Officials from some of the largest U.S. securities firms sparred Wednesday over how much regulators should control the pricing and timing of stock trades. But at the same time, they conceded the entire U.S. markets structure could be set on end by an upstart such as an Internet company.
"I get nightmares about people who aren't in our business yet," John Havens, a
Morgan Stanley Dean Witter
managing director, told a group of several hundred finance executives and professionals gathered near New York's Times Square to discuss U.S. markets.
"Who are these new competitors?" he asked. "I've got to think there are people out there who could create a virtual marketplace."
The discussion, sponsored by the
Securities Industry Association
, was spurred by the fact that new competitors already have waded into the stock-trading arena, leading some to complain that the markets have become fragmented. But the discussion also illustrated how disparate the views are in the securities industry as the major exchanges, brokerages, investment banks and others vie against one another to shape and dominate the markets. (
wrote about this issue on Tuesday.)
"None of us is comfortable, totally, that we all have the absolute answers," said Bernard Madoff, head of
Bernard L. Madoff Investment Securities
Havens said he favored a system that forced trades based on the first and highest bid for a stock -- a controversial concept known as price-time priority. That's one option the
Securities and Exchange Commission
is considering as a solution to fragmentation, caused by competition among traditional players and newer entrants like electronic communications networks, or ECNs, which match buy-and-sell orders off the exchanges. The SEC worries that as the major exchanges fight on another and as ECNs make inroads, the markets may be broken up, isolating investors from the best trades.
Havens took the party line of the larger investment banks, which have told regulators and Congress they favor centralized price and time controls for securities trading. But that view certainly isn't universally accepted in comments other securities industry players have sent to the SEC, and in statements they made in Wednesday's conference.
Forcing trades to be routed strictly on the basis of first and highest bids would deprive investors of other services brokerages offer, said Lon Gorman, executive vice president of discount brokerage
. "It doesn't recognize service. It doesn't recognize reliability," he said.
The SEC plans to review the comments it has received on market fragmentation in coming months, though it has no set deadline and it is uncertain it will do anything to change the current market structure.
After all, not everyone is even convinced that the markets are fragmented. On Wednesday, Gorman told his colleagues in the financial world that fragmentation has become an "F" word for the securities industry. But he said that's an exaggeration.
"The notion that the markets are fragmented to me is almost ridiculous," he said.