RULE 390
SEC Plans Moves to Lift Barriers
Shielding Big Board From Rivals
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
The Securities and Exchange Commission is expected next week to move toward sweeping away some of the last barriers that protect the New York Stock Exchange from competitors.
The initiatives, if approved, will make it easier for regional stock exchanges, nonmember dealers and, eventually, electronic-trading systems known as ECNs to trade Big Board stocks.
While the SEC clearly hopes increased competition will lead to more innovation and lower costs for investors, supporters of the Big Board have expressed concern that the expected moves will cause investors' orders to be shifted to venues where they may not get the best prices.
The expected moves reflect the SEC's stepped up efforts since September to come to grips with the rapid, and at times chaotic, changes in markets spurred by advancing technology and its own procompetition policies.
When the SEC's five commissioners meet next Wednesday, they are scheduled to vote on three separate staff recommendations, according to an SEC news release Tuesday. The first would approve a rule giving non-NYSE member dealers full access to trading NYSE stocks; the second would put out for comment a rule allowing regional stock exchanges to trade NYSE initial public offerings on the first, rather than second, day of trading; the third would approve a discussion paper on how much the Big Board and Nasdaq should be able to charge for their stock-price data.
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Competition in the Markets Initiatives now under way, their status and likely impact:
Initiative Status Impact
Abolish NYSE Rule 390 NYSE expected to act this week NYSE member firms can trade more easily away from NYSE, e.g. on ECNs
Expand NASD link to NYSE SEC rule expected next week Widen NASD member dealers' access tro trading NYSE stocks
Trading NYSE IPOs SEC proposed rule expected next week Enable regional exchanges to trade NYSE IPOs sooner
Restructure market data fees SEC concept release expected next week Address how much online brokers will pay NYSE, NASD for stock quotes
Market fragmentation SEC concept release expected Address how proliferation of trading venues may hurt investors
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Combined with the exchange's own expected move Thursday, partly due to SEC pressure, to eliminate its Rule 390, which hinders its member firms from trading Big Board-listed stocks elsewhere, the SEC's actions mean the world's largest stock market in terms of market capitalization could, before long, face unfettered competition across the most important aspects of its business.
The most significant of the initiatives is the proposal to give non-NYSE members access to trading NYSE stocks. It would permit members of the National Association of Securities Dealers, parent of the Nasdaq Stock Market, full access to the Intermarket Trading System, which links the Big Board with the NASD and regional stock exchanges.
The ITS ensures that when a dealer has the best price in the country, every other market will honor it. For example, if Knight/Trimark Group Inc. -- a member of the NASD but not the NYSE -- bids $72 for America Online Inc., ITS bars a trader on the Big Board from filling a seller's order at $71.75, and vice versa. Those rules apply only to stocks listed after 1979 -- or about 70% of the NYSE's stocks representing half its volume. This means investors may not always get the best price on some heavily traded blue chips like General Electric Co. or International Business Machines Corp.
At first, the expanded linkage won't give automated-trading systems known as electronic-communications networks, or ECNs, full access to NYSE stocks as they have to Nasdaq stocks. That is because, for various technical reasons, ECNs don't use the NASD's ITS linkage to the Big Board. An SEC official said the expanded linkage "is essential if the NASD is going to be able to offer to link ECNs into NYSE stocks."
The new ITS rule, if approved, would remove the competitive shackles from non-NYSE member-dealers. It would thus go hand in glove with the expected elimination of NYSE Rule 390, which bars member dealers from trading, away from a stock exchange, stocks that were listed on the NYSE before 1979.
Rule 390 is a growing irritant to firms such as Goldman Sachs Group Inc. and Morgan Stanley Dean Witter & Co., both of New York, which believe it hinders them from seeking potentially faster, cheaper trades on ECNs. The Big Board has maintained the rule protects investors by discouraging dealers from shifting business into their own trading rooms, where prices may be inferior to those on the busier Big Board floor.
Big Board Chairman Richard Grasso, however, dropped his resistance to changing the rule as SEC Chairman Arthur Levitt in recent months sided with the big firms and called for its elimination. A Big Board spokesman says the issue will be considered at tomorrow's NYSE board meeting. A person close to the exchange said staff will recommend the rule's elimination.
"The sense is this is a major [public relations] problem," the person said, noting that no matter how much the exchange argues that rule 390 protects investors, critics brand it "anticompetitive."
The second initiative the SEC will vote on is a proposed rule allowing regional stock exchanges to trade NYSE initial public offerings on the first day of trading. An SEC official said the Big Board had previously argued that regional exchanges might disrupt the underwriting process if they could trade an IPO on its first day. But the official noted, "You now have all sorts of people who are trading right away, including ECNs. It seems anachronistic now to keep regionals from doing it."
IPOs typically trade heavily and in big price ranges on their first day. ECNs and NASD dealers generally add to the volatility; it isn't clear whether the presence of regional exchanges will increase or decrease that volatility.
The third initiative to come before the SEC next week is a discussion paper, or "concept release," on market-data fees. The NYSE, NASD and the NASD's American Stock Exchange unit have been under pressure to cut the fees they charge for their stock-quotation data, especially by discount brokers such as Charles Schwab Corp., of San Francisco, whose customers are heavy users of such data.
Those fees are an important source of revenue for the exchanges, amounting to $111.5 million last year for the NYSE alone. One of the SEC's concerns is that if the NYSE and NASD pursue plans to convert their markets into for-profit businesses, reduced data fees will impair the funding of their regulatory arms.
While its final form must still be decided by the commission, the concept release is expected to describe several possible solutions. One is that the fees be set so as to finance both the cost of producing the data and the cost of regulating an exchange's market activity, but not necessarily the cost of regulating member firms. An extreme alternative is to charge just the negligible, incremental cost of producing the data, which would delight discount brokers but infuriate the exchanges.
"Everyone agrees some costs should be covered, but there's disagreement over which types of costs should be covered," the SEC official said.
Meanwhile, the SEC continues to work on a separate concept release about the consequences of stock trading fragmenting among traditional exchanges and proliferating ECNs. During the past three years, the SEC has favored competition among markets, rather than centralization. But while that may have spurred innovation and driven down costs, the SEC also has been criticized for ignoring the negative consequences. Specifically, some industry executives worry that with prices scattered among so many venues, it is increasingly difficult to ensure a customer gets the best price possible.
These issues will be discussed in a concept release on fragmentation, but that won't be ready for at least several more months, SEC officials indicated. |
