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May 26, 2005

Moving at Same Speed, Fewer Abuses?

By Gregory Bresiger

Enhanced linkages between markets mean less human intervention and a larger percentage of automatic trade executions. That was the argument of those who believe the debate over the extension of the trade-through rule was secondary to more connectivity, or what they called better market linkages.

"Quotes that could be accessed without human intervention. That, we felt, was the key," says Peter Driscoll, senior equity trader with Northern Trust and a governor of the Security Traders Association. He described the STA as a "deeply divided" group on the trade-through rule. Several members were "not willing to give it up" and others believed it was a relic that should be junked, according to Driscoll.

The Securities and Exchange Commission, in part, accepted the STA's call for improved connectivity. As part of its Reg NMS order, Rule 610, the regulators required, "a uniform market access rule that would promote non-discriminatory access to quotations displayed by SRO trading centers through a private linkage approach." And the SEC also ordered SROs to use uniform trading rules.

These include, "rules that, among other things, prohibit its members from engaging in a pattern or practice of displaying quotations that lock or cross the protected quotations of other trading centers," according to the SEC. The regulators, said one market observer, insist that all markets must move at the same speed.

"The main point the SEC made is that market rules can only function if there are uniform ways of accessing quotes," says Jodi Burns, a trading industry analyst with Celent Communications. Burns said that many of the current linkages in the auction markets are "antiquated." Driscoll said, with all markets - listed and Nasdaq - more efficiently linked, many of the current abuses of trading would be avoided. He said without automatic execution standards, there is often a 30-second lag in some markets, most notably the New York Stock Exchange. An order can be executed at the discretion of the receiving market.

"Thirty seconds is an eternity," Driscoll says. "Some parties can take advantage of this order information." With automatic execution and enhanced linkages, buyers will be protected, Driscoll contended.

"This 30-second standard was giving some people a free look," according to Burns. "The SEC isn't going to allow that. They're taking the position that the model to follow is the over-the-counter markets. Trades must now be completed in one second. Otherwise one can ignore the trade." Burns added that, despite the extension of the trade-through rule, the electronic markets probably would turn out to be the big winners in the Reg NMS package of reforms. The NYSE's merger with computerized Archipelago is a powerful sign of this rise of electronic markets, analysts note.