Capital Markets

New SEC Proposal on Market Reform

A former commissioner believes that NYSE opposition may be inclining the commission toward its original proposal to protect just the ''top of book.''
Craig SchneiderDecember 20, 2004

These days, regulation of the securities markets appears to be as volatile as the markets themselves. Consider the Securities and Exchange Commission’s 4-1 vote last week to re-propose reforms governing how stocks are traded on the exchanges. What’s being put on the table is far different, in some ways, from what observers had been led to expect.

The most notable feature of the re-proposed Regulation NMS (National Market Structure) — which also addresses order protection, inter-market access, sub-penny pricing, and market data — is an expansion of the “trade-through rule” to the Nasdaq Stock Market. That rule, which limits orders from being traded at anything but the best displayed price, is already adhered to by the floor-based specialist trading systems of the American Stock Exchange and the New York Stock Exchange (NYSE).

Before last week’s SEC meeting, it had been widely leaked to the media that the commission planned to re-propose Reg NMS with a voluntary “depth of book” approach to pricing. That approach would allow participants to choose to execute trades faster, minimizing price-movement risk.

Last week, however, the SEC offered a choice between the re-proposed version and an earlier approach that protects just the “top of book.” “That makes me think that they’re going to go back to adopt the original proposal,” said Rick Roberts, a former SEC commissioner and now a partner at law firm Thelen Reid & Priest. Noting that the NYSE has voiced significant opposition to the depth-of-book revision, Roberts wondered if “maybe the strength of the opposition caused [the SEC] to reconsider.”

William Uchimoto, a partner with law firm Saul Ewing LLP and a former attorney with the SEC division of market regulation, believes the matter will ultimately come down to politics and to personalities at the commission.

SEC chairman William Donaldson “really wants to have a legacy,” Uchimoto observed, and he is trying to “jam [Reg NMS] through as soon as possible.” In opposition, Republican commissioners Cynthia Glassman and Paul Atkins raised a number of concerns — among them Atkins’s objection that Reg NMS is unfair to the NYSE because it effectively kills the exchange’s proposed hybrid system. Uchimoto also gave debating points to Glassman, noting that the members of the SEC division of market regulation “were not that sharp” when confronted with her questioning of the proposal.

However, since the two other commissioners — Democrats Harvey Goldschmid and Roel Campos — said little at the meeting, Uchimoto believes they will side with Donaldson for an eventual 3-2 decision in favor of one of the two market alternatives.

Last week’s 4-1 vote put Regulation NMS up for public comment for an unusually short 30-day period. For now, the SEC plans to adopt one of the proposed alternatives in the first quarter of next year, but Roberts warns that with comments still in the offing, “anything can happen.”