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March 1, 2004

One Big Fund Company Backs Trade Through'

By Peter Chapman

The Vanguard Group has come out in support of the current trade-through rule. Gus Sauter, chief investment officer of the country's second largest mutual fund company, testified before Congress that investors would be better served if the Intermarket Trading System's trade-through rule were left intact. Traders need more automatic executions, not a weakening of the rules that bind the nations' exchanges, according to Sauter.

Sauter made his case during a hearing of the House Financial Services Capital Markets Subcommittee in lower Manhattan last month. The hearing was part of an ongoing review by the subcommittee of the trade-through rule. Sauter maintains the abolition of the trade-through rule would benefit market orders to the detriment of limit orders. "I cannot overstate the value of limit orders," Sauter told the committee. "Limit orders are the backbone of a perfectly liquid market. Limit orders are liquidity."

Sauter also maintained that limit orders need protection. Automatic executions protect them within a market center. The trade-through rule protects them across market centers. With decimalization and the advent of "penny jumping," Vanguard has placed fewer limit orders on the books at the New York Stock Exchange, Sauter said. Instead, it has hired two-dollar brokers to penny jump for it. "We now hire more people to jump in line for us," Sauter said. "This is not an efficient market system." Vanguard would resume its use of limit orders if they were more likely to receive automatic executions, Sauter added.