It's the regulatory equivalent of the 20-year locusts. Every decade or two, the Securities & Exchange Commission embarks on a wide-ranging study of the stock market. The last, in 1972, helped spark the series of events that ended fixed brokerage commissions and transformed Wall Street. Well, the SEC is at it again--a yearlong examination of the markets grandiosely entitled "Market 2000." Wall Streeters aren't worried about the outcome. They're petrified. And none have more reason for concern than the denizens of an ornate building at Wall and Broad. The New York Stock Exchange, which is facing unprecedented challenges to its franchise, has the most to gain--and, more likely, to lose.

On the surface, the Market 2000 study appears to be nothing more than a bureaucratic paper chase. It was outlined last July in an 80-page announcement. That generated a foot-thick succession of comment letters and academic studies from some two dozen exchanges, trading systems, and institutional investors. But the SEC study is doing more than filling a file cabinet. It is laying the groundwork for major changes in the regulation of the markets, with up-and-coming trading systems getting as much attention as the Big Board.

The change in Administrations is unlikely to divert the SEC--and may even spur action. "It's a mistake to think that they're just engaged in paper shuffling," says William J. Fitzpatrick, general counsel of the Securities Industry Assn. And Richard Ketchum, former SEC chief of market regulation and now executive vice-president of the National Association of Securities Dealers, which oversees the over-the-counter markets, notes that "every time the commission has engaged in this kind of study, it has resulted in concrete action."

What kind of action is in the offing this time? Market 2000 watchers suggest that the answer can be found in the SEC's favorite habitat--paper. In the missive launching the study, the SEC's Division of Market Regulation made clear that its agenda is comparatively narrow. The regulators excluded such troublesome topics as penny stocks and equity derivatives. Instead, the focus will be on the nitty-gritty of the equity markets. Specifically:

-- Trading systems. Intermarket competition is the focus of the study. It's a decidedly two-edged sword for the NYSE and its archenemies--Instinet, Posit, and the other trading systems that come to life when the Big Board is closed. The SEC study acknowledges the concerns of the exchanges that "they are at a significant competitive disadvantage" to the trading systems. It notes that the systems usually base their prices on trades in the primary markets--which the exchanges deride as "free-riding"--and don't have anywhere near the regulatory burden imposed on the exchanges. The SEC also made pointed references to another sore point: the practice of some trading systems, and OTC market-makers, to pay for orders from brokerage firms, which induces them to route orders away from the NYSE.

The tenor of the SEC outline of the study indicates that the agency is likely to bring the trading systems under its regulatory umbrella. Payment for order flow is also likely to be curtailed or eliminated. However, the SEC might be tempted to weigh the emphatic views of one major institution--Investors Research Corp. of Kansas City, which runs the $20 billion Twentieth Century Investors Inc. mutual-fund family. Investors Research strongly endorses the trading systems as providing "access to liquidity at very low costs," and urges the SEC "to affirm the move" to such systems.

-- NYSE Rule 390. If the SEC decides to "give" to the NYSE with one hand--by regulating the proprietary trading systems--it may well "take" with the other hand by making life harder for the Big Board. The NYSE's competitive Achilles' heel is its Rule 390, which restricts the ability of its member firms to trade NYSE-listed securities in the OTC market. Critics contend that Rule 390 merely protects the franchise of NYSE specialists, while the NYSE favors keeping Rule 390 as a "pro-customer protection rule." One unexpected nail in Rule 390's coffin has come from Goldman, Sachs & Co. Co-chairman Robert E. Rubin, whose views loom large because he is leading the race to become Economic Security Adviser in the Clinton Administration. Rubin doesn't endorse removing Rule 390--but he comes close. He notes that dropping 390 could provide "benefits that might result from the increased competition among markets" and remove much of the impetus behind after-hours and overseas trading of listed stocks.

-- NYSE Rule 500. This rule makes it difficult for an NYSE-listed company to voluntarily delist from the exchange. There's hardly much demand for that right now. But it could become a hot issue as competitors to the NYSE proliferate, notes veteran market watcher Junius W. Peake, professor of finance at the University of Northern Colorado. "The technology is certainly there--this is, after all, just a communications business," Peake maintains. It's no surprise that NASDAQ has long advocated elimination of Rule 500. But the SEC seems to be moving in that direction also. In its outline of the study, the SEC expressed interest in knowing if "commentators believe there are any regulatory anachronisms, lingering inefficiencies, rules or requirements whose costs exceed their benefits, or anticompetitive" rules. It then specifically requested comments on Rules 390 and 500.

While the sparring goes on, the Street watches--so far, mostly without joining the fray. Except for Rubin at Goldman, Sachs, no major brokerage honcho has sallied forth with a comment letter. The SIA has also steered clear of this hot potato. For its part, the NYSE says it is following the comments "carefully" and preparing a rebuttal. But in the final analysis, the huge volume of paper is outweighed by the SEC's obvious view that the markets' competitive barriers must come down just as assuredly as Wall Street's wall was dismantled 300 years ago. For the NYSE, the only question is whether it will adapt--or be buried in the rubble.



Non-NYSE trading systems face regulation

Unregulated trading systems that compete with the NYSE, such as Instinet and Posit, are under SEC scrutiny for trading off NYSE prices. New rules could curb their growth

Payment for order flow is in jeopardy

Over-the-counter market makers and trading systems often pay brokerages for directing customer orders to them instead of the NYSE. The SEC could eliminate that practice


NYSE specialists' monopoly is in danger

The SEC is taking a hard look at NYSE Rule 390, which protects the specialists from competition with dealers in the over-the-counter market

Companies may be free to leave the NYSE

NYSE Rule 500 makes it very tough for corporations to voluntarily delist from the NYSE. The SEC could repeal the rule, which critics say curbs competition between markets


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