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February 1, 2005

Big Guns Implore SEC on Best Price'

By Gregory Bresiger

The SEC should not go ahead with a proposal to expand the "best price" rule, according to officials of several electronic firms who were attending a recent American Enterprise Institute (AEI) conference. Among those at the conference were officials of Instinet, Nasdaq, White Cap Trading and Archipelago.

"We are philosophically opposed to the continuance of the trade-through rule," Jamie Selway, chairman of White Cap Trading, told Traders Magazine.

The SEC, which might be taking action as soon as this month on the package of Reg NMS proposals, was reviewing two recommendations to expand the trade-through rule. The proposals are designed to encourage market players to post limit orders and provide depth of book, which conference participants said would be a good thing if it promoted more liquidity. But using the proposals to expand the trade-through rule by calling it "a best price rule" would not be a positive step, said one conference participant.

"Whatever you want to call it, the trade through-rule should be junked," says Peter Wallison, an AEI resident fellow. Without the rule, Wallison added, ECNs could compete more effectively with the NYSE for listed business.

Wallison said any expansion or reform of the trade-through rule doesn't make sense. "As shown by the competitive Nasdaq market," Wallison added, "all investors, all market participants, and the U.S. economy as a whole would be far better off." Wallison believes that, although the SEC has not offered this choice of junking the rule, "market participants should now insist on it."

Selway said that no rule can "guarantee liquidity." But, he added, if the SEC insisted on a best price rule he would then reluctantly accept some NBBO system. "We'd like no rule, but I would be willing to accept some incremental change."

NYSE officials declined comment. But they pointed to a recent teleconference in which CEO John Thain said he is "generally" supportive of the Reg NMS plan. "And we're also supportive of the trade-through rule and the protection of the top of the book," according to Thain.