In its comment letter to the SEC, the NYSE stakes its positions on whether the proposed reforms meet basic principles of investor protection, such as putting the interests of investors—rather than intermediaries—first, and ensuring that orders receive the best price available. The NYSE also looks at whether the proposals reduce volatility, increase transparency, and encourage order interaction and the posting of limit orders—all important in protecting the investing public, says the NYSE.
Proposed Reg NMS tackles broad market structure issues related to inter-market access, sub-penny pricing, the dissemination of market data, and—perhaps the most contentious of all—the trade-through or “best price” rule, an investor-protection measure that precludes trades from occurring in one market at prices worse than the best price investors are offering in another market.
Reg NMS proposes two exceptions to the best price rule. One would allow broker-dealers to opt out of the rule provided customer consent is obtained on an order-by-order basis. The other exception would allow bids available for automatic execution to bypass or “trade through” better-priced bids not available for automatic execution.
In its comment letter, the NYSE strongly defends the best price rule, saying that it protects investors and is essential to the integrity of the U.S. capital markets. While the NYSE believes that investors’ right to best price should prevail, it is sympathetic to the view that when a market quoting the best price is unable to provide access to that quote immediately, market participants should be permitted to pass it by since prices can change in the interim.
In its comment letter, the NYSE supports a proposal to distinguish fast markets on a quotation-by-quotation basis. “If a market that normally offers execution automatically moves into manual-execution mode in a particular stock for a period of time, quotations in that stock from that market during that period of time should lose their trade-through protection up to the de minimis exception amounts. However, once the quote returns to automatic-execution mode, its quotations should be protected,” says the NYSE in its letter.
The NYSE opposes the proposed opt-out exception to the trade-through rule, saying that it undermines the price and investor protections that are central to the national market system. It argues that if the trade-through rule applies only during periods when markets provide ready access to their quotations, there is no justification for allowing market participants to opt out of the rule.
“In a situation where markets are providing quotes with similar accessibility, anonymity and speed, there is simply no rationale for permitting selective market participants to ignore displayed quotations in other markets,” says the NYSE letter.
The NYSE argues that allowing firms to opt out of the rule is inconsistent with the goal that customers always come first.
There are several victims when a market’s published quotation is traded through, the NYSE emphasizes in its letter. There’s the investor who bought or sold shares at a price inferior to the best price as well as the investor whose better-priced limit order was ignored. And, the NYSE argues, market transparency and liquidity suffer.
“If the opt-out exception were adopted, … investors would see their limit orders bypassed. This would hurt public confidence in the integrity of the market, would discourage customers from continuing to enter limit orders, and would thereby reduce liquidity and depth,” the Exchange argues.
The NYSE also makes the case that diluting the trade-through rule would increase price volatility, which would harm both issuers and investors. It notes that NYSE-listed companies experience substantially less volatility than those traded on Nasdaq, which has no trade-through rule.
“Price protection and integrity of our markets,” writes the NYSE, “have been key components of the national market system since its inception. They are not antiquated or outdated rules, but important principles which should be maintained for the benefit of investors, issuers and market participants.”
>For a copy of the NYSE’s comments on Reg NMS, go to www.nyse.com/pdfs/regnmscomment.pdf.
