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July 6, 2009

NYSE Reg May Give Brokers a Break on Rule 92

By Peter Chapman

Changes afoot at NYSE Regulation to make its trading-ahead rule look more like the Financial Industry Regulatory Authority's could remove some of the hassles involved with block trading on sellside desks.

As part of a long-term plan to remove duplication from their rulebooks, FINRA and NYSE Regulation are working together to "harmonize" their trading-ahead rules. FINRA proposes to merge its two Manning rules-one for limit orders and one for market orders-into a single Rule 5320. NYSE Reg plans to merge its two Rule 92 rules-one for the NYSE and one for NYSE Amex-into one. The two self-regulatory organizations asked for comment earlier this year. As Traders Magazine was going to press, they were mulling whether or not to file rule-change proposals with the Securities and Exchange Commission.

The harmonization proposals contain many elements. But perhaps the biggest benefit for NYSE members would be a liberalization of the provisions of the NYSE's Rule 92 dealing with customer consent on institutional trades. Currently, brokers must obtain order-by-order or blanket consent from customers before they can trade ahead of a customer's order. The industry has long complained that the provision is unnecessary and overly cumbersome. "It imposes unnecessary delays in the trading process," Ann Vlcek, associate general counsel of the Securities Industry and Financial Markets Association, told FINRA and NYSE Reg in a comment letter.

NYSE Reg has proposed adopting the disclosure provisions of the Manning rules. That way, brokers would only be required to inform their customers about their trading ahead practices on a periodic basis. The terms would be subject to negotiation, but brokers would not have to contact their customers every time they wanted to trade alongside their orders and request permission.

"Disclosure of the relevant terms and conditions, as in the existing FINRA rule, is easier for firms to control and implement and provides direct disclosure to customers without the administrative burden of ensuring that customers return a response," Vlcek said. SIFMA believes such disclosure could be provided when customers open accounts and annually thereafter.

John Matilzis

NYSE Reg gave a little ground on the issue two years ago when it permitted NYSE members to obtain affirmative consent from their clients on a one-off blanket basis. Brokers have found that solution unworkable, however, according to Vlcek, and still typically seek consent with each order.

Despite NYSE Reg's apparent turnabout on the issue, as evident by its Information Memo #09-13, it is still unclear as to whether NYSE Reg will adopt FINRA's approach to consent.

"It's harder to move from a regime where you have order-by-order consent, where a customer is consenting to something, to a disclosure regime," John Malitzis, executive vice president for market surveillance at NYSE Regulation, told attendees at SIFMA's annual Market Structure Conference. "The regulatory structure around order-by-order consent is a better approach." Malitzis emphasized the opinion was his own and may not reflect that of NYSE Regulation.

He added: "I recognize there are costs associated with that. They can be significant costs. We are looking for an analysis of the cost-versus-benefit of applying this across the board." Malitzis also conceded that buyside traders should probably be doing their own policing. "This ties in with personal responsibility," he said. "Their responsibility as a fiduciary or as a proprietary trader is to really understand how the firms are trading their orders."


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