FOR IMMEDIATE RELEASE 2000-14 NYSE's Rescission of Rule 390 and Commission's Request for Comment on Market Fragmentation (Summary of Rel. 34-42450) Washington, DC, February 23, 2000 -- The SEC today approved and issued a release that seeks comment on (1) the rescission of Rule 390, and (2) market fragmentation issues. First, the Release includes sections prepared by the NYSE that give public notice of the proposed rule change to rescind Rule 390. The NYSE also requests the Commission to adopt a rule to address broker-dealer "internalization" - broker-dealers trading as principal with their customers' orders. Second, the Commission requests comment on a broad range of issues relating to market fragmentation - the trading of orders in multiple locations without interaction among those orders. Broker-dealer internalization practices, as well as payment for order flow arrangements, constitute a specific type of fragmentation. The Release seeks comment on whether the lack of order interaction caused by fragmentation is, or will become, a problem in the markets. To focus discussion, the Release briefly describes six possible options for addressing fragmentation: 1. Require public disclosure by market centers (including exchange markets, over-the-counter market makers, and ECNs) concerning their order flow and the quality of their trade executions. Require public disclosure by brokers concerning their order routing arrangements and the results they have obtained for customers through the arrangements. 2. Restrict broker-dealer internalization and payment for order flow by reducing the extent to which market makers trade as principal with their customer orders by matching other market center prices (essentially the rule requested by the NYSE). 3. Require exposure of investor market orders to legitimate price competition, such as by exposing them in a system with a demonstrated record of price improvement or by publishing an improved bid or offer for a specified period of time. 4. Adopt an intermarket prohibition against market makers trading ahead of previously displayed investor limit orders held by another market center (that is, trading as principal with customer orders at the price of the earlier limit order). For limit orders to be protected, the market center holding the orders would be responsible for widely displaying the orders and making them easily accessible through automatic execution. 5. Provide intermarket time priority for investor limit orders or dealer quotations that are the first to improve the national best bid or offer for a security. 6. Establish nationwide price/time priority for all displayed trading interest. To further the public's understanding of these options and market fragmentation in general, the Release also provides an overview of market structure issues and the Commission's role in overseeing the national market system. It begins with the basics - the interests of investors (both large and small) and what they expect from the securities markets. Most importantly, markets should provide for the efficient execution of investor transactions at prices established by vigorous competition. The Release then notes that the Exchange Act creates a framework for meeting investor needs that relies on both fair competition among market centers (including exchange markets, over-the-counter market makers, and ECNs) and the interaction of buying and selling interest in individual securities. The relevant issue, therefore, is not whether to have either market center competition or order interaction, but, rather, how to achieve a market structure that secures the substantial benefits of both. Competition among market centers for order flow can encourage ongoing innovation and the use of new technology as a means to provide more efficient and higher quality trading services. The interaction of buying and selling interest in a security can promote vigorous quote competition and contribute to public price discovery by rewarding market participants (both investors and dealers) who publicly display their trading interest. The Commission is concerned that publicly-displayed trading interest not be isolated. Order isolation can occur, for example, if an investor enters a limit order with a price that establishes a new national best bid or offer for a security and the order is left unexecuted because other market centers match the limit order price rather than satisfying the limit order itself. In his Columbia University speech last September, Chairman Levitt called for a public dialogue on whether new technology offered ways to garner the benefits of order interaction while also preserving fair competition among market centers. The Release is intended to further this dialogue by providing a full opportunity for the public to comment on these issues. Commenters are encouraged to address whether they believe market fragmentation is now, or may become in the future, a problem that significantly detracts from the fairness and efficiency of the U.S. markets. Assuming there are commenters who believe fragmentation should be addressed, the six options set forth in the Release reflect a broad range of approaches that should help provide focus for the public's comments. Commenters also are encouraged to submit any additional options for addressing fragmentation that they consider feasible. The Commission emphasizes in the Release that its role is not to dictate market structure. Rather, as in the past, it will act only if necessary to address practices that inhibit or distort competition and stand in the way of the development of fairer and more efficient trading mechanisms. An example was the Commission's adoption of the Order Handling Rules in 1996, which addressed practices that previously had hampered quote competition and public price discovery in the over-the-counter market. By issuing the Release, the Commission intends to meet its public responsibility by focusing attention on issues that are vitally important to the continued success of the U.S. markets. If the U.S. markets fail to meet investor needs by offering the fairest and most efficient trading mechanisms possible, an increasingly competitive international environment will be sure to offer alternatives for investors. In issuing the Release, the Commission has not determined at this time that action to address market fragmentation is necessary. Implementation of any of the options would require at least two further stages of Commission action, both to solicit public comment on a specific proposal and to adopt the proposal after receiving the public's comments. # # #