SEC under pressure to debate trading reforms
By David Wighton in New York
Published: November 28 2004 21:58 | Last updated: November 28 2004 21:58
The Securities and Exchange Commission is under mounting pressure to reopen public debate over proposed reforms to US stock-trading rules after it emerged that its officials had privately changed the plans.
Bear Stearns, the Wall Street securities firm, is calling on the SEC either to drop the “very significant” change or make it public and allow more time for comment. “We believe that this development is highly material and has not been subject to adequate public debate and vetting,” the firm wrote to the SEC.
The reforms, dubbed Regulation NMS, have profound implications for US stock markets and have been the subject of intense debate since they were published in February.
In response to the proposals, the New York Stock Exchange has put forward a plan to develop a “hybrid” market, combining its traditional floor-based auction process with electronic execution of trades. The five SEC commissioners were due to vote on the reforms on December 15 but last week it emerged the proposals had been revised by SEC officials.
The change, first reported in the Wall Street Journal, has caused serious concern at the NYSE and at Nasdaq, though neither have made any public comment. According to Bear Stearns, it would appear to require “a significant change” to the NYSE's hybrid plan. “This redesign could delay the roll-out of the hybrid market.”
Bear Stearns expressed concern that the change could also increase market fragmentation and reduce the incentive for markets to innovate and stimulate liquidity.
The change concerns the extent to which investors should receive the best price for stocks on offer anywhere on US markets. The original proposal required that the best-priced order to buy or sell on any individual market should trump a less attractive order on another market.
But a second-best order could be ignored in favour of a less attractive one elsewhere, as long as this was the other market's best order. SEC officials are now said to be proposing that this so-called “price protection” should be afforded to all displayed orders, regardless of their position in a market's order book. This would require markets to display all their orders.
In the original proposal, the SEC made only passing reference to the idea, questioning whether the move “at this time would be feasible”, in spite of the fact that it would make sense “from a policy viewpoint”. This was echoed by Goldman Sachs in a letter to the SEC in July. Both Bear Stearns and Goldman Sachs own “specialist” firms running auctions on the NYSE floor that could be affected by the change. |
