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November 1, 1999

Levitt's Legacy: Fragmentation or Centralization. Will Arthur Levitt Find the

By John A. Byrne

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  • Levitt's Legacy: Fragmentation or Centralization. Will Arthur Levitt Find the
  • Page 2

The debate over Arthur Levitt's career as chairman of the Securities and Exchange Commission begins in earnest on June 5, 2003, when his current term ends. If he serves out his term, he will have become the longest-serving chairman of the SEC.

He will end up as a hero, a has-been or as a mediocre advocate of market reform. His legacy is not assured. But his place at the center of the most fascinating and challenging era in securities trading is guaranteed.

A global stock market that allows investors to trade around the clock in ordinary shares over high-speed digital networks is forming. Europe, Asia and the Pacific Rim are emerging as big-boned models of market efficiency.

Levitt, the dapper securities markets reform advocate, could play a leading role in the coming global capital marketplace. But with foreign competition percolating, regulators in Washington are uneasy.

Can the U.S. retain its position as the world's preeminent venue for stock trading in 2003? Levitt knows there is a very real threat of stumbling badly. And he is making no secret why the U.S. securities markets need to be overhauled.

"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," Levitt said in a speech at Columbia Law School in New York.

At stake is more than Levitt's legacy. The foundations of the U.S. stock markets are shifting with the weight of an alphabet soup of trading systems and execution centers.

"We are moving into an environment that steadily fragments," said Richard Ketchum, president of the National Association of Securities Dealers at the recent STA Conference in Palm Desert, Calif. "It looks and feels like the Middle Ages of securities trading where various fiefdoms are closely held by a small number of players, with other players having lesser or different access."

The solution? Levitt wants more centralized stock trading though he does not want competition eliminated. "We cannot ignore the possibility that aggregating limit orders across markets, and rewarding those that post the best price first, may produce better prices for customers," he said in a speech to the Economic Club of New York.

Achieving that goal is problematic. But the NASD, striving to create a venue for limit order trading, came up with its super montage proposal. As currently constituted, the dealers who run Nasdaq, as well as the ECNs, would essentially control the proposed system. ECNs are not as likely to support a potential competitor. Nonetheless, the NASD's proposal allows both groups to become "quoting participants," meaning orders for the montage system would be sent to them first.

The last effort to impose a limit order book collapsed over dealers' objections. They complained that customers' limit orders would bypass them. That system was a more extensive central limit order book.