Big Board Bracing for Rule 390 Change

The SEC 'encourages' the NYSE to part with its key listings rule.
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With a gun to its head, the

New York Stock Exchange

on Thursday is expected to open the door to its competitors -- including nascent Internet trading networks -- but just a crack.

The exchange's board is scheduled to discuss repealing what is called Rule 390, an arcane but revered restriction that prohibits member firms from trading stocks listed on the NYSE before 1979 anywhere but on the floor of the exchange.

But lest anyone confuse the move with goodwill on the part of the Big Board, many observers say the NYSE is on the verge of dropping the rule for one good reason: It has no choice. Even so, observers agree that the move amounts to a mere token change on Wall Street, where the Big Board's rivals still must clear much bigger hurdles on the way to offering true competition. And the change's impact on individual investors isn't at all clear for now.

Supply and Demand

Arthur Levitt

, chairman of the

Securities and Exchange Commission

, publicly demanded the rule's repeal in a speech at

Columbia University

this fall. "From a competitiveness standpoint, he thinks it's antiquated and it's time for it to go," an SEC spokesman says.

Should the Big Board refuse, it's widely believed Levitt would force it to drop the rule. "I think he would," says William Freund, director of the

Pace University Center for Study of Equity Markets

in New York.

An NYSE spokesman declined to comment on the perception that the Big Board is caving in to SEC pressure on the issue. "It is going to be discussed" was all he would say of the topic, now on the agenda for the board's monthly meeting Thursday.

Even so, repealing the rule is viewed by many as largely a symbolic move by the NYSE that won't have much practical impact for the start-up electronic communications networks, or ECNs, scrambling to compete with the Big Board.

The ECNs are anxiously awaiting what they consider a far more significant gesture from the SEC -- the granting of full exchange status.

"Maybe it has sentimental value to some people," quips Joan Solotar, a securities analyst at

Donaldson Lufkin & Jenrette

. "I don't think it will be anything dramatically different."


For investors, the change could actually prove detrimental, says Freund, a former NYSE economist. Dropping the rule could lead to increases in the difference between buying and selling prices, the so-called bid-ask spread, he said. That, effectively, would mean higher prices for investors, and higher profits for market makers and specialists.

"It will allow some of the big firms, if they are so inclined, to cross orders in-house," he says. "Or, if they are so inclined, they can be market makers in the NYSE stocks. It could ... in a way, worsen the market for investors."

As it is now, Rule 390's restrictions cover 30% of the companies listed on the exchange, representing 48% of the share value of NYSE-listed firms, the NYSE spokesman says.

The fact that 70% of stocks listed on the exchange now aren't covered by the rule shows the ECNs face more formidable hurdles than the NYSE trading restriction, Solotar says.

"The biggest issue for ECNs is consolidation of liquidity, with or without 390," she says.

But the fact that the majority of NYSE stocks aren't covered by Rule 390 now flies in the face of the argument that dropping the rule could hurt investors by widening the bid-ask spread, says Chris Concannan, associate general counsel for

Island ECN

of New York.

"Guess what?" he says. "The statistics prove that wrong."

State of Flux

Even if it did, the increase would be temporary, says Guy Moszkowski, an analyst with

Salomon Smith Barney

. Perhaps just as important for retail investors, he said, if the spread does increase, "They won't know."

John Schaible, president of the Clearwater, Fla.-based ECN


, says regardless of the NYSE action on the trading rule, ECNs still face a hurdle because they're shut out of the

Consolidated Quotation System


Consolidated Tape System


Intermarket Trading System


The CQS and CTS provide unified listings of buy and sell orders, and trades actually carried out. They are operated by the

Consolidated Tape Association

, a consortium of the existing exchanges.

The ITS links the NYSE,


exchange and smaller regional exchanges.

And while nine ECNs are connected to the Nasdaq trading system, they aren't considered full exchanges and don't have access to the consolidated reporting systems that potentially would enable their customers to see all the bids and offers on a particular stock.

"Those are the bigger barriers," says Island's Concannan. "The real barrier to competition from our point of view is quote access."

"Really, only the exchanges have access to the national markets," Schaible says.

Island and


now have applied to the SEC for full exchange status, and both applications are pending, according to the SEC spokesman.