SEC Proposes New Execution Rules

by Glen Shapiro, LawAndTax-News.com, New York

27 February 2004

Proposals announced this week by the US Securities and Exchange Commission to change the regulatory basis of trading on major exchanges such as NYSE, Nasdaq and newer, electronic exchanges, seem to have pleased no-one, although the SEC - whose commissioners unanimously approved the proposals - says it remains open to argument.

At issue is the so-called 'trade-through' rule, which requires that trades be executed at the best price. The rule often favours the NYSE over Nasdaq and its electronic trading rivals, which offer speedier execution albeit sometime at a lower price. "The trade-through rule is an anachronism today and we believe that it should be repealed," Nasdaq CEO Robert Greifeld told a congressional hearing last Friday.

The commission's proposal, which attempts to compromise between the NYSE and Nasdaq's polarised positions, would allow institutional traders to opt out of the trade-through rule, but would apply the rule to all exchanges in the absence of an opt-out.

Said SEC Chairman William Donaldson: "The critical issue is how to capture the benefits of speed and certainty of execution, while maintaining the bedrock principle of assuring that all investors - large or small - are protected." He warned that achieving these important goals would involve "trade-offs" that won't satisfy everyone. Indeed, several commissioners expressed concern about whether the rule changes might hurt overall market liquidity. Even Mr. Donaldson questioned whether the opt-out provision would lead to unintended negative effects, such as brokerage firms filling investor orders in-house instead of exposing them to the market.

The SEC's proposal would allow markets to ignore a 'best' price as long as it's within one to five cents of the next lower price, if getting the best price would slow the trade's execution. Under the proposal, a "fast" market with automatic execution would still have to get the best price from another fast market or match that better price. The rule would apply across all markets, including Nasdaq, which traditionally has been exempt from the regulation. The SEC also proposed an "opt-out" provision that would allow investors to give explicit consent to avoid the trade-through rule.

Electronic exchanges weren't happy: "I'm incredibly disappointed," said Jerry Putnam, Archipelago's CEO. "I don't know why the SEC has to come up with this massively complex rule." Nasdaq on the other hand gave the plan its qualified approval.

Recommended