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April 30, 2004

At Deadline

By Editorial Staff


*The New York Stock Exchange will become a hybrid exchange within the next three or four months. That's according to testimony from John Thain, the Big Board's chief executive. A hybrid exchange, such as the Chicago Board Options Exchange, combines automatic executions with floor-based trading. To become a hybrid, the New York says it will liberalize the rules governing its Direct+ auto-ex system. To that end, it plans to re-file a rule change with the SEC by the end of May.

The Commission quashed an earlier proposal. The New York hopes the changes will qualify it as a fast' market as defined by the SEC's new Reg NMS proposal. That way its quotes won't be traded through. The New York plans one significant change with the new filing. It will eliminate the rule that prevents automatic executions if the best quote is for only 100 shares.

Market Data

*The Securities and Exchange Commission is trying to find a reasonable formula on sharing market data fees, which generated some $400 million last year. But the biggest problem may simply be finding a formula that is clear. One market maker, who recently went through the NMS proposal, said that, "I'm still trying to figure out what the market data proposal means." Indeed, so apparently is the SEC.

The first SEC hearing on Reg NMS brought this comment from a regulator. He said the proposal, "is a broad-based formula for allocating market data revenues that incorporates several measures of quoting and trading activity an appropriate means to address distortive incentives created by the current trade-based formulas, or should other regulatory tools be used to address such problems?"


*Four buyside traders, testifying at the SEC hearing in New York City, were split on the need for an opt-out' provision in the proposed Reg NMS trade-through rule. The Investment Company Institute, Vanguard Group and AIM Capital Management all oppose opt out. However, Fidelity Investments was the lone supporter. The opt-out loophole would let traders bypass the market's best-priced quotes for those more likely to execute immediately.

"Opt-out is a vexing issue," said Kevin Cronin, AIM's head trader. "It is troubling to imagine advancing any public policy that would promote our ability to pursue inferior prices at the expense of those willing to display limit orders." Many fear limit orders would disappear if they were consistently traded through. But Fidelity head trader, Scott DeSano, countered that best execution often depended on "our ability to lock in a price at a given moment."

Trade Through

*A reformed trade-through rule should not be imposed on a market such as Nasdaq, a market in which competition is "intense." That's according to Robert Greifeld, who testified at a Securities and Exchange Commission hearing on the proposed Reg NMS plan. Greifeld argued that the controversial trade-through rule should be eliminated in venues in which "it dampens competition."

He cited the NYSE as an example of the latter. Nevertheless, Greifeld said that, if the rule is extended to Nasdaq, the SEC, "must ensure that its proposal does not inadvertently eliminate competition." Any opt-out reform provisions, he added, must not deprive "customers of the freedom of choice they enjoy today."