SEC revamping of trade rules could affect NYSE especially
The basic issue is whether stock markets should execute trades at the best price or the fastest speed.
By Walter Hamilton
Los Angeles Times
NEW YORK - The New York Stock Exchange can't seem to catch a break.
It won a key battle in December when the Securities and Exchange Commission moved to preserve a stock-trading rule critical to the Big Board's success.
But the agency also proposed a change that could make it easier for electronic trading markets to snare the 212-year-old NYSE's customers.
What the SEC decides will have far-reaching implications for investors and the United States' stock markets.
"It's extremely dramatic," said George Rodriguez, managing director of Algorithm Trading Solutions, an institutional brokerage firm in Newark, N.J. "It is one of those events in history that changes the landscape."
The basic issue is whether stock markets should execute trades for investors at the best price available or at the fastest speed, even if at a slightly inferior price.
The SEC has long required that NYSE trades be at the best price - meaning the highest for sellers and lowest for buyers.
Nasdaq, an electronic-based market established in 1971, has never been required to abide by the best-price rule, but would be forced to do so under the SEC proposals.
The best-price rule helps small investors who can't protect themselves against brokers or others who can benefit from giving them inferior prices.
The rule has been a boon to the NYSE: Since it often lists the best price, other markets sometimes have to send customer orders there - an upper hand the NYSE wants to keep.
For years, Nasdaq and a host of upstart electronic trading networks have argued that the best-price rule limits their ability to trade NYSE stocks. The NYSE controls trading in about 80 percent of the stocks listed on its exchange, a far higher market share than Nasdaq has for its stocks.
The electronic rivals say institutions such as mutual funds want fast trades, and argue that the NYSE uses the best-price rule to shield itself from competition.
Speed is important because stock prices often rise or fall quickly. So a mutual fund, for example, may want to complete a purchase of a stock before the price goes up, even if the fund pays a penny or two a share more than the best price available at the moment.
The SEC sided with NYSE rivals in February when it floated a proposal that would allow investors, in some situations, to opt for speed over best price, thus potentially circumventing the NYSE. The agency's staff reversed course in December when it proposed expanding the best-price rule to other markets, the biggest being Nasdaq.
The commission is expected to vote on the plan early in 2005. Two of the five commissioners raised concerns about the proposal, so it is unclear whether the staff proposal will survive as drafted.
The staff also gave the commission two alternatives.
The first proposal largely preserves existing rules in which markets display only the single best bid or offer for any stock.
The second would create incentives for markets to display all their customer orders for a given stock. That is vital for the NYSE because this information is now available only to its floor brokers and specialist firms that handle stock trades.
These brokers use their privileged access to the "book" of orders to make their own trades. So, forcing them to share the book with investors might be compared to forcing a blackjack dealer to divulge his hole card at the beginning of a hand.
Knowing that a stock has a backlog of "buy" orders, for example, could signal a coming rise in a stock's price and prompt a broker or specialist to load up on shares.
"It's going to make it much more difficult," predicted Junius Peake, a finance professor at the University of Northern Colorado, "for the NYSE to stay in business." |
