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Commentary: No More Breaks For The Big Board


For months the Securities & Exchange Commission has held the New York Stock Exchange's feet to the fire. The SEC's agenda: force the Big Board to lower the barriers to competition from rival electronic markets -- without undermining the nation's premier financial market. NYSE Chief Executive John A. Thain has responded with plans to beef up the New York market's puny e-trading system. But the SEC believes those plans aren't adequate -- and the agency is now countering with a proposal to turbocharge the automatic matching of buy and sell orders in ways that would force New York to go much further.

At issue is a basic change in how stocks are traded. For years, big investors such as mutual and pension funds have complained that the Big Board uses the so-called trade-through rule to stymie their trading. The rule's purpose is to ensure that investors get the best price available on all markets for stock they buy and sell. Frequently, the NYSE shows the best price. But too often, institutional investors argue, the slow pace of the NYSE's open-outcry auctions means that the displayed price is gone by the time an order actually gets to the exchange. The institutions miss out on the best price -- and can't send their order to a competing market that could fill it at a slightly inferior price, but at lightning speed.

The SEC is due to vote on Dec. 15 on a final staff plan. Some big investors want the SEC to scrap the trade-through rule and let them complete trades in whichever market they choose. But Chairman William H. Donaldson, a former NYSE chief, believes investors should always get a shot at the best price. So he's pushing the Big Board to expand its limited system for matching buyers and sellers automatically. Thain has proposed that when the NYSE has the best price, it fill the order with whatever shares are available at that price. If the order is too big to fill, the NYSE will provide shares available on the exchange at next-best prices.

Some large investors are skeptical. Under the NYSE plan, the exchange might capture a 10,000-share order to buy a $20 stock by offering 1,000 shares at the best price, $20. The entire order would be traded at the NYSE, and the average price on the remaining 9,000 shares might be $20.05. But a rival electronic market might have 9,000 shares to sell at an average of $20.02. "Protecting only the best price is meaningless," argues John J. Wheeler, director of U.S. equity trading for American Century Investments in Kansas City, Mo.

Nor does the NYSE's winner-take-all plan sit well with the SEC. Instead, the agency is floating the idea of an "intermarket sweep." On a $20 buy order, the market that offers 1,000 shares at $20 would still get the first crack. But the remaining 9,000 shares would be routed to whichever markets offer the second-best price -- and so on until the order is filled. The result: a fast trade at the lowest average price. Institutions would get their orders filled before other traders noticed and bid against them. Individuals would be able to place "limit orders" -- orders to buy or sell at a specified price -- without fearing their orders would be bypassed, making their trades cheaper.

But that doesn't go far enough for some big players. "We don't think the government should be deciding for investors where they should send their orders," says Eric D. Roiter, senior vice-president at Fidelity Management & Research Co. The Big Board also faces a thornier dilemma. The rise of electronic trading could squeeze the livelihoods of 400 or so independent floor brokers. That has some floor brokers griping that the SEC is trying to push through a radical rule change without seeking public comment. But the agency has repeatedly fine-tuned its original rule proposal, first unveiled back in February.

Guaranteeing that orders get filled with the best prices displayed would be a tectonic shift in trading rules. That's why the SEC shouldn't let the Big Board get by with half a reform -- and a system that preserves its 80% lock on trading in listed stock. To get investors the best prices, the SEC needs to make a clean sweep of barriers that impede trading.

By Amy Borrus


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