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September 30, 2004

Merrin: NMS Rule Change Unrealistic

By Gregory Bresiger

Block traders may be on the verge of losing a key rule that gives them an advantage.

A current rule now prevents aggressive traders from knowing too much about the orders of rivals. But the Securities and Exchange Commission wants to change the rule, which requires alternative trading systems to provide full access and display all orders in certain stocks.

The rule is triggered when the ATS generates at least 20 percent of a stock's volume. Under the SEC proposal in Reg NMS, the threshold would be reduced fourfold to five percent.

Now some trading executives are crying foul. Reducing the threshold could force some block crossing systems to rethink how they promote their operations for members. The fear is that the rule will force them to run a public data display entity that is more like an ECN. The impact on buyside traders who use block trading systems to curb market impact - and find liquidity - could be equally dramatic.

Seth Merrin, CEO of Liquidnet, says the Reg NMS proposal is unrealistic. Merrin notes that the original so-called fair access rule was designed for markets where orders are displayed to many members.

This rule was not designed for venues such as Liquidnet, he adds. But trading systems like Liquidnet would be targeted if the new proposal is enacted, according to obervers.