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John Turney
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Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

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April 30, 2004

Another Multi-Million Dollar Hosing?

By Gregory Bresiger

Every regulatory reform, good, bad or indifferent, has a cost - a cost in dollars, a cost in the hours spent in compliance and other costs that only become apparent as the rules become law. The order handling rules, T+3, decimals and other changes all had their multi-million dollars costs and their controversies. But backers of these changes said they were worth it - they made trading less expensive and ultimately fairer to the investor.

That's what Reg NMS proponents are expecting in the latest round of proposed reforms, a set of measures, which SEC Chairman William Donaldson said, would involve some trade-offs. Will the costs of firms making these Reg NMS market structure changes result in better efficiencies?

For starters, the costs of implementing Reg NMS, just for the trade-through rule, will run in the hundreds of millions of dollars and in the millions of hours, according to the SEC proposal.

"The Commission staff estimates that there would be an initial one-time burden of 200 burden hours per SRO or 1,800 hours, and 150 burden hours per non-SRO order execution facility or 1,015,200 hours, for a total of 1,017,000 burden hours to establish policies and procedures designed to prevent the execution of the trade-through for an estimated one-time initial cost of $145,469,475. The Commission estimates a capital cost of approximately $101,655,000 for both SROs and non-SROs resulting from outsourced legal work," the SEC noted.

More costs would result from the disclosure of the trade-through provision. Here the "burden," according to the SEC, would be $893,376 for broker dealers. These disclosures would also cost brokerages "a total onetime cost of approximately $83,923,200, plus a one time capital cost of $16,243,200 resulting from outsourced legal work."

Many of these costs are detailed on page 75 of the document, which is 247 pages long and contains 377 footnotes. Junius Peake, a business professor at the University of Northern Colorado, pointed out these costs and the length of the proposal. His conclusion is that Reg NMS is "a mess." Peake, who had wanted to testify before the SEC, is calling for "an all-electronic market structure."

"Writing rules that leave the NYSE still using obsolescent technology to maintain their present structure is strictly a political decision, not a regulatory one," Peake wrote in a letter to the SEC. Peake advocates a strict price-time priority system.

Bill Singer, a securities industry attorney and activist in New York, said he believes the costs will be a burden for many firms. "One must wonder whether the cost of this historic effort should be placed upon the shoulders of the major firms who caused so much hardship to our markets," Singer told Traders Magazine. "Rather than burden the industry - and many smaller firms - with the huge costs, I wonder if some thought should be given to whacking some of the major mutual fund firms and broker dealers with major SEC fines for the NMS overhaul." An SEC spokesman, asked about the potential Reg NMS costs, said, "it is just a proposal."