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September 28, 2006

Free-Market Economist Sirri Named to Head the SEC's Division of Market Regulation

By Gregory Bresiger

Economist Erik Sirri, a former official of the Securities and Exchange Commission, has rejoined the regulator as its new director of market regulation. He replaces Annette Nazareth, who went on to become an SEC commissioner and Robert Colby, who held the position until a new market regulation director was finally named.

Sirri is now a professor of finance at Babson College in Massachusetts. He was praised by trading officials as someone less likely than his predecessors to add new trading rules.

"He will not be a heavy-handed regulator," said one trading executive. The source noted that, from 1996 to 1999, as the SEC's chief economist, Sirri had pushed the commission not to impose price controls on fund expense ratios.

"Instead, he (Sirri) pushed for greater transparency for fund expense ratios, as opposed to writing more rules on what could be charged," another trading executive said.

SEC Chairman Christopher Cox praised Sirri's professional experience.

Sirri has "an exceptional insight into the future of securities exchanges, which has been a major focus of his work, and which will be indispensable in safeguarding the interests of investors as capital markets around the globe rapidly converge," Cox said. The appointment will become effective this month.

The staff appointments at the Division of Market Regulation, trading officials say, are more important in some respects than the commissioners themselves. That's because commissioners often tend to rely on the staff to write and vet rule changes.

The staff, for example, had a critical role in writing and re-writing the long-debated and controversial Reg NMS. Some trading critics of Reg NMS have complained it was "the creation of the staff" and not the commissioners. That four-part regulation represented the greatest set of market structure changes in some 30 years. These changes will be phased in over the next year.

Sirri was at the SEC as chief economist when the order-handling rules were written, and he became well known in the trading world with a 2003 study on order preferencing. It compared the quality of executions on the New York Stock Exchange with those on five regional exchanges.

The study, co-authored with another academic, Mark Peterson of Southern Illinois University, concluded that the primary exchange provided the lowest execution prices for market orders.

However, it also found that, for limit orders, "regionals execute more of them and more frequently than the primary market and with a total execution cost that is not very different from the primary market," according to the study, "Order Preferencing and Market Quality on U.S. Equity Exchanges."

In most other cases, the preferencing exchanges are "no worse than, and in most cases better than, the nonpreferencing regional exchanges," Sirri wrote.

Preferencing, Sirri and his co-author concluded, generally does not hurt executions in the five exchanges studied.

Robert Schwartz, a business professor at Baruch College in New York City, applauded the appointment. "Erik Sirri is a well-experienced economist who has excellent credentials," he said. "He is well respected because he has lots of experience in micro market structure."

Colby has been acting director of the Divison of Market Regulation since the resignation of Nazareth in August 2005.

Nazareth, who had been division director since 1999, was sworn in as an SEC commissioner in April.