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December 1, 2002

Commission Slow to Act on Market Structure Reform?

By Gregory Bresiger

The Securities and Exchange Commission, looking for a new chairman as Traders Magazine went to press, appears slow to come up with solutions for the persistent problem of a fragmented market.

That's the opinion of John Giesea, president of the Security Traders Association, who attended recent SEC public hearings on market structure.

"First, my impression is a rather interesting twist," wrote Giesea in a memo on the hearings, "in that to me the industry is calling upon the SEC to be more proactive. I make the analogy of calling upon the SEC to put on the striped shirt and whistle and make the necessary calls. It further appears that the SEC is not terribly anxious to do so."

Access Fees

The STA is pressing the regulators for action on two primary fronts: the ability of ECNs to charge dealers access fees without the reverse and Amex's ability to trade Nasdaq securities. That's despite charge and counter-charge that the American Stock Exchange lacks the electronic support to effectively trade over-the-counter stocks - charges that have been dismissed by Amex officials.

But the industry, Giesea said, should be prepared for the possibility of some action on internalization policies, an area in which the SEC might move. "The Commission clearly has a dislike for issues surrounding the payment for order flow in which market data fee rebates get categorized," Giesea wrote.

"Related to the payment for order flow - there appears to be a negative attitude toward internalization. I think that, someday, there will be a requirement to display an order prior to internalizing," he added.

Giesea criticized the SEC, arguing that internalization, "in the ideal," adds liquidity and price improvement.

Separately, buyside representatives attending the SEC's New York market structure hearings think that the current practice of "pennying" - and allowing specialists to step ahead of transactions - is bad for the markets.