NYSE chief defends trading rules
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The NYSE is proposing changes to upgrade its trading capability.
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NEW YORK (Reuters) -- The New York Stock Exchange's new chief executive, John Thain, has vigorously defended the specialist system and current securities trading rules, saying investors were better served by a system that places a premium on price rather than speed.
Thain assumed leadership of the NYSE in January, four months after former Chairman Richard Grasso resigned under pressure in the wake of accepting a $188 million pay package.
In a wide-ranging interview with reporters Monday, Thain also said the exchange was seeking "a very substantial return of (Grasso's) excessive compensation" in an effort to help restore its diminished credibility in the eyes of the public.
At the NYSE's request last month, the U.S. Securities and Exchange Commission and New York Attorney General Eliot Spitzer began an investigation into how Grasso amassed his pay package.
Thain's comments echoed those he made last week in New York at a U.S. Congressional hearing on market reforms, where he defended the "trade-through" rule -- a requirement that traders fill investors' orders on the market that offers the best price -- which is normally the Big Board -- even if the orders could be filled faster on a competing exchange.
Critics of the rule say it enables the NYSE to maintain what an unfair competitive advantage, shielding its market makers -- known as specialists -- from the faster trade execution of automated platforms.
Many of those inclined to use automated trading platforms include institutional investors.
The SEC is considering changes to the trade-through rule which could come as soon as this week, senior SEC officials said.
By mandating that stocks must be "traded through" to the market with the most competitive price, critics say the trading rule fails to take into account customers for whom speed, not price, is paramount.
Such investors, many of them institutions and short-term traders, use automated platforms for their comparatively quicker processing time.
Earlier this month, the NYSE proposed several changes to enhance the Big Board's electronic trading capabilities, as well as speed up the time it takes to process those trades.
Thain said those rule changes would make the NYSE "a fast market" not unlike its electronic-based competitors.
In speaking to reporters Monday, Thain argued against the need for changes to the trade-through rule.
"Once you have equally fast markets, investors should go to where they get the best price," he said, adding that the trade-through rule "has allowed U.S. markets to be successful as they have been."
One proposal the SEC is said to be considering allows for the possibility that, on a case-by-case basis, an investor could accept a higher quote on a competing market if the processing time was faster.
Thain, however, voiced doubt over such a provision. He argued it could lead to diminished liquidity and greater fragmentation in stock trading.
Many of the investors that are most amenable to electronic trading are institutional investors and short-term traders. Skeptics have argued that such investors can exploit the volatility of automated trades for their own profit.
Accordingly, Thain argued that proponents of electronic trading had "financial incentives ... that are not in the best interest of the customer."
Last week, five of the largest market makers at the heart of an investigation into improper trading reached a tentative settlement with regulators for $240 million.
The agreement consists of fines and disgorgement for investors, who regulators say were short-changed when specialists improperly inserted themselves into orders where buyers and sellers should have been matched.
Critics say the specialist system should either be drastically altered to provide more electronic trading, or be abolished altogether.
But Thain argued that specialists "have real value" and help smooth liquidity on the trading floor.
"There's a belief that specialists are more involved in trades than they are," Thain said, adding they are involved only in 10 percent of the floor's daily volume.
Copyright 2004
Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
