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July 27, 2005

Dissenters Challenge: Trade Through
Atkins/Glassman Attack

By Gregory Bresiger

(Traders Magazine, July 2005) -- Reg NMS "contrived" problems that were not "substantiated," according to Paul Atkins and Cynthia Glassman, the SEC commissioners who voted against it.

The problems came out of complaints by individual investors and unnecessary transaction costs on the NYSE and the Nasdaq. "Excessive" volatility and high trade-through rates were also documented in a study by the SEC. But the majority of commissioners in favor of Reg NMS "cherry picked" statistics from a study to fit their prejudices, Atkins and Glassman charged.

"The Reproposing Release claimed that 7.9% and 7.2% of the total share volume on Nasdaq and the NYSE, respectively, were traded through," the two commissioners wrote in an unusual dissent that ran to 40 pages.

But the "Release failed to point out, however, that these trade-through rates were calculated, not on the basis of a quotation's displayed size, but on the size of the order. Thus, an order executed at an inferior price was considered to have been traded-through at its full size even if the order was for a large number of shares that were available in the market," according to the dissent.

When exceptions are factored in for the trade-through rule, the Nasdaq trade-through rate was actually between 1% and 2%, Atkins and Glassman said. They added that the majority's cited trade-through figures were "overstated." That's because they didn't include trades for institutions, intermediaries and sophtisicated individuals.

"The minimal trade-through results reflected in the study," the two commissioners wrote, "do not support the conclusion that trade-throughs are a significant problem-certainly not one that justifies regulatory intervention on the scale of Regulation NMS."

The extension of the trade-through rule will likely hurt competition among market makers, the pair said. They will concentrate on price, paying less attention to other aspects of the trade, the two commissioners warned.

"Given the rule's sole focus on price," they wrote, "incentives to improve execution quality above and beyond the trade-through rule's mandated execution methodology may be reduced."

Atkins and Glassman offered their own plan for market structure reforms. Better access to quotations, improved connectivity among markets and market participants as well as a clarification of what constitutes a broker's best execution obligations.