Commentary

Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

Traders Poll

Do you think it's a good idea to conduct an access fee pilot to assess the pricing models used by many trading venues?

Yes

67%

No

0%

Should have had a pilot program a long time ago.

33%

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March 1, 2004

At Deadline

By Editorial Staff

Market Structure

*It's a step in the right direction. That's how John Giesea of the Security Traders Association characterizes the SEC's latest market structure reform proposal. It calls for capping access fees at one tenth of one cent and proposes uniform market access rules. "That certainly addresses the fairness issue with us," Giesea said. STA has frequently complained that market makers are assessed these fees, but they are barred from imposing them.

Giesea also praised the plan to end subpenny trading. "That's a slam dunk," he added. On some other issues, such as the trade through rule and market data, he said that STA wants to study the SEC plans in detail. The SEC, on the trade through rule, is asking for a way of opting out. This would permit investors to avoid the regulation on any trade, regardless of the venue or the price. On market data, the SEC wants to change the formula for distributing market data revenue.

Automatic

*Nasdaq and Instinet officials are critical of the Big Board's new auto-ex proposal. The NYSE wants to ease rules for those using its Direct+ system, but Instinet Chief Executive Ed Nicoll and Nasdaq CEO Bob Greifeld recently told Congress that the plan has many problems. Auto-ex, they said, doesn't apply in the case of quotes of 100 shares. And that is a situation that exists 10 percent to 20 percent of the time, Nicoll said. "The specialist can turn off auto-ex for 100 shares," Greifeld complained. Nicoll noted that auto-ex only can be used against the market's best prices. Inferior priced quotes wouldn't be eligible, despite the fact they may be for a considerable number of shares, he said. Nicoll also said the specialist is not required to auto-ex an order if the quote is in "a non-firm mode."

Directed Brokerage

*The Securities and Exchange Commission proposed banning mutual fund companies from directing commissions to broker dealers in compensation for distributing fund shares. The nation's top regulator maintains the practice, known as "directed brokerage," may cause fund companies to "compromise best execution." It could also cause fund houses to engage in other breaches of their fiduciary duties.

Specifically, the SEC proposed three changes to rule 12b-1 of the Investment Company Act of 1940. First, the SEC wants to bar funds from directing order flow to brokers for selling their funds. Second, the SEC wants to eliminate the practice of "step-outs." That's where a fund company instructs its executing brokers to share their commissions with other brokers who sell the fund's shares.

Finally, the SEC wants to require fund companies to set up internal controls. Those would eliminate the possibility of the money manager entering into any directed brokerage arrangements.

Research

*State Street Research Investment Services failed to take adequate steps to prevent market timing and has been fined $1 million, according to NASD. State Street, the regulator said, agreed to pay $500,000 in restitution to individual State Street Research funds. These market timing violations took place between 2001 and 2003, the authorities said.

"Market timing, in violation of prospectus limits, can dilute the value of fund shares, raise transaction costs and thus harm fund shareholders," according to Mary Schapiro, vice chairman of NASD.