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April 30, 2001

Disclosure Rule's Mixed Reception: Could Lawsuits Eclipse Investors' Savings?

By Sanford Wexler

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  • Disclosure Rule's Mixed Reception: Could Lawsuits Eclipse Investors' Savings?
  • Page 2

Regulation is a cure for some and a pain for others.

A Securities and Exchange Commission regulation scheduled to go into effect this month is designed to give small investors more information about how and where their trades are executed. It will also result in creating additional record-keeping chores, more expenses and possibly exposure to costly litigation for many broker dealers.

The SEC regulation, "Disclosure of Order Execution and Routing Practices," actually consists of two separate rules: Rule 11Ac1-5 requires market centers, such as Nasdaq wholesalers, to make publicly available monthly electronic reports that document order execution statistics; Rule 11Ac1-6 requires broker dealers that route customer orders to other venues to make available to the public quarterly reports of their identities.

The SEC contends that the rules "are intended to spur more vigorous competition among market participants to provide the best possible prices for investor orders."

Some industry experts welcomed the new rules.

"For a long time individual investors sent their orders to brokers and never had a clue when an order was placed, where the trade was executed, and where the market was at when the trade was executed,"said Larry Tabb, a securities industry consultant at The TowerGroup in Needham, Mass. "This helps the individual investor understand how his trade is being processed."

The rules are scheduled to be phased in over the coming months. The first stage for Rule 11Ac1-5 applies to 1,000 stocks with the highest average daily share volume on the NYSE and the 200 most active stocks on the Amex for the quarter ended Dec. 31, 2000. The first monthly reports must be made available to the public by the end of June for data collected in May.

After July 2, 2001, Rule 11Ac1-5 will apply to the next 1,000 NYSE and the 200 Amex stocks with the highest average daily share volume, measured for the quarter ending March 31, 2001. On the top 2,000 Nasdaq stocks, monthly publication is slated to commence in September for data gathered in August (for the same quarter ended Dec. 31, 2000).

The first quarterly report required under Rule 11Ac1-6 (comprising the same set of 2,200 stocks under Rule 11Ac1-5), is due by the end of October 2001, for the quarter ending September 30. Thereafter, the rules will apply to all listed and Nasdaq stocks but not to Nasdaq Small Cap, Bulletin Board and Pink Sheet stocks.

The rules are the result of the SEC's long-running inquiry into market fragmentation. In a November 1999 SEC study, for instance, it was recommended that the commission consider forcing broker dealers to disclose information on execution quality. That included a requirement that broker dealers provide their customers with "plain English information about the execution quality available at different market centers."

Retail investors are not the only group frustrated by the paucity of order execution data. Trading firms have the same problem. In a comment letter to the SEC, Lon Gorman, vice chairman and president of Charles Schwab's capital markets and trading group, noted that useful order execution data from certain markets was hard to track down.