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May 26, 2005

Is the Trade-Through Rule Debate Over?

By Gregory Bresiger

The trading community is divided over the SEC's decision to extend the trade-through rule - the so-called best-price rule - to electronic markets. And these divisions have become politicized.

Several members of Congress have condemned the Securities and Exchange Commission's plan. Trading professionals were equally outspoken. "It will discourage innovation," says Mark Madoff, a principal of Bernard L Madoff Investment Securities. "It was unfortunately what we expected."

Madoff said a better alternative would have been a phased-in approach, combined with better market linkages. "Linkages would have meant the trade-through rule was not needed," he says. Madoff, however, said that Congress should not try to reverse the rule.

"My biggest fear is that there is now a potential for the slow market to become the market model," according to Bill Yancey, president of Automated Trading Desk. Still, he argued that the trading industry should adjust to the rule. Indeed, an official of an electronic firm, who didn't want to be quoted by name, said he had hoped the rule would have been junked. But he now believed that the decision should not be changed. "Actually, this system will be good for many ECNs," he says. "There will be less fragmentation. The NYSE's overall control over listed business will go down."

Yancey urged that the debate over trade through "should not be politicized." Nevertheless, the best-price rule already seems to have been politicized. Typical of Congressional critics is Senator Mike Crapo (R-Idaho). "I am disappointed and troubled that the Commission was unable to proceed with one voice on this important rule. The lack of consensus raises the possibility that Congress should intervene."