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March 1, 2003

Rebate Regs Confuse Philly

By Gregory Bresiger

Payment for exchange sponsored option order flow should be eliminated, but the Securities and Exchange Commission must be clear in how it wants to do that.

There are times when internalization carried out by members can be in the best interests of the clients and the SEC should enact rules that will clarify these situations.

That's what Philadelphia Stock Exchange (PHLX) officials are telling the regulators.

Broker dealers' best execution guidelines aren't always clear for the exchange's members under the current rules, wrote Meyer Sandy' Frucher, chairman of the PHLX.

"Rules that promote internalization, facilitation, crossing and similar practices by exchange members clearly create opportunities for such members to benefit from order flow received from their customers (or purchased from others) through increased trading opportunities and commission revenues," Frucher wrote in a letter to the SEC.

Order Routing

"Whether a firm is likely to wantonly trade," Frucher continued, "against internal order flow to the detriment of customers, by not aggressively seeking the best price, depends primarily upon the integrity of the management of the order routing firm and, secondarily, upon the various safeguards built into the system."

Frucher noted that some of these safeguards are required by the rules of the exchanges.

The SEC started this debate back in January when it sent a letter to the heads of the five options exchanges warning that payment for order flow "encourages firms to consider their own economic interests over those of their customers."

The SEC says it is studying the issue.