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November 1, 2004

The Big Board's Enemies

By John A. Byrne

The critics of the New York Stock Exchange are wrong. The case for repealing the trade-through rule and reforming the auction model has merit. But it is laughable when the critics suggest that trading reforms were a tonic for the Big Board's country cousin, Nasdaq. Good for whom? Do they really mean the retail and institutional investor? Give me a break. Last time I checked, it was hard to find a viable market center trading Nasdaq stocks. If the institutional trading markets are suffering at the expense of the retail investors, does this make economic sense? The typical Nasdaq model of the future is shaping up as a natural monopoly similar to the same natural monopoly - did someone call it evil? - known as the NYSE. The most obvious manifestation of this is the recent purchase of Schwab Capital Markets by UBS AG for $265 million in cash. [The Cover Story and Special Feature catch the crosscurrents.] Cutthroat profit margins seem to promote monopolies and economic tension. Yet, the critics want to dismantle the NYSE. The politicos in Washington are playing hardball. So what would it take to sponsor a bill to torpedo the rule? "If the trade-through rule was still around in a few years, we would pass a bill," Justin Daley, an aide to Rep. Michael Oxley (R.-Ohio), told me. Oxley is Chairman of the House Financial Services Committee. Daley, who was speaking extemporaneously, then added that the trade-through rule is not a free market reg, implying that repeal is a deregulatory measure. This came from one of the sharpest young market structure operatives in Washington. Oxley's office subsequently made it clear that the congressman has previously pressed for reform of the trade-through rule, which critics contend preserves the NYSE's monopoly. However, Oxley would prefer the regulatory agencies to dump the rule.

What then are the merits of reforming the NYSE? Will the proposed Hybrid model mend fences with institutional customers? One upstairs trading executive, who wants to remain anonymous, said the Hybrid does not go far enough. For starters, the NYSE should permit market price quote data on its Open Book to be totally integrated on one single screen, with the information now displayed by ECNs and others on separate screens. Of course, the critics say, the NYSE's country cousin has the perfect example. It's the entity effectively fostered by government intervention - the SuperMontage. "The human trading eye," sniffed the trading executive, "finds it very difficult to maneuver when you have two separate montages, one for NYSE data, the other for all this other stuff." Will someone fetch the Kleenex? Daley, meanwhile, told me that when investors eventually figure out how bad the trade-through rule is, they will vote with their feet. "Look at how efficient Nasdaq has become, spreads have narrowed," he said. Really? Don't get me started. Now who'll drive the reforms in the next few years? "The Fidelitys of this world will drive the changes because they represent the interests of the retail investors," Daley said. Could he be wrong?

John A. Byrne