To: Anthony@Pacific who wrote (74807 ) 1/28/2002 10:07:12 PM From: kumqwatt Respond to of 122087 In a New World, a Puzzling Directive From the S.E.C. By GRETCHEN MORGENSON The New York Times January 27, 2002 As the Enron (news/quote) saga shows, investors have entered a new world where accountants don't account, managers manipulate and corporate disclosures conceal. And, if an event of last week is any guide, the world has also become one in which the nation's top securities cops may act to thwart enforcement of securities laws. Last week, regulatory officials said, the Securities and Exchange Commission sent a letter to the National Association of Securities Dealers directing a regulator there to drop a suit it had planned to file against a member that is violating a securities law. At issue is a practice of Island ECN, the nation's top electronic stock trading network, to withhold from the overall market access to its best bid and offer prices on the world's most heavily traded security, the Nasdaq 100 tracking stock. Island makes its prices in this stock, known as the QQQ, accessible only to its paying customers, not to the overall market. Island's closed system is bad for investors in two ways. Those who do not pay to trade on Island may be missing out on a better price that appears there. Those who trade only on Island may be using inferior prices if better prices exist elsewhere. Congress tried to prevent such a system from springing up way back in 1975 when it directed the S.E.C. to devise a national market system so that all investors could see and act on the best prevailing prices for stocks. To that end, Securities Exchange Act Rule 301(b)(3) says any market participant responsible for at least 5 percent of a listed security's share volume for four of six months must give all investors access to its best prices in that security. Island, the venue with the biggest share of QQQ trades, has met that percentage threshold every month since last April. Andrew Goldman, an Island spokesman, said the company would love to get its customers' bids and offers into a national market system. But the current venue to do so, the Intermarket Trading System, is too slow for Island's fast-trading clients. "The I.T.S. system has delays up to 60 seconds," he said. His traders would rather pay more to get instant executions. Nevertheless, a law is a law, and with Island well above the 5 percent threshold in the QQQ, the N.A.S.D. was preparing to sue the network. It seems likely that Mary L. Schapiro, president of the N.A.S.D.'s regulatory unit, didn't want to repeat the mistakes of predecessors who were found by the S.E.C. in 1996 to have allowed anti-investor practices to take place on Nasdaq. Then the S.E.C. sent its letter directing the regulatory unit not to pursue the matter. When asked about the letter, neither the N.A.S.D. nor the S.E.C. would comment. The commission may have been persuaded to call off the watchdogs by Hardwick Simmons, chairman of the Nasdaq stock market, who wrote a letter on Dec. 4 stating that Nasdaq does not believe Island should be required to participate in the I.T.S. This view may not be surprising, given that Nasdaq rakes in a lot of money from Island for its QQQ trades. Based on its volume in the security, Island probably provided Nasdaq with more than $8 million in revenue last year. Dean Furbush, a senior official at Nasdaq Transaction Services, said Mr. Simmons's letter was just a policy suggestion for the S.E.C. to consider. "I feel strongly that this is a pro-investor view that stands on its own, independent of business," he said. There is a growing sense of unease among investors that the S.E.C., under its new chairman, Harvey L. Pitt, may not be the investor protector that the Enron era requires. The view appears to be justified. nytimes.com