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November 1, 2000

Deeply Concerned' SEC Studies Order Flow Arrangements

By William Hoffman

The Securities and Exchange Commission's Office of Economic Analysis is using the results of an in-depth study of 400 stocks to determine whether further steps are needed to resolve concerns about internalization and payment for order flow.

The study monitors 200 randomly-chosen issues from Nasdaq and 200 New York Stock Exchange-listed issues, utilizing comparisons not previously available of order execution quality for the same securities traded on both exchanges and by individual market centers.

The study, which is expected to be released shortly, was noted in the agency's Sept. 25 proposed rule on disclosure of order-routing and execution practices.

The agency "remains deeply concerned, particularly in light of the unanimous views expressed by investors responding to the [earlier SEC] Fragmentation Release, about the potential for internalization and payment for order flow arrangements to interfere with order interaction and discourage the display of aggressively-priced quotation," the SEC stated.

In an examination of 200 Nasdaq stocks earlier this year, the SEC's Office of Economic Analysis concluded that nearly 85 percent of customer orders were routed to market centers that were not quoting the best price in the market.

The study was welcomed by Michael Dorsey, general counsel at Knight Trading Group. "I think it's long overdue," he said. "The SEC should be looking hard at execution quality. It should conduct its own study as opposed to looking at figures that are compiled by the market centers and at reports put together by independent groups." The SEC also plans to continue monitoring how the rescission of off-board trading restrictions affects order-routing practices in exchange-listed securities.