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January 1, 2001

More Order Disclosure and Confusion? The SIA Fears that Rules Won't Show Quality' of Executions

By William Hoffman

Also in this article

  • More Order Disclosure and Confusion? The SIA Fears that Rules Won't Show Quality' of Executions
  • Page 2

The SEC's rules on disclosing order routing and execution practices have come under fire. They are considered too complex and still don't go far enough.

"I think the commission really missed the boat on this one," said Georgetown University Professor Jim Angel, who is an expert on market structure issues. Customers won't know how to interpret the complex information brokers and market centers must release while market centers are under no mandate to make the information accessible or understandable, said Angel, who is currently on a research sabbatical at the National Association of Securities Dealers in Washington.

On the other hand, Stuart Kaswell, general counsel at the Securities Industry Association, lauded the Securities and Exchange Commission for noting publicly that the disclosed data can't serve as a reliable basis to legally challenge a broker's best execution duty.

"They [the SEC] clearly went out of their way to diminish that concern," Kaswell said. "I think the message to the trial lawyers is, go look for overheated pickles, this is not the place to be."

Start Date

Phase-in of the new rules begins April 2, 2001. Rule 11Acl-5 will require market centers in national market system securities to make monthly electronic disclosures of execution quality information on a stock-by-stock basis. The information will show how various sizes of market orders are executed compared to public quotes, and disclose effective spreads quoted to investors when their orders are routed to a market center.

Market centers must also report the extent to which limit orders are executed at prices better than public quotes.

Rule 11Acl-6 will also require brokers that route customer orders to report quarterly the identity of market centers to which they route a significant percentage of orders. Brokers must also disclose internalization and payment for order flow relationships. These are at the root of what some analysts see as a conflict of interest between broker dealers and their customers. Finally, broker dealers must answer customer requests to learn where their individual orders are routed for execution during the previous six months.

Kaswell said the SIA remains concerned that the disclosures won't provide a basis for customers to analyze execution quality by liquidity, anonymity, transaction costs, or factors other than speed or price.

"There's an old refrain in the industry: Best execution is a little like saying best meal. When you're in the mood for pizza, the best steak in the world isn't going to do it'," he said.

Odd Lots Study

One industry source recalled a recent private study that concluded odd lot trades had a poorer quality of execution than round lots. The SEC's new disclosure requirements do not address execution quality of odd lots, this source said. Yet smaller firms which deal more often and directly with the public do much of their business in odd lots.

"I can imagine execution quality in this area is only going to get worse," the source said.

Michael Dorsey, general counsel for Knight Trading Group in Jersey City, agreed with the SEC that the rules should increase transparency in routing and execution processes, and thus spur competition among market centers and broker dealers.