SEC Proposes Changes in Stock Trading
By MARCY GORDON Tuesday, February 24, 2004
WASHINGTON - Federal regulators proposed changes Tuesday that would allow stock investors to choose the fastest trade over the best price, a move opposed by the new head of the New York Stock Exchange, which could be harmed by the shift.
After fine-tuning and final adoption by the Securities and Exchange Commission, the package of changes affecting stock trading and price quotes will bring "the most significant modernization" of the nation's market system since 1975, SEC Chairman William Donaldson said.
Under the proposal, the SEC is allowing investors to opt out of the agency's so-called "trade-through" rule on a trade-by-trade basis if they want speed regardless of price. In those cases, investors would have to be told in advance that there is some price risk in opting out.
The current rule requires brokers to obtain the best possible price for customer orders, even if it requires going to another market and takes longer. Critics, including the NYSE's electronic rivals, say it is ineffective and unfairly favors the exchange.
"The competitive nature of our markets causes them to continually evolve, and innovative trading technologies, new market entrants and shifting trading patterns are the direct result of this evolution," Donaldson said at a public meeting. "It is critical to our mission that we examine changes and trends in our markets and assess whether our regulatory regime requires adjustment."
The rule changes, proposed in a vote by the five SEC commissioners, likely will be adopted by the agency sometime after a 2 1/2-month public comment period. They could take effect before the end of the year.
Commissioner Roel Campos said they will add "another layer of protection" for investors.
The move could divert business to all-electronic markets from the more traditional NYSE, the world's biggest stock exchange. Just five weeks into his job, NYSE chief executive John Thain said he will lobby against the changes, even as his exchange prepares to change the way it does business to remain competitive should the rule take effect.
Thain told reporters Monday that altering the rule could deprive investors of the best possible prices for their stock trades.
Thain maintains that his plan to increase the volume of electronic trading on the NYSE puts the exchange in the same category as the faster all-electronic markets, while still maintaining the liquidity and price support that the NYSE's auction system of specialists provides.
The 211-year-old NYSE, which uses an auction system involving human stock specialists on the exchange floor to link buyers with sellers and sometimes haggle on price for a match, offers best price as its strong suit. The No. 2 Nasdaq Stock Market and the other all-electronic exchanges that have proliferated in recent years enjoy a speed advantage.
Nasdaq, which has bitterly criticized the NYSE and the specialist system, called the SEC proposal "a historic development" and "a significant step forward for investors."
The NYSE, newly overhauled, has been emerging from a scandal over its former chairman's pay and the specialist system has come under attack as corrupt and fostering abuse of investors. Last week, five specialist firms on the exchange agreed to a tentative $240 million settlement with the SEC for allegedly skimming profits on trades that put investors at a disadvantage.
As part of the broad review of all U.S. stock markets and how they operate, the SEC commissioners also proposed and opened to public comment limits on the use of stock quotes in fractions of a penny and on the fees that markets charge for access to stock quotes.
Two Republican commissioners, Paul Atkins and Cynthia Glassman, said they would have preferred outright abolition of the trade-through rule.
The agency also proposed to modify the rule to allow the markets themselves, in certain cases, to not give an investor a better price if that would slow the trade. |
