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November 1, 1999

SEC Chairman Goes to Bat for Market Makers

By William Hoffman

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  • SEC Chairman Goes to Bat for Market Makers

Securities and Exchange Commission Chairman Arthur Levitt, a target for traders angry with his agency's overhaul of the equity markets, came out swinging for market makers at Columbia University Law School in New York.

In one of the most far-reaching speeches in his SEC career, Levitt acknowledged the unfairness of the access fees charged by electronic communications networks to market makers. These are the same fees, of course, unleashed by the order handling rules introduced by his agency.

Levitt said these fees are unfair. "Because brokers often have little choice but to pay whatever fee is charged by the ECN," he said, "competitive pressures on these fees have been all but paralyzed."

The SEC Chairman said he has instructed his staff, "to recommend the best approach towards restoring a fair, competitive balance in this important area."

Creating a Stir

Levitt's speech was widely expected to stir up the juices on Wall Street, having been partly leaked to the media days in advance. And Levitt, credited with a fine sense of timing, did not disappoint.

"We have an opportunity today that I don't think we'll have again in our lifetime - to realize the vision for a true national market system - one that embraces our future as much as it honors our past," he said.

Aware of the structural changes that are rocking the U.S. securities markets, Levitt called for fairness on another front. He said the New York Stock Exchange's Rule 390, which prohibits exchange members from dealing listed securities on other exchanges, should "not be part of our future." He said effective self-regulation must not be overlooked if U.S. stock markets become publicly traded companies. And he said "in the name of more competition, more connected, and more liquid options markets, we still have a ways to go."

Most significant, Levitt opened debate on the controversial subject of market fragmentation, asking, "Should we consider pulling together electronically all limit orders and quotes displayed internally in the various markets - creating a virtual limit order book?"

Levitt didn't call for legislation to reform or centralize or modernize the stock exchanges. But he did say he was "intrigued" by the possibility of creating a single regulatory body to oversee member regulation, sales practices, and all other aspects of intermarket trading. That would leave each market responsible for its own separate regulatory and surveillance functions

Does Congress care? Right now, Congress is eyeing other areas of securities reform. The chairman of the Senate Banking Committee, Sen. Phil Gramm (R-Texas), has been busy with the Financial Services Modernization Act. But Securities subcommittee Chairman Rod Grams (R-Minn.) will probably take Levitt's remarks into account as he crafts an updated Securities Markets Enhancement Act. His spokesman said Grams declined comment on Levitt's speech.

One market participant privately worried that federal legislation could take ages to pass, while the outcome would be far from certain.