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December 1, 2011

Trader Asks SEC to Look At Rule

By Peter Chapman

Peter Driscoll, a senior trader with the Northern Trust Co. and a former chairman of the Security Traders Association, has asked the Securities and Exchange Commission to reconsider its approval of a controversial New York Stock Exchange rule governing trading ahead, or front-running.

Peter Driscoll

Driscoll sent a letter to the SEC on Oct. 18, questioning the legality of the changes made by the NYSE Euronext unit to its Rule 92. The executive wants the SEC to kick back the rule to the NYSE and reopen the comment period, which ended Sept. 14.

Driscoll made his request as a private citizen and not through his company. Northern Trust is one of the industry's largest money managers.

The rule change "reduces the protections currently afforded client orders and makes the trading process much less transparent," Driscoll told the SEC. "Buyside stakeholders were surprised by this rule change."

As part of a "rule harmonization" process under way between NYSE Euronext and the Financial Industry Regulatory Authority, the three stock exchanges operated by NYSE Euronext reworked their trading ahead rules to conform with FINRA's Rule 5320, better known as "Manning."

With the changes, brokers were relieved of their obligations to ask the buyside upon receipt of every order whether or not they could trade alongside, or ahead of, the order. Now, the buyside trader must raise the issue himself with every order.

The New York Stock Exchange filed its changes for "immediate effectiveness" rather than go through the standard notice and comment process. The exchange told the SEC it was eligible to file in expedited fashion partly because the rule does not "significantly affect the protection of investors or the public interest."

Driscoll disagrees with that assessment, telling the SEC that "many clients (buysiders) viewed this protection as fundamental."

Although filed as immediately effective, the rule proposal did include a 30-day comment period. The NYSE received no comments. Driscoll blamed both brokers and the NYSE for the lack of input from the buyside, noting that "the harmonization of NYSE Rule 92 escaped the attention of much of the buyside community."

At a recent industry conference, Rick Ketchum, president and chief executive officer of FINRA, urged brokers to work closely with their customers on the new trading ahead rules.

"From the standpoint of the customers, a surprise never works," Ketchum said. "They're never positives. They're never received well by the regulators or the media. This is a great time for the sellside to take a step back and work toward an environment where there is transparency and understanding of the alternatives."

It is not unheard of for the SEC to stay a rule it has approved. Typically, an aggrieved party must file a "Petition for Review" with the regulator. The Chicago Board Options Exchange filed one in 2009 after the SEC approved the International Securities Exchange's clean cross order type. Nasdaq OMX filed one this month after the SEC prohibited it from making a fee change.

Steve Nelson, principal at Nelson Law Firm, says the SEC has backtracked more frequently in recent years. That's due to pressure on the regulator to speed up its approval process of exchange and FINRA rules.

"They can't really speed up because they don't have the staff," Nelson said. "So the rule goes into effect and then the SEC realizes it was a bad idea and abrogates it."

Driscoll, who was chairman of the Security Traders Association from 2008 to 2009, did not respond to an email seeking comment on whether he or any organization planned to file a "Petition for Review" with the SEC.

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