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September 30, 2003

The Decline and Fall of the NYSE Empire?

By Gregory Bresiger

The Senate Banking Committee, and its subcommittee on Securities and Investment, are each holding hearings on the state of the securities industry.

As Traders Magazine went to press, these hearings included the much-anticipated discussion of market structure reforms, which range in scope from fragmentation and the National Market System, to decimalization and penny jumping on the NYSE.

With the resignation of Richard Grasso as NYSE chairman, all the most critical issues of market structure are being examined. Several traders said this would leave the NYSE more vulnerable in the end to the regulatory inroads of competitors.

"The [NYSE] is certainly losing their strongest advocate and that leaves open the door for the electronic firms," said one trader.

This comes as the Big Board and officials of the newer electronic exchanges cross swords over the rules governing listed trading. These include the ITS and the trade through rules, which are credited with giving the NYSE a virtual stranglehold on listed business. But an NYSE official, in a recent internal publication, says the Big Board's electronic competitors are looking to the regulators to bail them out.

"Rather than simply competing to offer investors best prices, some electronic markets are trying to enlist Washington's help to opt out of the National Market System by eliminating the so-called trade through rule," wrote Robert Britz, NYSE president and co-chief operating officer. "If successful, they would have license to execute investors' orders at inferior prices, while ignoring (i.e. trading through) investors with better-priced orders," he added.

Britz argues that NYSE's competitors are willing to ignore best prices because they suggest investors want other things besides the cheapest price. "However, their negligible market share in the NYSE-listed stocks suggests that investors actually feel differently," he said.

An official of one of the new breed of electronic firms took issue with that, contending the NYSE engages in monopolistic practices. These electronic firms would like to see numerous changes, but their biggest priority is the trade through rule. Officials of these firms believe the SEC is already friendly to their entreaties because the regulators, this past summer, suggested they might look favorably on reform. One proposed reform would let markets overlook a better price if it weren't immediately available and if it were no more than a few cents better.

Separately, a former compliance officer at the American Stock Exchange has complained he was unfairly fired by the exchange. In a letter to the board, he blamed the exchange's current trouble with the Securities and Exchange Commission for his dismissal. The agency, in a report, says the exchange failed to properly handle stock and options orders and concealed regulatory flaws. Richard Robinson said he was canned because of his co-operation with the SEC. Robinson's outburst came as Amex chairman Sal Sodano came under fire for the size of his compensation - $5.6 million last year and another $22 on his retirement.