The nation's financial markets should be left alone so competitors can duke out how securities are traded in coming years.
Not so fast. Regulators should create a closely linked national system to guarantee the best prices and timing for stock trades.
Those are the extreme opinions dozens of financial firms and experts have offered the
Securities and Exchange Commission
, which is wrestling with mapping the future structure of the U.S. markets. Among the key issues facing the regulators is ensuring that orders placed on each of the many U.S. equity trading platforms can be seen by market participants so they get an accurate portrait of the market.
The SEC invited the comments in response to concerns over fragmentation stemming from competition between the
New York Stock Exchange
market and upstart electronic communications networks, or ECNs.
Many of those diverse opinions will be on display Wednesday morning in Manhattan at a seminar at which finance industry and regulatory officials are scheduled to address the market structure issue.
"You may not ultimately achieve best price if orders are not able to interact with each other across market centers," Annette Nazareth, the SEC's director of market regulation, said in February when she announced
options the agency is reviewing to solve the problem.
"This is an issue on which we want to have a broad spectrum of opinion," Nazareth said then.
Robert Parks, a Wall Street economist and finance professor at the
Lubin Graduate School of Business
in New York, thinks all the talk about fragmentation and stopping it is a bit of a ruse. "That word fragmentation sounds to me like another word for intense competition," he says.
Most of those who've offered the agency their
views have ruled out the most extreme fix on the SEC's regulatory platter: a proposal to require all limits to be displayed and traded through a single location called a central limit order book, or CLOB.
But it's clear from the comments pouring into the SEC that there's little if any consensus about the shape the markets will or should take in the future.
"The biggest challenge will be how to take them all and come up with something coherent," SEC Commissioner Laura Unger said Tuesday.
Some, like the clearing firm
, a division of
Donaldson Lufkin & Jenrette Securities
, advised against any wholesale change in the U.S. markets.
"Quite simply, our markets are not broken. Radical changes are not necessary. Consequently, we do not now support any initiatives that would significantly change the manner in which the markets operate, such as a central limit order book," wrote Pershing's chief operating officer, Richard Brueckner.
Top officials from the largest investment banks had put up a unified front on that point in March when they appeared before the
Senate Banking Committee
and took the opposite view, calling for a central limit order book.
Securities Industry Association
, a trade group that represents most securities firms, took a step back from that when it offered the SEC its formal position on the future of market structure this month.
The SIA said it favors a system that would route stocks to the highest bidder -- known as price priority. The group, cognizant of the hostility some Wall Street players hold toward the concept of a central book, studiously avoided using the expression CLOB in its filing, says spokeswoman Margaret Draper.
Among the proposals the SEC is considering is mandating that stocks are routed through a nationally linked system to the highest,
first, bidder -- a function called price/time priority.
But that's little different than the central limit order book as far as the ECNs are concerned.
"Price-time priority sounds theoretically attractive, but it's truly anticompetitive," says Chris Concannon, associate general counsel for the
. "When you think of price-time priority, you have hundreds of orders coming in at the same time. We would have internal matches that were actually missed because we routed that order out to another market."
Rejecting the price-time priority is one of the few aspects of the markets' future about which the ECNs and the traditional stock exchanges publicly agree.
The NYSE formally
rejected any notion of a central trading book for securities last month, calling such a central repository anticompetitive.
The Big Board threw regulators a conciliatory bone late last year when it agreed to do away with Rule 390, a restriction that barred NYSE member firms from trading stocks listed before 1979 on other exchanges.
The NYSE has opposed a central order book out of fears other exchanges and ECNs would capture the order flow that makes the Big Board the market of choice for many major institutional investors. The NYSE hasn't submitted its comments on market fragmentation to the SEC; Nasdaq had completed it comments but wasn't prepared to release them Tuesday.
The debate, in the end, may be moot. Within 10 years, Pace professor Parks predicts all stock trading in the U.S. will be done electronically, leaving the NYSE trading floor and the professional floor trader as relics of a bygone era.
"I think what you'll have is a centralized clearinghouse," he says. "Instead of market fragmentation, over time, the electronic commerce will dominate. The trader's job will be at risk. He will disappear."