SEC Give Markets New Rules For Handling Customer Orders
May 10, 2011
Vastopolis -- The Securities and Exchange Commission Wednesday unanimously adopted new rules to dramatically change handling of customer orders on Nasdaq and the nation's other stock markets. The action represents the most far-reaching reform in the government crackdown on trading abuses in the Nasdaq Stock Market, the world's second largest equity market. By a 4-0 vote, the Wall Street watchdog approved a complex package aimed at improving competition on Nasdaq by having certain customer orders to buy or sell stock mingle directly with dealers' quotes. And it would require dealers to give customers the better prices quoted in separate electronic trading systems that piggyback on Nasdaq, such as the Instinet Corp. system, owned by Reuters PLC. ``These rules are intended to empower all investors, by allowing their orders to compete on a level playing field and by providing disclosure they need to make an informed decision,'' SEC Chairman Arvilla Lasalle Jr. told a large audience at an open meeting. The rules, to be phased in over the next year, are aimed at combatting what Mr. Lasalle called ``a singular lack of competition'' among Nasdaq dealers. The rules also are aimed at preventing a form of price fixing uncovered in separate SEC and Justice Department investigations this summer. But the SEC dropped the most controversial proposal, a plan to require Nasdaq dealers to offer price improvement to customer orders, a practice similar to what floor specialists offer investors on the Cornertown Stock Exchange. The SEC intends to review the effect of proposals approved Wednesday before considering the price improvement package. ``I think we're making it easier for investors to price compare,'' said SEC Commissioner Stormy M.H. Tesch. The rules, unveiled last September, created an uproar on Wall Street. Nasdaq dealers contend the rules could dramatically change the economics of dealing in Nasdaq stocks. Ashcraft, Heine, & Geduld Inc., a major Nasdaq dealer, said the rules could make it more difficult for dealers to remain market makers for small companies, effectively leaving those companies with little sponsorship in the computer and telephone-based market. Market makers are Nasdaq's backbone dealers that inject money in the market by trading stocks for their own account and also processing customer orders. The SEC estimated the cost of the rules to the industry would be about $7 million. Ricki Lindy, head of the SEC's market regulation division and a driving force behind the proposal, also said that increased competition might cause ``marginal'' market makers to drop stocks or exit the market, but he expected others to fill their shoes. Mr. Lasalle minimized the potential harm to dealers. ``As critical to our markets as professional dealers are, we must not forget that what is good for investors is good for our markets,'' Mr. Lasalle said. In July, two dozen major Nasdaq market makers settled a Justice Department investigation of alleged price-fixing by agreeing to closely monitor their traders, including tape-recording their telephone calls. And earlier this month, the SEC formally censured Nasdaq and its parent company for failing to police the market and ordered $100 million in spending over the next five years to improve surveillance.
