As the U.S. financial markets continue to push further into uncharted territory, the
Securities and Exchange Commission
Wednesday unveiled six key facets aimed at winning more disclosure of execution processes and costs to clients in the emerging market structure.
The result of the plan could be a centralized market consisting of price quotes from the three national exchanges, regional exchanges, nine electronic communications networks and a proliferating band of other alternative trading systems.
The release of the plan marks the beginning of the 60-day comment period on the agency's attempt to manage growing market fragmentation created by the proliferation of electronic trading platforms. It also sets the agenda for SEC market structure hearings Monday and Tuesday of next week, which will feature testimony from
New York Stock Exchange
Chairman Richard Grasso,
Morgan Stanley Dean Witter
CEO Phil Purcell,
Charles Schwab and
CEO Henry Paulson.
According to the SEC release, the plans would require public disclosure by so-called market centers, including
market makers, concerning their order flow and the quality of executions. It would also require similar disclosure from brokers about their order-routing arrangements and the arrangements' results.
With many electronic trading systems having investors in the broker-dealer community, the agency is trying to open up these individual markets to a broader group of orders to ensure that every bid and offer on a security can be seen by every investor.
SEC Chairman Arthur Levitt has been pushing for greater transparency and a wider reach for the various quotes from the different trading venues. He's been concerned with fragmentation that "significantly detracts from the fairness and efficiency of the U.S. markets," according to an SEC release.
The SEC's plan also includes a provision for restricting brokers' internalization of and payment for order flow, and another for exposing market orders to legitimate price competition, the release said.
Payment for order flow results in a rebate of commissions to firms which send their orders to one market maker or market center, and has been criticized by professionals who claim the practice provides incentives against finding the best execution price.
Internalization is the process of brokerage firms trading with their customers by matching current market prices but not executing the trade on an exchange. It has been embraced by larger brokerage firms as a way to cut transaction costs but is also seen as limiting transparency.
In a bow toward the development of online trading practices, the SEC proposed an intermarket prohibition against market makers trading ahead of displayed limit orders. As part of that piece, the market center holding the order would be responsible for displaying the order and making automatic execution possible.
The SEC release says the agency is also pushing for intermarket time priority for investor limit orders or dealer quotations that are the first to improve the national best bid or offer on a security, giving broad access to the best execution available.
Also up for comment in the NYSE's bid to squash its Rule 390, which prevents the trading of NYSE-listed stocks off the exchange floor. Competing ECNs have already threatened to list Big Board stocks and the SEC's Levitt has criticized the effort as anticompetitive.