Conference Call: SEC likely to consider faster links for ECNs

Allowing fast, cheap electronic networks to trade stocks listed on the New York Stock Exchange without going through an antiquated system that links markets will be a front-burner issue for the next chairman of the Securities and Exchange Commission.

Joseph Lombard, senior counsel in the chairman’s office of the SEC, made that prediction along with other securities industry participants who spoke at a recent Capitol Hill forum on upcoming SEC issues.

The event was sponsored by Citizens for a Sound Economy Foundation, a free-market advocacy group based in Washington.

If electronic communications networks, or ECNs, are allowed to trade listed stocks without having to go through the technologically outmoded Intermarket Trading System, investors could save money and trade faster, said Matt Andresen, chief executive officer of Island ECN of New York. ECNs now account for about 30% of the trades made on the Nasdaq market.

Under rules for trading exchange-listed stocks, traders must route trades through the intermarket system, which allows customers to get the best price available, no matter which exchange posts the best price.

Mr. Andresen told the gathering of Capitol Hill aides that Island decided not to compete in that market. “The rules that are put in place to provide competition … or linkages between markets actually keep electronic marketplaces from being able to operate,” he said. “The problem is you’re not allowed to go any faster than a traditional marketplace.”

exempting traders

Island’s primary selling points, he said, are speed, reliability, low cost and transparency [making offering and transaction prices public]. “If we have to slow our market down to the lowest common denominator in the slowest traditional marketplace, then we will not be able to bring those benefits,” he said.

Island offers its institutional investors the best price almost two-thirds of the time, Mr. Andresen said.

Mr. Lombard said that one possible solution is a concept outlined by the commission several months ago. It would exempt traders in listed stocks from rules requiring them to offer the best price from other trading systems as long as customers are informed when a price is not the best.

For such an approach to work, he said, it would have to be applicable to all market participants.

“What if the New York [Stock Exchange] wanted to withdraw and trade through; could they do this? Is it something that could work no matter who wanted to use the mechanism?”

Another issue for the commission to consider, Mr. Lombard said, is investor confidence in the fairness of the market.

Under the current system, “If there’s a better price, you get it. What happens if you let people trade through, and their customers see they got X price, and about the same time somebody got X plus a nickel. They [customers] begin to say, `Are securities being priced in a fair way, or are insiders getting all the best deals?”‘

Gregory Smith, senior analyst for e-commerce at J.P. Morgan H&Q in San Francisco, noted that no other industry is required to offer customers the best possible price for the products sold.

“It’s never been a better time to be an individual investor,” he said. “There ‘s never been such a level playing field.”

There is no single answer to how securities markets should be structured, he said. It is impossible to please all market participants completely, because there are many diverse investors. Institutional and retail investors and day traders have different interests, he said.

Competition is needed in the marketplace, he added. “The last thing you want to do is inhibit what could ultimately be a better mousetrap that would be better for everyone out there.” Further, with electronic trading systems throughout the world, trading can easily move outside of the United States if markets here do not stay competitive, he added.

Another issue discussed by the group was how market data should be disseminated. The SEC has formed a market data advisory committee, which is to issue a report on the subject in September.