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November 13, 2007

SEC Gives Block Traders Relief on Order Protection

By Nina Mehta

Now that Regulation NMS has been fully implemented, the Securities and Exchange Commission has decided to loosen one aspect of its order-protection rule that pertains to manual agency block executions.

In the SEC's next update to its Reg NMS list of frequently asked questions, the commission intends to allow traders who manually negotiate agency block trades for clients a "20-second look-back." That's according to Stephanie Dumont, vice president and director of capital markets policy in the Office of General Counsel at the Financial Industry Regulatory Authority.

Speaking at an Investment Company Institute conference in New York, she said the look-back will allow a broker to print an agency cross block without having to execute against quotes that became protected after the block price was negotiated but before the trade got on the tape. According to the planned SEC interpretation, as long as the block price was within the national best bid and offer at some point in the previous 20 seconds, the block can be printed without trading through protected quotes.

Dumont said the information came from a September phone conference held by FINRA with Daniel Gray, senior special counsel for market structure in the SEC's Division of Market Regulation. She noted that the 20-second look-back will not be a trade-through exemption, but instead will be considered a reasonable policy and procedure relating to trade-through compliance for block-size agency trades.

At the ICI conference, Robert Colby, deputy director of the SEC's Division of Market Regulation, acknowledged industry "concern about how manual orders get done" when the market for the security in question is moving fast. He referred to the difficulty traders have in printing blocks in those circumstances, without trading through subsequently protected quotes, as an "artificial problem" that warranted addressing.

Robert Harrington, head of institutional block origination at UBS, said the look-back "could be helpful, allowing us to leave the current quote alone while filling clients' demands regarding the block." However, he added, the quantity of protected quotes that have had to be executed in these instances has been smaller than what traders expected before Reg NMS was fully implemented.