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August 9, 2006

Traders to SEC: Need Help With Self-Help

By Gregory Bresiger

Information please.

That's what regulators are being asked for on the self-help exemption of Reg NMS's order protection rule (OPR), otherwise known as the trade-through rule. The request is coming from a Securities Industry Association (SIA) committee that says it is not clear when the self-help exemptions apply and when they don't.

Trading executives are unclear about the circumstances under which a broker-dealer can justifiably invoke self-help exemptions

"We still need to understand how each router uses the self-help exemptions, what the scope is and what triggers them and what would terminate an exemption," Andy Madoff, an executive with Bernard L. Madoff Investment Securities, told Traders Magazine. Madoff, who is also a member of the Securities Industry Association's Reg NMS OPR/Access Rule Implementation Working Group, stressed that Securities and Exchange Commission officials are cooperating with the trading industry.

But some traders worry about complying with the new rules even after reading them and a Q&A put out earlier this year by the SEC. Their questions are over what policies and procedures a trading center or a broker-dealer must have to qualify for OPR exemptions, the trading executives say.

One executive asked: How will a market designate itself a fast market and how can it switch back to a slow market?

This is one part of a series of questions and comments that the SIA group recently addressed to the SEC. These include best execution, timing and performance issues or what some trading executives have called "the devil in the detail issues." Even the number of exemptions employed by a brokerage could be an important issue for traders. Regulators have said they will be reviewing the frequency with which traders use these exemptions.

The SIA committee's questions include: How will broker-dealers be informed when one invokes an exemption? How should broker-dealers notify an exchange when it invokes one of the exemptions against a market and what documentation will be required of broker-dealers?

Traders are fearful that their use of exemptions might be challenged by SEC examiners. A trader gave an example: Say one invokes an exemption because one knows a trader has a problem with an exchange, then a trader wouldn't be required to protect a quote.

"But now the SEC says that you must document that. You must have an audit trail for that and notify the offending exchange that you're actually having problems with them when you trade through it," according to the trading official, who complains the exemption rules aren't clear on how one communicates problems to the exchange.

"They don't put any details of how you're supposed to notify them, what the timing of the notification should be and must they be notified on every order or is it on a batch basis? These are the kinds of things that are not clear in the rule," the trading executive said. He cautioned that it might be impossible for someone to know if he or she is following the proper procedure because "the SEC isn't going to write our codes for us."