Commentary: The New Markets Need Tools, Not Rules

All the king's horses and all the king's men never faced a challenge like this. The Securities & Exchange Commission has pushed the Humpty Dumptys of stock trading--the New York Stock Exchange and the Nasdaq stock market--off their walls, opening stock trading up to a growing list of competitors. Now, SEC Chairman Arthur Levitt Jr. is considering whether to put the markets back together again.

The SEC should leave its glue pot at home. Technology and competition broke open the markets, loosening the oligopolistic grip of the NYSE'S specialists and Nasdaq's market-makers. Now, new technology is emerging to cope with the side effects. Fledgling companies are at work on products that will assure investors the quickest executions at the best prices--even in fragmented markets. Levitt can help investors by ensuring that they get the information they need to make the best deals, not by forcing trading back into its old shell.

SMART ORDERS. True, the new world of trading has problems. New electronic minimarkets, called electronic communications networks (ECNs), have snatched more than 25% of trading volume in Nasdaq stocks and are poised to divert trades from the NYSE's floor. The danger is that, as trading splits, investors won't get the best prices. An order to buy Intel Corp., say, may be trapped in a Nasdaq market maker's queue, even if an ECN elsewhere offers a better deal. Or a broker may send all its orders to the market maker offering the richest payments for order flow. The SEC is considering a raft of new rules telling brokers how they must handle orders to cope with these risks.

But what if an investor had an electronic assistant that scanned all the exchanges, ECNs, and market makers, found the combination of price, order size, and speed that best met his or her needs--and automatically filled the order in milliseconds? Many companies are developing just such "intelligent order routing" for stock and option traders.

For two years, of Austin, Tex., has employed its price-seeking program to help high-volume professional traders. Now that it has been acquired by Middle America's favorite online broker, Charles Schwab Corp., CyBerCorp figures it can defragment the market for small investors, too. "We pull all the best prices together in one place and create a single pool of trading," says Philip R. Berber, CyBerCorp's chairman. That's exactly what the SEC says it wants.

One problem such systems face is traditional markets' antiquated technology. Hooking up high-speed Net servers to the NYSE-dominated Intermarket Trading System "is like connecting a Pentium III to a coffeemaker," says NYFIX Inc. CEO Peter K. Hansen. His Stamford (Conn.) firm, which offers brokers and ECNs 500-plus fast electronic links that carry orders for 300 million shares a day, is creating a parallel network that could supplant traditional markets. Soon, NYFIX plans to offer brokers the chance to match orders within its network for a small fee, with no dealer spread. That should give buyers and sellers a better price.

SOPHISTICATION. Technology is also helping brokers pioneer creative ways to trade. Former SEC Commissioner Steven M.H. Wallman is launching a brokerage, Folio[fn], that lets investors buy and sell packages of stocks--a "folio" of, say, 28 Internet stocks--for one fee. Eventually, he says, individuals will strike the same sophisticated trading deals that institutions do--paying 6 1/4 cents extra for Cisco Systems Inc., say, to save 12 1/2 cents on Microsoft Corp. The one-size-fits-all rules being debated at the SEC could ban such techniques.

The best way for the SEC to help investors is to let these tools blossom. One idea the SEC has floated would help: requiring markets and brokers to publish trade-execution records. If customers see how often their broker gets them a better-than-market price--vs. how often the broker sends trades to the market offering the best kickbacks--they would seek out smarter order-routing tools with gusto. That would do more to unify market access than any regulatory fiat.

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