In what he called a "giant step toward a true national market system,"
Securities and Exchange Commission
on Thursday called on the stock exchanges,
dealers and electronic trading networks to voluntarily open their limit order books in a first step to centralize market data.
Levitt also said that the SEC approved a
National Association of Securities Dealers
rule change that will make it easier for upstart electronic communication networks to trade stocks now listed on the
New York Stock Exchange
"Now is the time for all market participants to move toward open books across all markets," Levitt said in a speech at
. "Now is the time for a voluntary private sector initiative in this important area -- one that does not require major systems engineering."
The NASD's rule change, proposed in mid-January, will enable ECNs to trade New York Stock Exchange stocks through the intermarket trading system, or ITS, but won't require them to automatically execute trades that come through that system. The SEC gave the NASD the right to trade NYSE stocks in December.
Levitt's move to open exchange and ECN limit orders -- the type of orders in which investors dictate buying or selling a stock at a certain price or better -- would likely be followed by efforts by private concerns to create a central system of sharing stock prices and order information across the markets, Levitt said. "Vendors could consolidate this data and package it in a form that is most useful to their customers," he added.
For its part, the NYSE already is moving toward opening its limit-order book, NYSE spokesman Ray Pellecchia said. "We've proposed that, and we're moving forward with that," he said.
Pellecchia said he couldn't comment yet on Levitt's call for all exchanges to open their order books. "The devil's in the details," he said.
The Nasdaq, which is owned and operated by the NASD, has proposed a "SuperMontage" that would publicly display its orders and quotes.
spokesman Andrew Goldman said Levitt's words were encouraging.
"Overall, we're thrilled about cracking the monopoly on the limit-order book that market professionals have held," he said. "We don't think there's any information that's more important to investors than knowing the entire supply and demand."
Island's order book is accessible to investors on the trading system's
"It's another giant step by the commission to allow for the competition that Arthur Levitt really wants to open up all markets," said Chris Concannon, associate general counsel for Island. "Clearly Chairman Levitt is taking all the steps necessary to allow for the ECNs to quote on ITS/CAES and
the consolidated quote system and offer some kind of competition with the New York Stock Exchange." CAES is Nasdaq's computer-assisted-execution system.
ECNs have taken an increasingly large piece of Nasdaq trade executions during the past two years, accounting for about one-third of volume, but they have yet to make inroads in the listed markets. Island, an ECN owned by
Datek Online Holdings
, has filed for exchange status specifically to build up its ability to trade listed stocks.
Still standing in Island's and other ECNs' paths to listed trading is the NYSE's Rule 390, which prohibits member firms from trading certain listed stocks from the floor. The NYSE, however, has indicated that it will repeal that rule.
Levitt said there is evidence that limit orders are being mishandled by "market intermediaries." He said that on one equity exchange, one of every six limit orders wasn't properly displayed. He did not name the exchange. Levitt said he has asked SEC officials to prepare a report on limit-order display within 45 days.
Levitt's call for open order books was the latest attempt to come up with some way to unify the fragmentation that's developed between the markets, including the NYSE, the Nasdaq market, the options exchanges and ECNs.
Last month, the SEC announced it was studying various options for doing that, including possibly requiring markets to publicly disclose information about their order flow and trades, and establishing a central order book.
The agency set a period of 60 days to gather comments about those proposals.
In his speech Thursday, Levitt said opening the exchanges' order books would help ease the change to decimalization, the trading of stocks on decimal increments of as little as one penny rather than the current system based on other fractions of a dollar.
The SEC in January told the Big Board and Nasdaq to begin quoting prices in decimals on July 3.
NASD asked the agency to postpone the shift to decimals until 2001, but the SEC refused the request.
"Our future markets must serve the diversity of America's investors," Levitt said. "This is not a debate about big firms vs. small firms. This is not a debate about institutional interests vs. retail interests. It is a debate about how to best equip our markets to compete in an increasingly globalized electronic market."