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November 1, 2003

Specialists Under Fire

By Gregory Bresiger

The specialist system and the concept of self-regulation of markets must go, a scholar of markets has told Congress. "The era of the SRO is over," he said.

Those were some of the comments given by James Glassman of the American Enterprise Institute, who testified before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. Glassman also implored the lawmakers to insist that the New York Stock Exchange's specialist system be ended.

"That system - which permits about 400 traders from just seven firms, with inside knowledge, to enhance their own accounts as well - is an anomaly, an antique among the world's major exchanges," according to Glassman.

Glassman's testimony came at the same time that the giant Fidelity Investments, the nation's biggest fund company, joined the battle over specialists. Its head of Global Equity Trading, Scott DeSano, recently called for the abolition of the current specialist system. He wants it replaced with "an electronic system such as that used by the Nasdaq Stock Market, in which computers pair buy and sell orders with no human go-between." (NYSE officials didn't respond to their comments about SROs and the attacks on the specialist system. Instead, they referred to recent Congressional testimony by interim Big Board Chairman John Reed).

Glassman also ridiculed the NYSE's current system of self-regulation, saying its sanctions are too few and far between. Glassman also charged that NYSE officials have been paid more than they deserved because they provide a regulatory environment that is lenient. He wondered, "what company, given the opportunity - would not pay its own regulator a hefty sum?" Interestingly, Glassman's comments came at about the same time that a key SEC official said that SRO governance is going to be targeted by the commission.

Glassman's proposed reforms: Require all exchanges to use an outside regulator. Also, the NYSE should be transformed into a publicly-owned entity. Only by expansion of the shareholder base of the Big Board, Glassman said, would the current conflicts of interests end.

"The NYSE now engages in practices that are often at odds with the best interests of investors," Glassman charged.