's no longer needed in today's fast-moving electronic markets where orders can be executed without human intervention.
Nasdaq Chief Executive Robert Greifeld, in congressional testimony last week, likened the way the rule works in practice to a consumer learning that Wal-Mart offers Coke for 99 cents, but has only 500 bottles at that price.
"Recognizing how busy Wal-Mart is on Saturday afternoon, you would realize that by the time you traveled to Wal-Mart, it would be unlikely that you would be able to purchase the Coke for 99 cents," Greifeld said.
The staff says it's recommending retaining the rule and applying it to all markets, not just the NYSE. But they will give investors the choice to opt out of the rule.
An investor who believes the specialist wouldn't give him the best-quoted price could opt to have his order executed elsewhere at a higher price. He would pay more for quick and certain execution.
The staff recommends a limit of 1 to 5 cents difference in the national best bid and offer price on what the investor who opts out would pay. The limit would depend on the stock's price. The 5-cent limit would apply to stocks priced above 100.
The staff would also require brokers to tell customers who opt out of the rule to tell them exactly how much their decision cost.
Institutional investors, including mutual funds, have screamed foul over the Big Board's trading practices. The new proposals may quiet those complaints.
Small investors are less affected. Trades up to 1,099 shares are executed automatically at the NYSE. Studies show retail investors get good trades.
The SEC staff held a rare press briefing the day before Tuesday's meeting to quell rumors about what the proposals would be. No written descriptions of the proposals were released.
Rule Changes Take Months
If the SEC adopts the staff proposals, there will be a 60- to 90-day comment period, followed by further staff analysis. It would be many months before any new rules could be adopted.
One staff member called the opt-out provision "a way to impose market discipline." If an investor worries that the NYSE, say, wouldn't give them a good execution, they can take their business elsewhere. And the exchange would be forced to mend its ways.
"It sounds like they are moving in the direction of reform," said John O'Hara, Archipelago's chief administrative officer.
O'Hara notes the debate over the rule is usually summed up as price vs. speed. But he said the NYSE specialists aren't giving the best price anyway, citing their recent $240 million settlement with the SEC.
The NYSE declined to comment on the SEC proposals, pending a written description, but stood by its defense of the trade-through rule.
"It is difficult to see how investors would be served. Why should investors ever receive anything other than the best price?" said NYSE CEO John Thain last week.
The changes in the trade-through rule are part of a general overhaul of market structure rules to be proposed Wednesday. The staff wants the creation of a new Rule NMS, or national market system, to govern the operation of the stock market.
Another proposed rule would ban posting quotes in increments smaller than pennies in stocks above one dollar, though trades can still be executed between penny increments.
A staff member said sub-penny quotes seemed to be little more than a way for floor traders and others to jump ahead of posted orders. |
