Sec Reforms Level Nasdaq Playing Field
The Securities and Exchange Commission on Wednesday adopted dramatic new reforms aimed at improving competition and fair handling of investor orders on the Nasdaq Stock Market.
By a 4-0 vote, the Wall Street watchdog approved the most ambitious step in the government’s crackdown on the computerized stock market.
The new rules allow certain customer orders to buy or sell stock to mingle directly with dealers’ quotes. And they would require dealers to give customers the better prices quoted in separate electronic trading systems that piggyback on Nasdaq, such as the Instinet Corp. system, owned by Reuters PLC.
“These rules are intended to empower all investors, by allowing their orders to compete on a level playing field and by providing disclosure they need to make an informed decision,” SEC Chairman Arthur Levitt Jr. told a large audience at an open meeting.
Not since the late 1970s has the SEC adopted a set of reforms that so significantly alter trading practices in the nation’s securities markets, agency officials said.
By improving competition in this fashion, the rules stand to save investors money by reducing transaction costs and preventing a form of price fixing uncovered in separate SEC and Justice Department investigations this summer.
Two dozen major Nasdaq dealers settled a Justice Department investigation in July by agreeing to closely monitor their traders, including tape-recording their telephone calls, and to take other steps to halt price fixing in stock quotes.
And earlier this month, the SEC formally censured Nasdaq and its parent company for failing to police the market and ordered Nasdaq to spend $100 million over the next five years to improve surveillance.
Daniel Weaver, a finance professor at Marquette University in Milwaukee, said the SEC’s rules are more significant than either enforcement case, since the agency is changing the structure of Nasdaq.
“This is going to be a great thing for customers,” Weaver said.
The fast-growing Nasdaq is an unconventional stock market, where dealers trade stocks over a network of computers and telephones instead of meeting face-to-face on a trading floor. Stocks listed on Nasdaq, such as Microsoft Corp. and MCI Communications Corp., are widely held investments, especially prevalent in technology-oriented mutual funds.
One of the new rules requires public display of customer limit orders that are priced better than an existing quote by an exchange specialist or a Nasdaq market maker. A limit order represents a customer’s request to buy or sell a certain amount of shares at a specific price. Customer limit orders compete with professional orders on the New York Stock Exchange, but not on Nasdaq.
This rule is aimed at cutting the artificially wide gap between buying and selling prices on Nasdaq, known as the “spread.” In doing so, the rule also will reduce dealers’ profits but save investors money by cutting their trading costs.
“I think we’re making it easier for investors to price compare,” said SEC Commissioner Steven M.H. Wallman.
The quote rule is designed to ensure all investors are fully informed of the best prices at which specialists or market makers are willing to trade a stock. The rule is aimed at preventing so-called hidden markets, where Nasdaq dealers can trade stocks at prices more favorable than the publicly available quotes.
The SEC dropped the most controversial proposal, a plan to require Nasdaq dealers to offer price improvement to customer orders, a practice similar to what floor specialists offer investors on the New York Stock Exchange. The SEC intends to review the effect of the rules it approved before considering the price improvement package.