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Important article. Looks like there is an opportunity to comment to the
SEC.
JW
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http://www.thestandard.com/article/display/0,1151,12355,00.html
February 28, 2000
A Hard Look at Market Regulations
The SEC and the Senate Banking Committee both are scrutinizing the way
the Net affects U.S. stock markets. Are we getting more competition – or
chaos?
By Elizabeth Wasserman
Two branches of the federal government have begun to investigate the
impact the Internet is having on the U.S. stock market – and they're
concerned with far deeper issues than the rise of Net stock-obsessed
daytraders.
The Senate Banking Committee convenes in New York this week to consider
the future of stock trading in the Internet era – and to mull how the
rules might need to be changed. The range of opinions on the subject is
great. On one end of the spectrum, the exchanges and their middlemen say
the Internet has led to "market fragmentation." On the other end, the
new electronic communications networks, or ECNs, assert that competition
is helping investors trade more quickly and inexpensively.
Securities and Exchange Commission Chairman Arthur Levitt is trying to
guide the discussion. On Feb. 24, the SEC issued a long-awaited request
for public comment on several options for remaking the financial
markets. The document will help frame the issue for this week's
committee hearing, at which a who's who of Wall Street will testify.
Levitt is scheduled to address the panel, as well as the chairmen of
Morgan Stanley, Goldman Sachs, Merrill Lynch (MER) , Charles Schwab,
Credit Suisse First Boston, the New York Stock Exchange and the National
Association of Securities Dealers. The outcome of the market reform
process, which begins with the upcoming hearing, has profound
implications for investors. Rewriting the securities rule book has the
potential to affect trading commissions, stock prices – and the future
vitality of the U.S. stock markets.
The SEC's "concept release" sets up a 60-day comment period on a wide
range of options for changing how stocks are traded and quoted. The
point most likely to spark controversy calls for a centralized,
nationwide system that links traditional exchanges, such as Nasdaq and
the New York Stock Exchange, with the ECNs in a system that would
display all buy and sell orders.
"The risks are very high," says James Angel, a Georgetown University
finance professor and a visiting scholar at Nasdaq. "We can screw it up
badly. Right now we have the best capital markets in the world. Our
equity markets are the envy of the world. Our transaction costs to
consumers are the lowest in the world."
At the moment, ECNs deal largely in stocks that trade on Nasdaq. But
under pressure from the SEC, the NYSE has proposed eliminating its
controversial Rule 390, which blocks NYSE members from trading most Big
Board stocks off the exchange.
Some of the resistance to the centralized order book comes from Wall
Street traditionalists, who believe the approach would lead to the
demise of the face-to-face, floor-broker system that is the hallmark of
the NYSE. The NYSE, meanwhile, has announced plans to create its own
electronic trading organization.
But others argue that a centralized system would benefit consumers by
exposing their orders to the wider market. "If you were selling your
house, would you want to list it with a single broker or a
multiple-listing service," says Junius Peake, a former Nasdaq vice
chairman who now teaches finance at the University of Northern Colorado.
That depends on who you talk to. "We call it competition," says Andrew
Goldman, spokesman for Island ECN, a newcomer that claims to now trade
12 percent of Nasdaq's volume, about 200 million shares per day. "We're
not sure how the introduction of ECNs has fragmented the market. We've
been responsible for doing away with the middleman, empowering investors
with the resources and information they need to take charge of their own
financial management."
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