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May 31, 2000

Schwab Exec: Why We Reject the CLOB

By William Hoffman

Publicly displaying the dealers' full limitorder book would be neither useful nor beneficial to all market participants, according to Leonard Mayer, chairman of the Securities Industry Association's Trading Committee.

"The only ones that are truly going to benefit from this information are industry professionals," he said in a wide-ranging interview.

These pros include day traders, momentum traders, hedge funds, and institutional investors, he said. They can take advantage of their close proximity to the marketplace.

"Small investors who buy 200 or 300 shares of stock couldn't care less and are probably not impacted at all," Mayer said.

SEC Challenge

Mayer, president of Schwab Capital Markets in Jersey City, said the suggestion by Securities and Exchange Commission Chairman Arthur Levitt that market centers voluntarily display their entire limit order books might sound good.

But in reality, it won't work, Mayer argued. "A central limit order book has been proposed several different times over the last 30 years," he said. "In each case it's been concluded that it's a bad idea."

The SIA, in a comment letter to the SEC, supports the concept of an intermarket price-priority rule.

That would require market makers and market venues to match the best bid and offer first appearing in other markets, the letter to the SEC states.

The letter, penned by PaineWebber official Mark Sutton of the market structure committee, said more disclosure of order routing practices as well as the quality of trade executions, could be desirable.

The SIA group stopped short of endorsing that step. It said standard measures of the factors at stake should first be introduced.

Mayer said his firm is in favor of price priority "across all markets." "Either send [the order] to the best market, or you compete with the best market," he said.

Limit order books have been a favorite black box' solution to the problem of market fragmentation.

Levitt has defined market fragmentation as multiple market centers executing trades without any communication between them, Mayer noted.

Mayer said some in the industry believe that market centers and electronic communications networks must reach agreement to halt fragmentation. It has become serious enough to warrant hearings in both houses of Congress, he said.

Others argue that any black box' solution would be outdated by the time it could be formulated, he added.

The U.S. Justice Department said it favors guiding trades to the exchange that first offers the best price, Mayer said. But that, he argued, "should be a decision made by the marketplace, not by a regulator."

Mayer noted that the depth of markets, liquidity, capacity, and speed should also be factored into deciding who executes an order.

Separately, Mayer said real-time broadcasting of stock quotes is the best way to provide transparency. Real time broadcasting should be provided at a charge that excludes regulatory fees and exchange market-ups, but covers operating costs.

"Don't put the burden on people who need real time market data," Mayer said. The infrastructure to implement such a system is already in place, Mayer said. "The only issue should be: Is it priced fairly?"

Trading Committee Members

Trying to find answers to the questions of transparency and fair pricing is part of the SIA's Trading Committee's mission. It brings together disparate segments of the exchange community: retail traders, market makers, broker dealers and institutional investors. Most of the major issues are explored at its table.

"It's really hard, because everyone comes to the table with an opinion," Mayer said. "Hopefully not only are they representing their own interests, but also the industry as well."

Members engage in discussion and aggressive persuasion. "I don't have a whip," Mayer said.