Date: May 10, 2004
Publication: Institutional Investor

Trade-Through Rule Debated, But Access Seen As Key

The trading community continues to haggle over the best way to reform the markets, but one elite panel at a Baruch College conference on institutional trading didn't seem to hesitate on where the focus should be market access. The debate, which centered on how to meet the needs of institutional investors through market structure reforms, also included more back-and-forth on the controversial trade-through rule.

The problem is market access, not the trade-through rule, commented Richard Rosenblatt, ceo of Rosenblatt Securities. He believes the trade-through rule makes sense and protects electronic trading venues from disadvantaging any customers. "I would keep complaining about access and make sure we evaluate things on what is best for us [he clarified later and said investors]. It is about best price. Demand all brokers provide what you need," said Rosenblatt. "[But] don't push [the NYSE] into a corner where they automate themselves out of existence." The NYSE has a manual system working side-by-side with an electronic system now, he added. Arthur Hogan, chief market analyst at Jefferies & Co., agreed that access is a top issue. "Give the NYSE better access to and from alternative marketplaces, including regional exchanges and ECNs," he said.

If greater access is achieved, then the need for the trade-through rule disappears, argued William O'Brien, chief operating officer at Brut. When a conference attendee asked what volume would leave the NYSE if the trade through rule were adopted, O'Brien said, "I do not know...I would not be surprised if New York goes to 48%" compared with its current volume of approximately 80%. With fair competition, the market will judge what system is best, O'Brien added.

The SEC's proposed rule on Regulation NMS suggests a uniform rule for all NMS market centers that would require policies to prevent trade-throughs, the execution of an order in its market at an inferior price to a displayed price elsewhere. The proposal also offers a market access rule, a sub-penny ban and rule amendments on providing market information. Of all four proposals, the sub-penny ban is the least contentious as everyone supports it, according to professionals. The debate centers on the characterization of "fast" and "slow" markets. The SEC is considering allowing market participants to trade-through "slow" markets. Some trading pros are bristling at the fact that the SEC is trying to define which markets are "fast"; they believe the market should determine that. Michael Simon, senior v.p. and general counsel at the International Securities Exchange, said that the Regulation NMS proposal is a "worse" trade-through rule than what exists now. "Withdraw Regulation NMS because it criminalizes trade throughs and locked markets and it regulates access fees."

A number of conference attendees expressed surprise the regulators were seeking to criminalize certain trading practices. Lanny Schwartz, executive v.p. and general counsel at the Philadelphia Stock Exchange, argued against government intervention in areas with vigorous competition. "Do not let government policies dictate how quickly markets can increase their competitive advantages or bring new products," said Schwartz. "I would have less government intervention in access fees. Get rid of the short sale rule."

< Back to Press page >