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January 1, 2004

SEC to the Rescue of the ITS?

By Gregory Bresiger

There's usually just one thing traders agree about when the topic is the controversial Intermarket Trading System - the regulators have been tardy in addressing its problems.

The Securities and Exchange Commission said it was going to fix the ITS problem, a promise applauded by both friends and critics of the system.

"It's long past time they did something," Andy Brooks, a trading executive with T. Rowe Price, told Traders Magazine.

Another trading pro echoed that view. "The ITS is supposed to provide a cost-effective way to access liquidity. Right now it is just not doing that," said Arthur Pacheco of Bear Stearns. Pacheco suggests that private systems might provide a much more efficient, innovative answer. But the ITS, an electronic link connecting U.S. exchanges and players in listed stocks, also has its defenders.

"The ITS system is not perfect, but it basically works. I don't want to replace the whole system unless we find something else that works as well," said Mark Madoff, a trading director at Bernard L. Madoff Investment Securities. His firm is a big player in the off-board trading of listed securities. Madoff notes that the problem is often the shortcomings of some players. "Without adequate linkages there is going to be continuing problems," he warned.

Madoff pointed to the recent woes of Nasdaq trading at the Amex. "That wasn't the problem of the ITS," he said. The flaw is in the system, he said, adding that the execution snafus can come from executions at traditional markets that aren't as automated as more electronic competitors. He suggested that the trade through rule might be reformed by guaranteeing executions to automatic execution venues.

Despite the debate over the future of the ITS, trading players agree on one point: the SEC must make any changes because the ITS can't reform itself. The regulators are examining the role of price/time priority. The SEC is also investigating claims by ECNs and others that investors are often hurt under ITS rules that can force an order to line up at the NYSE for up to 30 seconds if it is offering superior prices on some stocks. "It's a very tricky issue," said Brooks.