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June 30, 2003

Extension on Trade Through

By Gregory Bresiger

The SEC now says those hoping for relief from the trade through provisions of the Intermarket Trading System (ITS) will have a nine month extension of the exemption for exchange traded funds. The exemption had been slated to end last month.

Executives at electronic trading firms hailed the decision.

"This is an important step. It shows that the commission is starting to recognize the increasing importance of electronic trading," said Andrew Goldman, executive vice president for Island/Instinet and the firm's key Washington lobbyist.

The de minimis exemption - de minimis is a Latin term meaning small - allows ETFs to escape the trade through provisions provided they are "within three cents away from the best bid and offer quoted in the CQS [Consolidated Quote System]."

"The three cent de minimis exemption allows ITS participants and their members to execute transactions, through automated execution and otherwise, without attempting to access the quotes of other participants when the expected price improvement would not be significant," according to the SEC order.

The exemption, which permits trade throughs in the Nasdaq 100 Index ETF (QQQ), the Dow Jones Industrial Average and the S&P 500 Index funds, had been slated to expire on June 4. It is now extended to March 4, 2004, according to the SEC order.

"During this extended exemption period, the Commission intends to consider whether to adopt some other alternative solution, or to allow the exemption to expire," the SEC wrote. The SEC noted that the decision doesn't exempt firms from best execution obligations.

Several trading executives also told Traders Magazine that they hope that the SEC will go further. "The three cent de minimis rule is an incremental step in breaking down one of the inefficiencies of the inter-market trading in active EFTs," according to Jenny Drake, a market structure specialist with ArcaEx.

"Ultimately, we believe investors will benefit from more significant reform - to the many rules and procedures that govern inter-market trading in listed securities," Drake said. Many trading executives hope that the SEC will make the trade through exemption permanent next year.