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December 1, 2004

At Deadline

By Editorial Staff

London

*The London Stock Exchange hopes to trade more small-caps electronically. In a controversial proposal, the LSE wants to add about 425 thinly-traded stocks to its hybrid SETSmm platform. It already trades about 220 names on the year-old SETSmm, a system that combines an electronic book with market making. The bourse claims the move will lead to tighter spreads and increased volumes. Dealers, who now trade the stocks manually via the SEAQ system, have opposed the move. They contend liquidity will suffer. The LSE argues the move is in line with a Europe-wide plan to require dealers to display unexecuted limit orders. Under the LSE's proposal, the number of stocks traded over SEAQ will drop from 1,581 to 1,154. SEAQ and SETSmm are two of the LSE's four trading platforms. The other two are SETS, which handles the 180 largest stocks, and SEATS+, which has 52 small-caps. All told, the four systems handle 2,036 names.

Best Execution

*Once again, the Securities and Exchange Commission is examining if the biggest trading firms are obtaining best execution, according to published reports. The SEC is investigating a dozen firms that may not have obtained the best price for their retail clients. The investigation, according to the reports, has been going on for several months. The reports come as Traders Magazine, back in September, reported that rising internalization rates have been targeted by regulators who wonder if they are compromising best execution standards. "It is obvious," one analyst told Traders Magazine, "that internalization would be the one place to go to see if execution costs are higher than they think they should be."

Merrill

*Merrill Lynch hired six equity trading technology specialists away from Morgan Stanley. The team is part of Merrill's plan to become a stronger force in electronic trading. The group joined Merrill along with Rohit D'Souza, Merrill's new head of global equity trading. D'Souza, an expert in electronic trading, was formerly head of North American equity trading at Morgan Stanley. He is credited with building Morgan Stanley's Passport direct market access system. At Merrill, sources say, his team is likely to build a similar platform. Currently, Merrill offers its customers the Lava Trading system. The hires are considered a major blow to Morgan Stanley, which was suddenly left unprepared. The departures are only the latest in a string of defections from Morgan Stanley. At least two technology experts moved from Morgan Stanley to Banc of America Securities this year. Martin Ruiz joined to head up client connectivity. Jason Crosby joined as head of program trading sales. Merrill and Morgan Stanley had no comment.

Scandal

*Trading industry fraud is less blatant than it was some 15 years ago. And regulators are now more likely to target practices such as early trading or collusion, according to Larry Tabb, founder and chief executive of the Tabb Group. "Back in the mid-90s and the late 80s, a scandal would involve traders stuffing paper tickets in desks because they didn't want to sell their losses. Now it's more the strategy behind some of the issues," Tabb said at an Instinet/Tabb Group roundtable. An Instinet official agreed, saying that regulators are looking at structural issues that were once common practices that no one seemed to discourage.