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May 1, 2011

SEC Likely to Have 'Trade-At' Debate

By Peter Chapman

The SEC broached the issue last January because it was concerned too much volume was being traded off-board. It worried internalization might be impairing the public market's ability to discover price. Currently, about one in three shares is traded away from the public markets. That figure has grown sharply in recent years.

Exchanges would be the beneficiaries of any trade-at rule, as they would likely receive more orders. However, publicly at least, they are not clamoring for one. While they are worried about the growth in off-exchange trading, they maintain that a trade-at rule might be going too far.

"Trade-at is a sledgehammer," Chris Isaacson, chief operating officer at BATS Global Markets, said yesterday. "It would be the biggest change in U.S. equities market structure since Regulation NMS-maybe even bigger."

In any case, Isaacson said, the industry and the regulators need to first agree that there is a problem. "Do we believe there is too much off-board trading that is hurting price discovery?" he asked. "I think there is a big debate whether or not there is actually a problem."

Still, he noted that at least 40 percent of the share volume of three of the top four traded stocks was done off-board. That was true of five of the top 10 stocks, as well. (Those figures include the shares of Citigroup, which recently announced a 1-for-10 reverse split, a move expected to dramatically reduce trading volume.)

Isaacson and other exchange executives say some action may need to be taken, but that the solution could involve something less drastic than a trade-at rule.

Among the alternative ideas floating around are a price-improvement requirement; an exemption for block trades or child orders of block trades; or shrinking spread widths.

"I think what will evolve as the debate continues is perhaps not a full trade-at type rule, but other things that are more palatable or incremental," Joe Mecane, chief operating officer at NYSE Euronext, said at the Security Traders Association of New York conference.