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August 31, 2001

Stock Exchanges Demand Reform But SROs Say SEC Campaign for ATS Equality Is Doomed

By Gregory Bresiger

A proposal to make it easier for self-regu latory organizations to file new rules is "unlikely" to be approved by the Securities and Exchange Commission, according to a senior trading executive in the Nasdaq community who is familiar with the rule.

"I think it has little chance because lots of people in the industry have told the SEC that it isn't going to work," according to the source, who did not want to be quoted by name.

The proposed rule 19b-6 is designed to give stock markets a better chance to compete against electronic communications networks and other electronic trading systems.

Exchange officials have charged that they are subjected to long delays in obtaining rule changes, delays that their electronic trading systems' competitors now do not face. That, exchange officials have said, gives their electronic competitors an unfair advantage.

The rule, as proposed by the SEC, would speed up the regulators consideration of SRO ruling filings.

According to the SEC filing, the rules would "require that the Commission issue a release relating to the proposed rule change within 10 business days of filing with the Commission, or within such longer time period as to which the SRO consents in writing."

Trading Rules

Besides the expedited review period, the proposed rule also expands "the categories of proposed rule changes that qualify for immediate effectiveness to include trading rules" and it would allow SROs to file rules changes electronically.

However, the SEC also noted that, if the SROs are allowed to have changes reviewed quicker, then proposals must be drafted with precision.

"In light of past problems with SROs submitting unclear rule filings," said the SEC, it is proposing to prescribe in Rule 19b-6, "the items that must be included in the rule filing for it to be considered properly filed."

These would include, "a statement of the authority for and the basis of the proposed rule change, including the impact on competition, as well as a summary of any written comments received by the SRO."

Several SRO officials have complained that requiring the SEC to act on a rule filing within a quicker period is illogical because the agency already moves very slowly. They say the SEC usually takes more than a year to act.

Several exchanges have filed negative comments about the changes. However, others have supported the proposed 19b-6 rule, among them the Philadelphia Stock Exchange. The ECN, Bloomberg Tradebook, also supports the rule. The New York Stock Exchange is reportedly a critic of the reform.

A NYSE spokesman didn't return calls seeking comment. The Nasdaq source, who insisted the reform wouldn't be approved, said there is another reason why it is doomed: Harvey Pitt, the new chairman of the Securities and Exchange Commission, is also going to let it die because of the large amount of criticism from ECNs, SROs as well as from buyside and sellside officials.

A Nasdaq spokesman didn't return phone calls. The SEC declined comment.