New Age Securities Firms to Testify Against Central Limit Order Book

New Wall Street's mailbox is filling up in a way Charlie Brown could only dream of.

Having been left off the guest list three weeks ago when the heads of Wall Street's major old-line firms lobbied the Senate on their view of one consolidated stock market, new age securities firms now are going to the after-party.

Their Senate testimony Wednesday will revolve around the topic at the core of the current market structure debate: a proposed central limit order book, which would combine all market participants' limit orders in one established marketplace. (Limit orders are orders to buy or sell at a set price and differ from market orders, which are orders to buy at the best market price.) Simply put, they're against the idea because it would hurt their businesses.

New Wall Street's fight against a central market contrasts with the major Wall Street firms, which, at the late-February Senate hearing, argued for one central market. Traditional firms claim a central market would stop the fragmentation they say has popped up with the growth of electronic communications networks, or ECNs, which match buy and sell orders on their own. ECNs have taken volume from traditional Nasdaq market makers, which, like ECNs, match buy and sell orders, but they also often put their own money on the line.

Three ECNs, two online brokerages and a Midwestern brokerage (OK, so that's not exactly new Wall Street) will get at least on the stage, if not center stage, before the Senate banking subcommittee.

The Washington testimony won't be as high profile as that of Merrill Lynch ( MER), Goldman Sachs ( GS), Morgan Stanley Dean Witter ( MWD), etc., during the New York hearings on Feb. 29 before Sen. Phil Gramm's Senate Banking Committee.

Certainly, there's no way to confuse the rapid-fire words from Matthew Andresen, the twentysomething chief of Datek Online's Island ECN, with the austerity of old-timers such as Phil Purcell, Morgan Stanley's chairman. But it will give Andresen and the other upstarts a chance to try to influence the Senate.

The point they'll hammer home on Wednesday is that there's no place in a competitive marketplace for a central limit order book -- or CLOB, as insiders like to call it -- maintained by one market.

"If the CLOB has any life left in it, we'd like to put the stake in it Wednesday," says Kevin O'Hara, general counsel of ECN Archipelago.

Given Securities and Exchange Commission Chairman Arthur Levitt's comments during a Chicago speech last week, it seems that the ECNs may find themselves speaking to an already sympathetic ear.

Levitt, rather than supporting the old-line proposal of a CLOB, suggested securities firms make public all of their limit orders so that they can easily ensure the best trade. Better links between marketplaces and broker dealers, as well as private market forces, should determine how orders are actually displayed, he said.

"To have one central marketplace blessed by the regulators guarantees that there will be no innovation in the future," says David Downey, president of Interactive Brokers, the online brokerage unit of options firm Timber Hill. "As builders of this technology, it is absolutely not clear to us which technology is the best, and to decide on which technology, to decide on a CLOB today, is a bad policy."

Downey will be joined Wednesday by online broker Ameritrade's ( AMTD) Chairman Joe Ricketts, Island's Andresen, Archipelago Chief Executive Gerald Putnam, nascent ECN NexTrade President John Schaible and Midwest brokerage Edward Jones Managing Director John Bachmann.

Of those, Island, Archipelago and NexTrade all have applied to become stand-alone stock exchanges, although recently Archipelago announced that it was putting its application on hold because of a deal it signed with the Pacific Stock Exchange that will have it handling the Pacific's equity trades.

Last fall, Archipelago was one of the firms that said it would build links to other ECNs participating in the nascent after-hours market. The Nasdaq stock market has since extended its quotation system until around 6:30 p.m. EST, but work on those links has continued. Archipelago says that it expects to have the links with six or seven ECNs up by month's end.

Congress' interest in these links, new technology and the potential for competition to change the status quo of financial market structure can perhaps be gauged by Andresen's recent popularity in Washington. Prior to this week's hearing, Andresen already has been to the Hill five or six times this month to talk to the powers that be. He's headed down again next week to the House of Representatives for another hearing on -- surprise -- market structure.

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