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December 1, 2003

The Alternative Model for NYSE

By Gregory Bresiger

Instinet's leader has told Congress that the New York Stock Exchange must be required to take multiple modernization steps, the same as other exchanges.

"The NYSE should also be required, as Nasadaq was a few years ago, to separate its regulatory function from its business interests. Regulation is a duty owed to the public and must be separate from the profit motive," Ed Nicoll, CEO of Instinet, recently told the House Financial Services Committee.

Taking Shots

Besides taking shots at the Big Board, Nicoll, without mentioning any group, also took issue with the Security Traders Association's recent letter to Congress. It warned of numerous market structure woes that required immediate action by Congress and the regulators. But Nicoll disagreed with these sentiments.

"Some market participants have indicated that they want regulators to take actions on other issues such as fragmentation, so-called regulatory arbitrage, access fees and locked and crossed markets. But are these concerns really that troubling? Nicoll asked. Nicoll also warned that the logic of many reformers is that competing market centers are a bad thing. The logic of that argument, Nicoll told regulators, is that all markets except one central market should be closed.

"I don't believe that anyone is comfortable with shutting down all markets save one, or with the notion of eliminating competition between markets. Moreover, there are fundamental problems with the idea of a centralized market," Nicoll told lawmakers. "First, one market cannot adequately serve the diverse needs of every kind of investor. Second, with a centralized market there would be no competition between markets, raising transaction costs and inhibiting innovation."

STA officials were not available for comment. However, Benn Steil, a scholar who follows market structure for the Council on Foreign Relations, said he generally agreed with Nicoll's comments.

"I believe competition is good and a centralized market could indeed stop it. Fragmentation is often a result of outdated regulations imposed by the SEC in the 1970s and 80s," according to Steil. He added that some rules were required in the wake of the Nasdaq bid rigging scandals of the 1990s. However, Steil also argues that breaking up the Big Board is not necessary.

"It would make much more sense to demutualize the New York Stock Exchange. After the floor goes, and the specialist system with it, we would no longer have the complaints about the system," Steill added.