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July 31, 2004

The Gipper at the SEC

By John A. Byrne

A distinguished trading professional I have known and respected for many years once told me that SEC Chairman William Donaldson is not "very smart." My acquaintance, a man of about three score years and then some, has known Donaldson since both of them began their Wall Street careers. They were together at the New York Stock Exchange when Donaldson was chairman. By smart, the informant was referring to generally accepted standards of intelligence. Donaldson, in his estimate, was therefore a slow learner. He was not an intellectual and would be out of place in book club circles. But, thank goodness, William Donaldson is no intellectual. He seems instead to possess that rare practical sense and intuitive ability - cultivated over a lifetime of experience as an administrator and a Wall Street pro - to recognize a problem when he sees it. An intellectual might approach a problem by summoning abstract theory and book learning. By contrast, Donaldson - the practical man - slices right through it. Get it? Soon after he took office at the SEC, Donaldson went out on a limb and surprised many professionals. He proposed another look at the dreadful carnage caused by the introduction of decimalization. It is unlikely Donaldson spent many hours in a library studying statistics and papers on the reduction in average trade sizes. He did not have a eureka moment as he burned the midnight oil. Instead, as a former pro on the front lines a soup to nuts guy - he could easily recognize the egregious amounts of blood spilled on the battlefield.

William Donaldson went to work at the SEC right away, handling an amazing array of hot potatoes and trading issues. He managed to shepherd the mind-boggling Reg NMS document and to stay on top of the hedge fund industry. The SEC's very own Gipper boiled it all down and didn't bore the hell out of institutional and retail investors. He described a problem like the original Gipper, Ronald Reagan, in language that elementary schoolchildren could understand. Therefore, his style now augurs well for the future of the New York Stock Exchange. At a Senate Banking Committee hearing in Washington last month, Donaldson, for example, said he'd question why the industry would need the proposed Reg NMS "opt-out" rule if the NYSE builds a hybrid market. He spoke kindly about the importance of traditional markets while recognizing the contribution of modern electronic alternatives. What would he say then to those who want to re-examine penny increments? Sure, it sounds like sacrilege. But seriously, how about trading some stocks in minimum nickel increments? An NYSE pro urged that approach on a trial basis when our writer, Nina Mehta, went down to the floor of the exchange for this month's cover story. James J. McGuire, Sr., a managing director at LaBranche, advocated testing a cross-section of 200 stocks. That's because pennies are still hurting the industry. If Donaldson's record tells us anything, he might just take McGuire up on th

John A. Byrne