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July 5, 2006

Question & Answers: An SEC Reg NMS Critic

By Gregory Bresiger

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Paul Atkins was one of two members of the Securities and Exchange Commission to vote against Regulation NMS last year. His side lost, of course, but he remains unconvinced of the benefits of the new rules. Atkins, a former securities attorney, has a decidedly free-market orientation. He remains skeptical that the set of rules that are presently transforming the structure of the stock market-will do any good.

Atkins has numerous complaints about what has been described as the greatest set of market structure changes in the last 30 years.

Reg NMS is difficult to understand, Atkins believes. That's because it was badly put together. He had favored an opt-out provision for the controversial new trade through, or order protection, rule. This was an exemption that Atkins says was squashed by William Donaldson, the previous chairman of the SEC.

The trade-through rule will miss its original June 29th implementation date (For more, please go to Washington Watch). This comes as no surprise to Atkins, who insisted on issuing a minority opinion when NMS was passed. Now, he believes Reg NMS implementation problems are inevitable.

"Naively ambitious" is how he describes the original deadline set by the SEC. That's because the regulator, he says, is still far behind in issuing "a great deal of interpretative guidance." The SEC must take action on a host of SRO and NMS plan rule proposals, according to Atkins

Trading industry participants grappling with the trade-through rule, Atkins notes, will need some live working experience with new SRO rules, SIP processes, and concepts that have come out of Reg NMS. For example, broker-dealers must revise their systems and develop new compliance policies as well as new procedures, he says.

Atkins has also complained that quickly evolving markets need interpretative guidance on the trade-through rule right now. Trading players must have direction from the regulators on how the various exceptions to the rule will operate.

Traders Magazine's Managing Editor Gregory Bresiger recently spoke with Commissioner Atkins about the trade-through rule.

TM: The SEC is going to delay implementation of Reg NMS until early next year?

Atkins: That's my anticipation and I don't see any way around that. I had objections to the rule.

TM: And they were?

Atkins: The rule is overreaching and ill conceived. It leaves too much discretion with the regulators, and in my view is an answer looking for a problem. As the staff has been hinting for months now, you should expect to see some relief, at least on the timing of the rule implementation, soon. It's just too bad that we are not proposing relief beyond the timing, like maybe dropping the trade-through rule

TM: Why the delay? Is it because trading participants are confused by Reg NMS?

Atkins: We've had to grant clearly anticipated exemptions that were necessary from the rule like that for Liquidnet. [Liquidnet won an exemption from the new fair access threshold. It was lowered from 20 percent to 5 percent].