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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: Dan Duchardt who wrote (7486)	3/17/2000 11:42:00 AM
From: John Koligman	Read Replies (1) \| Respond to of 18137

Another 'timely' article in today's WSJ on limit orders... Regards, John SEC Reviews Brokers' Failure To Disclose Stock 'Limit Orders' By MICHAEL SCHROEDER Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- The Securities and Exchange Commission has opened a wide-ranging review into securities firms' failure to properly disclose orders to buy or sell securities at a fixed price, possibly violating securities rules. SEC Chairman Arthur Levitt, in remarks prepared for delivery Thursday night at Northwestern University in Chicago, also unveiled a plan to prod market participants to display all limit orders -- when investors specify the purchase or sale price -- in a single, widely available electronic format. Mr. Levitt said the SEC has found an alarming failure by broker-dealers to display investors' limit orders, and is conducting a marketwide review to determine the scale of the problem. In 1997, regulators ordered broker-dealers holding limit orders equal to or better than current prices to either execute them immediately or display them to the market within 30 seconds. It is this regulation that is being violated. A boon to investors, the so-called order handling rules have tightened the difference between dealers' bid and offer prices by 30%. Even small price improvements are significant. For instance, if a stock price improves by 6.25 cents, or 1/16th of a dollar, an investor makes an additional $62.50 on a 1,000-share order. Mr. Levitt's primary motivation behind the push is to offer traders greater transparency. Presumably, if prices at all markets are readily visible to traders, they have more information about where to direct their trades to get the best deal. Ultimately, Mr. Levitt hopes this will foster greater competition among the markets. "In far too many cases, limit orders are being mishandled. Deficiencies are being uncovered by our examiners with our equity exchanges, options exchanges, and over-the-counter dealers," Mr. Levitt said. As an example, he said, preliminary results show that one out of six limit orders wasn't properly displayed on one particular regional exchange. Throughout his more than six-year tenure, Mr. Levitt has been a strong advocate for the use of limit orders. In the SEC's landmark investigation of price collusion in the Nasdaq Stock Market, the SEC found that dealers often concealed limit orders, which would have improved the prices investors paid for stocks. In contrast to limit orders, market orders are filled at the bid or offering price available at the time, which during volatile markets could be significantly higher or lower than investors expected. While current rules call only for dealers to display the single best bid and offer, Mr. Levitt is urging markets and exchanges to voluntarily share all their limit orders with each other and investors. In his prepared text, Mr. Levitt called for an industry roundtable to discuss creating a display of limit orders from all the market participants. But any investor could elect to keep prices private; a big mutual fund, for instance, might not want to tip off the rest of the market about its trading strategy. The chairman made clear, however, that the government wouldn't mandate a vehicle for collecting and showing limit orders. One alternative might be to supply prices to third-party data information firms, such as Reuters Holdings PLC or Bloomberg LP, which would make the prices available to everyone. The concept already has a lot of support. The New York Stock Exchange and the National Association of Securities Dealers have proposed plans to display their orders. New electronic markets have been pushing for open order books. For instance, Island ECN shows all its stock prices on the Internet at no charge. "The ability of all investors to see the depth of supply and demand in any stock would be a giant step towards a true national market system," Mr. Levitt said. Making available the price information to the markets and investors will become even more imperative when securities are priced in pennies, rather than fractions of a dollar. This move toward "decimalization" was scheduled to be phased in beginning in July. But the NASD, Nasdaq's parent, recently asked for more time to upgrade and test its systems to make sure the huge expected volume of orders can be handled without disruptions. As a result, the SEC is considering pushing back the pricing change possibly until early 2001. Mr. Levitt's limit-order proposal dovetails with the SEC's broader initiative to link markets and revise regulation as technology alters markets' traditional structure. Many argue that markets today are more fragmented because investors can place orders among a growing number of competing exchanges, electronic systems and stand-alone dealers.