SEC Votes 3-2 To Adopt Controversial Market Reforms
By Judith Burns
DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--A divided Securities and Exchange Commission voted 3 to 2 Wednesday to adopt Regulation NMS, a controversial plan to modernize rules for U.S. stock markets.
SEC Chairman William Donaldson joined the two Democrats on the five-member SEC to approve the measure, while his fellow Republican commissioners Paul Atkins and Cynthia Glassman opposed it and announced plans to file a formal, written dissent.
Atkins and Glassman complained the rule would be anticompetitive, costly and bureaucratic, and Atkins encouraged Congress to step into the fray. Donaldson and Democrats defended the changes, predicting they would help ensure investors get the best price when buying or selling stocks.
"This is, as far as I'm concerned, not a political question," Donaldson told reporters after the SEC's public meeting to consider the rule. He said the agency has to be independent of "political affiliations" and do what is best for investors.
Once the new rule takes effect, orders to buy or sell stocks would have to be routed to markets posting the best price available for immediate execution.
Currently, market participants are barred from "trading through" the best prices for exchange-listed stocks, but not those listed on the Nasdaq Stock Market.
The SEC said it will begin phasing in new restrictions on "trade throughs" starting April 10, 2006, with 250 stocks - 100 from the New York Stock Exchange, 100 from Nasdaq, and 50 from the American Stock Exchange. All stocks traded on U.S. markets would be subject to the same rule starting June 12, 2006.
New restrictions on quoting stocks in sub-penny prices will take effect sooner, starting this July 1, the SEC said. Another aspect of the plan, which will change the allocation of market-data revenue, is set to take effect in July, 2006.
By far the most controversial feature of the package is the new trade-through rule, dubbed the "order protection rule."
SEC market regulation division director Annette Nazareth said the new rule would be far more effective than the current rule at preventing trading through the best price posted on one market to a worse price elsewhere. But she conceded that trade-throughs won't disappear altogether, even with the new rule in place.
The new rule will apply only to best displayed prices. The SEC scrapped the idea of extending it to other prices, those in the "depth" of a market's order book, on a voluntary basis. The final plan also omitted an earlier idea to allow market participants to "opt out" of trade-through protections if they wish.
Instead, the SEC said the trade-through restrictions will apply except for intermarket sweep orders, instances of "flickering" quotations where multiple prices are displayed in a single second, and prices that cannot be immediately accessed through electronic trading.
The SEC's approach is expected to speed the development of electronic trading at the NYSE and other markets known for traditional trading on the exchange floor through specialists and floor brokers.
Critics said the new rules may chill future innovation and technological development, and questioned whether Nasdaq and electronic markets need a trade- through rule at all. SEC economists estimated about 2% of orders on Nasdaq and the NYSE are "traded-through," and SEC officials disagreed on whether that level is high enough to be of concern.
Commissioner Glassman said the 2% level "tells me that trade-throughs are not a significant problem" on Nasdaq. She said the SEC ought to modernize markets by abolishing the trade-through rule altogether rather than extending it to all U.S. markets.
"No one knows whether this massive regulation will work," despite the hefty costs involved, Glassman said in a statement outlining her objections to the rule.
Glassman expressed frustration that the SEC couldn't reach a compromise, saying her offer to test new trade-through restrictions first in the listed market before applying them to Nasdaq stocks was "rebuffed" by SEC Chairman Donaldson.
Donaldson declined to discuss the details but told reporters Glassman's recollection of discussions on a compromise "are totally incorrect."
Atkins joined Glassman in opposition, saying the SEC's new rule may help modernize the NYSE, yet "drag the rest of the markets backward." He urged Congress to step in and give the SEC "direction" on what it should do to modernize rules set in the 1970s.
In Congress, House capital markets subcommittee Chairman Richard Baker, R-La., previously blasted the SEC's approach and indicated he might introduce legislation to overturn the SEC if it moved ahead with a uniform trade-through rule.
After the SEC vote, House Financial Services Committee Chairman Michael Oxley, R-Ohio, told reporters it would be "premature" for his committee to step in, however.
Democrats Roel Campos and Harvey Goldschmid sided with Donaldson and the SEC staff. Goldschmid said it would be "risky" to rely on market-based competition to protect investors, and Campos said the SEC is seeking "to do what is right for the investor."
Consumer groups have supported the rule, as has the Investment Company Institute, the leading mutual fund industry trade group, and many fund companies, although Fidelity Investments, the nation's largest mutual fund firm, opposed it.
Nazareth said the SEC staff "stands by its original assessments" and that critics are wrong in claiming its economic analysis was flawed. She called the current rate of trade-throughs on Nasdaq is "unacceptable."
According to the SEC, the new rule will entail $144 million of one-time start- up costs for markets, and $22 million in annual costs. It estimates investors will benefit to the tune of $320 million per year, with most of the expected benefit - about $200 million - going to those who buy and sell Nasdaq stocks.
-By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com
(Siobhan Hughes contributed to this report.)
Dow Jones Newswires
04-06-051430ET
