Commentary

John Turney
Traders Magazine Online News

Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

Traders Poll

What is your favorite movie about trading?

Wall Street

23%

The Big Short

13%

Margin Call

6%

Equity

0%

Trading Places

38%

The Wolf of Wall Street

8%

Boiler Room

7%

Arbitrage

0%

Too Big to Fail

5%

Free Site Registration

January 3, 2006

NASD to Monitor Trade-Through Exemptions

By Peter Chapman

The NASD, concerned about loopholes in the forthcoming trade-through rule, plans to closely monitor its members' compliance.

The Securities and Exchange Commission's new order protection, or trade-through, rule doesn't go into effect for another seven months. But the NASD is already cautioning broker-dealers to think twice before exercising a key exemption of the rule.

Richard Wallace, the NASD's chief counsel, told conventioneers at the Security Traders Association's annual gathering, that the regulator would "be taking a hard look when firms opt to exercise the self help' provision" of the new rule.

The self-help provision allows firms to trade through a quote they deem manual' even if it is designated as automated' by the market displaying it. The order protection rule generally forbids traders from trading through, or bypassing, those quotes that are eligible for automatic executions.

"Firms will need to be pretty careful as to how they make those decisions," Wallace warned, referring to the exemption.

The regulator compared the trade-through rule's self-help provision to an exemption in the NASD's 1997 Limit Order Display Rule. That exemption permitted members to ignore the rule during "exceptional market circumstances." Wallace complained that some firms "took an aggressive view" of the phrase exceptional market circumstances,' claiming it took in the first and last 15 minutes of the trading day.

The self-help provision of the trade-through rule was meant to deal with the possibility that market centers might refuse to offer automatic executions against quotes designated as automated.' Bob Colby, the SEC's acting head of market regulation, speaking at the STA bash, called the self-help provision a back stop.'

"My guess is that markets will be reluctant to say they just went from automated to manual," Colby said. "But if they don't mark their quotes as manual, they will have violated the rule."