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January 3, 2011

Bring Back the Block Exemption?

By Peter Chapman

With the passage of Regulation NMS in 2005, block traders lost the right to ignore competing bids and offers in the marketplace. Under Rule 611, they have had to take out any better-priced quotes before printing their block trades. Although they sought an exemption that would allow them to trade through these quotes, the Securities and Exchange Commission nixed the idea.

The regulator maintained at the time that an exemption would discourage the use of limit orders and harm the price-discovery process. Now, five years later, at least one senior trading executive, speaking at the Investment Company Institute conference, called that decision a mistake.

"We designed a market that serves retail orders in the top 200 to 500 stocks," said Chris Concannon, formerly a senior Nasdaq OMX official, now with a proprietary trading house. "But as you move out of those stocks and increase order size, we have a flawed market."

Concannon contends that brokers are reluctant to take on block trades in small- and mid-cap stocks because Rule 611 forces them to show their hands. While the rule may not be a problem when trading blocks of highly liquid stocks, too much information is divulged when taking out the quotes of smaller names. That pushes up the cost of trading the stock.

He believes the SEC should consider an exemption for block trades in certain, but not all, symbols.

"The liquidity provider is hampered by the Reg NMS trade-through rule," Concannon said. "That makes no sense. There are no limit orders sitting there being unfairly treated."


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