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July 27, 2005

Payment for Order Flow Stays

By Gregory Bresiger

(Traders Magazine, July 2005) -- Internalization and payment for order flow are practices rife with "conflicts of interest," an SEC executive says, yet they will not be ended.

That's what a top regulator recently told the Options Industry Conference. Elizabeth King, Associate Director of the SEC's Market Regulation Division, said banning the practices wouldn't necessarily help the investor. (See Options column).

"Payment for order flow and internalization are symptoms that pricing inefficiencies remain-despite the significant progress that has been achieved in the options markets," King told the conference. "Without improvements to the prices at which options trade, banning payment for order flow or internalization would improve the profits of dealers, but do little for the customers."

Lee Pickard, from 1973 to 1977 the director of the SEC's Division of Market Regulation, told Traders Magazine that the SEC is not going to ban these practices.

"Whether they have the power to do so or not is one issue, but they will not ban these practices because they are not rife with conflicts of interests," he said. Pickard said the SEC, a few years ago, made changes in how options are traded, requiring greater disclosure.

"Possibly, the SEC will make more disclosure requirements. But that is as far as I think they are going to go," he added. Pickard said the SEC may make some minor changes in payment for order flow and internalization rules.

King says the SEC is attacking payment for order flow by promoting transparency and the quality of markets.