Another exerpt from the WSJ
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NYSE May Revise Best-Price Rule
By DEBORAH SOLOMON and KATE KELLY
Staff Reporters of THE WALL STREET JOURNAL
The Securities and Exchange Commission could soon deliver one of the biggest challenges to newly installed New York Stock Exchange Chief Executive John Thain: changes to a longstanding rule that many of its critics believe helps the Big Board maintain its dominant market position.
The SEC's staff is recommending that the agency modify a rule requiring that markets always get investors the best price, even if it means going to a competing market to fill the order. SEC staff is recommending that in some instances, speed of execution should take precedence and markets should be able to ignore or "trade through" a superior price if getting that price would slow down execution. The recommendation is expected to be part of a broader package of market structure changes that the commission will consider later this month.
Electronic markets, such as the Nasdaq Stock Market, which is controlled by the National Association of Securities Dealers, Instinet Group Inc. and Archipelago Exchange, have lobbied aggressively to have the "trade through" rule eliminated by the SEC. And Monday, California controller, Steve Westly, joined their efforts. In a letter to SEC Chairman William Donaldson, he wrote, "the trade-through provision is obsolete."
The NYSE's competitors have long complained that the trade-through rule unfairly gives an advantage to the Big Board, which often posts superior stock prices but tends to fill orders more slowly as it allows human brokers to compete to find the best price for customers. While electronic markets like Nasdaq execute trades automatically and immediately, getting an order filled on the NYSE can take several seconds or even a minute. Some investors say they don't have a good sense of what the best price is at a given time, since the auction-trading system dictates that the best buy and sell orders change frequently after they are published for the public to see.
Mr. Donaldson and other commissioners have said that traders shouldn't be forced to wait if what is most important to them is speed and not price. Some SEC officials say that the rule creates an inconsistency between floor-based exchanges and electronic markets that can at times disadvantage investors.
Under the SEC's recommendation, automated markets would still have to get the best price from another automated market or match that better price. But if the superior price is on a market without automated execution, a faster market could trade through the better price as long as the price it gets is within a few cents.
Mr. Thain, cognizant of the SEC's plans, is considering automatically matching some investors' stock orders electronically in order to avoid seeing the exchange routinely traded through by other, faster markets, according to people familiar with the matter. Mr. Thain has told regulators that he disagrees with the idea that there should ever be an exception to getting investors the best price and has said the SEC should instead mandate automatic execution. But the SEC clearly wants to modify the rule and the resulting shift could force the NYSE to lose out on filling some orders if it doesn't implement a more-automated system.
At a well-attended meeting with NYSE members Monday, Mr. Thain, flanked by NYSE co-Presidents Catherine Kinney and Robert Britz, took questions from brokers and specialists about the plan to introduce more electronic-trading capabilities onto the floor. The dialogue was candid, said people who attended the gathering.
"People are concerned about their livelihoods," said Jim Conlin, president of the brokerage firm Kabrik Trading, "but most people understand that we need to make certain changes." Still, he said, there's a feeling that the exchange's floor operations might not be under the microscope if not for last year's compensation involving former NYSE Chairman and CEO Dick Grasso.
Members who attended the session also echoed Mr. Thain's hope that the automatic-execution enhancements might counteract attempts to roll back the trade-through rule on the part of competitors.
The SEC's plan will also allow investors who always want to get the best price the ability to mandate that their order be routed to whatever market has the superior bid or offer. While staff is supporting the recommendations, the proposal could change if commissioners make modifications in the coming weeks.
SEC officials said its plans are a measured response to a longstanding issue. While some NYSE competitors -- and at least one SEC commissioner -- want to see the SEC abolish the trade-through rule, the staff is not prepared to go that far.
