- The Washington Times - Wednesday, April 6, 2005

NEW YORK (AP) — A divided Securities and Exchange Commission yesterday narrowly approved a new regulation requiring brokers to accept the best quoted price for any transaction, no matter which market it comes from.

While proponents hailed the move as a protection for individual investors, some of Wall Street’s trading houses said the rule would hamper competition and limit investors’ options.

By a 3-2 vote, with the commission’s two Democrats siding with Republican Chairman William Donaldson, the agency extended the reach of a regulation requiring brokers to obtain the best possible price for customer orders even if it means going to another market and takes longer. Stock traders could no longer ignore a better price in favor of sending an order to a preferred market, which might allow for faster execution.

The five-member panel tentatively approved the plan, called Regulation National Market System, or Reg NMS, in December. The SEC chairman has since defended it before Republican critics in Congress, who have raised the possibility of a legislative challenge to the agency.

“In formulating this proposal, we have kept our eye on one overriding objective, the protection of investors, with particular attention to small investors,” Mr. Donaldson said. “The proposed trade-through rule would strengthen the confidence of all types of investors in the U.S. equity markets.”

Advocates for investor groups saw the decision as a victory for small investors, though with implementation of the rule more than a year away, remained wary of potential changes.

“This trade-through rule has a very strong potential to protect investors,” said Jim Allen, senior policy analyst with the CFA Centre for Financial Market Integrity. “Our perspective is, if it’s good for investors, then in the long run it’ll be good for the markets themselves. Of course, we will have to see what the next year holds.”

Major Wall Street firms, including Fidelity Investments and Charles Schwab & Co., were firmly opposed to the new rule. They say the regulation would rob them of the flexibility to have some orders handled by a faster electronic market, rather than a slower market with human traders, when there was a compelling investment reason to do so.

Critics also said the move would stifle free-market forces, protecting slower markets — the New York Stock Exchange and its floor-auction system was a frequent target — at the expense of faster computerized markets.

“This decision flies in the face of key issues of competitive forces leading to technological efficiencies,” said Vincent Phillips, chief executive officer of CyberTrader, a Schwab subsidiary specializing in serving active individual traders. “These competitive forces have also driven down prices, and I hate to see this come along, because as it gets implemented, those infrastructure costs will inevitably be passed on to the investor.”

As expected, Republican Commissioners Paul Atkins and Cynthia Glassman attacked the plan as anti-competitive and voted against it; they reiterated their desire to see the trading rule abolished. The two Democratic commissioners, Harvey Goldschmid and Roel Campos, sided with Bush appointee Mr. Donaldson, a former chairman of the New York Stock Exchange, to support the plan.

A trial implementation, involving 100 stocks on the NYSE, 100 from the Nasdaq Composite Index and 50 from the American Stock Exchange, will begin April 10, 2006. Full implementation of the rule is scheduled for June 12, 2006.

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