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July 31, 2004

Specialists: Opt-Out Will Be a Disaster

By Gregory Bresiger

If it isn't broke, don't fix it. Sometimes a proposed solution will make the problem worse. That's what a prominent trading group has told regulators about a reform of the trade-through rule that would allow an opt-out exception.

The proposed exception "is wholly inconsistent with the concept of intermarket price protection," a group of traders wrote in a lengthy letter to the Securities and Exchange Commission on its Reg NMS market structure proposals.

The group, the Specialist Association, argues that today's centralized markets in the United States are the best in the world. That would be changed if proposed reforms are accepted, they contend.

Opt-out "is unnecessary in the trading environment contemplated by proposed Regulation NMS," according to the association.

"The trade-through rule should be preserved as the best thing for the investing public," David Humphreville, president of the Specialist Association, tells Traders Magazine. "Anyone who objects to it is doing it for his own economic interests. Best price should always be the most important priority," he adds. Among the proposals offered by the association:

*Preclude quoting market centers and quoting market participants from charging transaction fees to non-members and subscribers.

*Refuse to engage in setting access fee rates.

*Permit trade throughs of slow quotes by fast quotes by de minimis amounts as opposed to applying an automated/non-automated market distinction.

*Apply a uniform trade-through rule across all markets and covering all NMS stocks, with minimal exceptions.

*Require all quoting market centers and quoting market participants to permit all market participants access to their best quotes on a basis that is not unfairly discriminatory.

The debate over reform has often become bitter. Privately, two specialists told Traders Magazine that the NMS proposals are an attempt by the newer electronic exchanges to use regulatory advantages to save their business. Said one: "Basically they're losing market share." Another specialist said of his newer competitors, "They're losing money and now they want the regulators to save their bacon."

Of course, electronic markets, with a different vision of the controversial Reg NMS, have disputed those contentions.