Brokerages Don't Promptly Display Orders, SEC Says
from Bloomberg News
WASHINGTON (May 4) -- Many brokerages fail to promptly display customer orders that could improve the prevailing stock price, suggesting investors may not be getting access to many of the best possible prices, a Securities and Exchange Commission report found.
The report, by the SEC's inspections staff, also found these practices often go undetected and unpunished because of lax oversight by stock and options markets.
Securities firms and the exchanges both need to increase automation of procedures involving ``limit orders,'' which are placed by customers to trade at specified prices rather than at the market price, the 26-page report said. Many dealers on the Nasdaq Stock Market handle all limit orders manually, the report said.
The report found that four large dealers regularly violated SEC rules on limit-order display, including one firm that mishandled 92 percent of the orders sampled by inspectors. The three other firms improperly displayed between 26.5 percent and 58 percent of the orders reviewed, it said.
``This strongly suggests a pattern of neglect, serious neglect, among some market participants (in) surveillance and compliance efforts,'' SEC Chairman Arthur Levitt said. He called on brokerages and exchanges ``to redouble efforts'' to improve procedures.
Some exchanges do no monitoring at all of brokerages' limit-order display, relying only on customer complaints, the report said. The options exchanges are particularly lax, though all markets need to improve their oversight, said Lori Richards, the SEC's director of compliance inspections and examinations. At one regional stock exchange, one out of six limit orders wasn't being properly displayed, the report said.
Focus on Limit Orders
The SEC's enforcement division is reviewing some of the findings to see if further investigation is warranted, Richards said. SEC inspectors also immediately intend to focus more on handling of limit orders, she said. In addition, the SEC's economic-analysis unit is conducting a broader study of limit order display.
Investors are harmed by these practices because their particular order may not get executed, Richards said. Trading spreads, the difference between buying and selling prices, also may be kept artificially wide, she said.
The report, which also was written by the SEC's economic analysis office, was based on March and April inspections of regional and national stock markets, options exchanges and dealers on Nasdaq. It didn't identify any of the offending firms or exchanges, quantify the extent of the violations, or attempt to estimate their financial impact on investors.
Displaying Orders
Limit orders account for two-thirds of all orders placed on the New York Stock Exchange and Nasdaq. These investor orders, which interact with orders placed by dealers and institutions, can equalize access between dealers and investors, the report noted.
``But in order to level the playing field, the dealers must actually display the limit orders they receive,'' the report said.
Dealers and specialists have 30 seconds to display limit orders that improve on the market price. If they don't display them, they are supposed to either execute the orders or refer them to another market for display.
The most typical brokerage violations found were failure to display orders within 30 seconds, to post the proper order size, and to properly transfer the order to another exchange, the report said.
Levitt first highlighted the emerging evidence in a March speech.
``I am deeply troubled by this apparent disregard for customer orders and systemic competition,'' the SEC chairman said at the time. The violations appear to be ``very extensive,'' he said, though not resulting from ``venality.''
Roundtable Discussion
Levitt also convened a roundtable of securities industry executives today to discuss ways the industry might pool many of the best limit orders from different U.S. markets into a central display.
Now, the different market venues must display only one best buy and one best sell order for each stock, rather than a ranked list of the 10 or 20 best. Levitt said he wants a voluntary consolidation of the best orders from sites such as the New York Stock Exchange, the Reuters Group Plc's Instinet Corp. trading network and the Knight/Trimark Group Inc. brokerage.
Many of the brokerages and exchange participants expressed support for Levitt's goal of increased visibility of limit orders, and said they'd be willing to open their own limit-order books. Some said, though, that institutional investors have shown a reluctance to open their order books.
``We somehow have to figure out how to deal with this inequity,'' said Bernard L. Madoff, a New York broker-dealer who also heads the Securities Industry Association's trading committee.
Other brokers warned that expanding limit-order display could have unintended effects on market volume and volatility.
Both the NYSE and Nasdaq have proposed ways to broaden public display of pending limit orders, which have been an important vehicle for promoting price competition in the last few years. Since they were begun on Nasdaq in 1997, these orders have narrowed trading spreads by about 30 percent.
May/04/2000 13:56
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