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February 1, 2002

Lies, Damn Lies and Best Execution Stats

By John A. Byrne

The new SEC rule that forces trading firms to provide customers with statistics on execution quality has lit a fire under two of the nation's largest brokerages.

In one analysis of Rule 11Ac1-5 Nasdaq statistics prepared by Market Systems Inc., discounters Charles Schwab and Fidelity are shown in a negative light compared to full-service rivals, Merrill Lynch and Salomon Smith Barney.

Schwab executives disputed the results. "It's an old saw that if you torture statistics long enough you can make them say anything you want," said Charles R. Schwab and David S. Pottruck, co-chief executives of Charles Schwab, to a letter in The Wall Street Journal. The furious Schwab execs, responding to an earlier story in a Heard on the Street' column that carried the analysis, noted, "Trade-execution costs represent just a part of overall investor expenses."

"Indeed, many online discount-brokerage firms offer far lower trading commissions than those at full-service rivals, which should be factored into deciding which brokerage firm to trade at," the letter added.

At a conference in Chicago hosted by data analysis firm Market Systems, where The Wall Street Journal article was reprised, some panelists said interpreting and responding to the data on execution quality demanded care. The mechanics of measuring execution quality are "not necessarily always cut and dry," said Andrew David, chairman of Rock Island Securities. "It's like counting chads in Florida."