By Jim Connolly
Earlier this month, the Securities and Exchange Commission adopted provisions that would, among other things, require investment companies to obtain the best price for electronic stock trades for consumers even if it is on a market exchange different from the one the broker is trading on.
The rule, Regulation NMS, will become fully effective in 2006 with the best price component fully effective on June 12, 2006. The “trade-through” rule is designed to prevent a trade on a market other than one offering the best price. The regulation is comprised of four proposals: order protection; intermarket access; sub-penny pricing; and, market data.
While the Investment Company Institute, Washington, supports the proposal, some mutual funds companies have expressed concern over the rule, which was adopted on April 6.
In a statement, ICI says Regulation NMS will create a regulatory structure that “governs the securities markets, encourages liquidity, transparency and price discovery in order to facilitate the trading of institutional sized orders.”
The trade-through rule also will create greater confidence in securities markets by helping to eliminate “an impression of unfairness.”
But SEC Commissioner Cynthia Glassman noted in a speech given on April 6 that the trade-through rule, while an “excellent goal,” is one situation that does not require the rule. She argued that the goal can be met without “imposing a new layer of regulatory oversight and compliance costs that go along with any regulation and are ultimately paid for by investors.”
Glassman said the SECs Office of Economic Analysis found that approximately 2% of all trades on NASDAQ and the New York Stock Exchange were trade-through in 2003. Glassman put the cost savings to investors because of the rule at $321 million and compared it with $18.7 trillion in 2003 trading on both markets. She noted comments received by Fidelity, TIAA-CREF, Schwab and Ameritrade.
Indeed, on Feb. 15, 2005, Fidelity Investments, Boston, submitted a statement to the House of Representatives Committee on Financial Services subcommittee on capital markets, insurance and government sponsored enterprises, in which it concurs with Glassman. It states that the rule “would deny an investor the right to take into account other important factors that bear upon the choice of market and best execution.” Examples offered include market data and transaction costs.
Fidelity also argues that “so long as bids and offers are made available to investors on a timely and continuous basis, and investors have ready access to competing market centers, the government need notand should notdeprive investors of the freedom to choose among markets.”
Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.