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May 10, 2006

All Roads

By Michael Scotti

On Wall Street, it seems all roads lead to competition. Since its founding with the Exchange Act of '34, the Securities and Exchange Commission's mantra has been about creating a marketplace that fosters competition. That's also the centerpiece of the SEC's Reg NMS: Have orders compete across market centers for the best price.

This gist of this month's cover story on wholesalers would undoubtedly get an approving nod from the SEC. Executive Editor Peter Chapman outlines just how competitive this dealer business has become. Using technology, today's wholesalers are an efficient lot. New entrants are pushing the envelope and making tight margins even tighter. These upstarts are taking business away from established wholesalers, too. The beneficiaries, of course, are retail investors, as large order senders are pushing for the best deal. And that must be pleasing to the SEC, which has always championed the retail investors' cause.

Traditionally a Nasdaq and OTC business, wholesalers see opportunity on the horizon. New York Stock Exchange-listed stocks, Chapman writes, will be their next growth frontier. That should happen once Reg NMS's trade-through rule is implemented.

There's also been a brouhaha over Nasdaq's new proposed trade reporting facility. Its approval by the SEC is key to Nasdaq gaining its exchange status. Managing Editor Gregory Bresiger's story explains why competing exchanges oppose this facility. At the heart of the matter is internalization of order flow by big brokerages, something the NYSE is strongly against. That's because internalized orders do not get exposed to the marketplace. Bresiger, in our Washington Watch section, has also written about best execution in relation to internalization, a practice that is being looked at by the SEC.

Besides best execution, another aspect of internalization the SEC is likely to review is whether internalization increases or stifles competition. Exchanges-including regionals, ECNs, and wholesalers will continue to compete for listed flow. Competition, in theory, should give investors the best price. Print facilities and internalization are likely to continue to be at the center of the discussion about competition and best execution. We hope you find these stories of interest. Enjoy the issue.

Michael Scotti

Editorial Director