SEC suggests only fine-tuning for exchanges

January 28, 1994|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- The SEC released its long-awaited "Market 2000" report yesterday, a 450-page survey of the stock market that is less a blueprint for the future than a tune-up guide.

The Securities and Exchange Commission's report, some of which is expected to result in new laws and regulations over the coming year, calls for few basic changes in how the major stock markets are run. Instead, it proposes a series of adjustments to make trading more open and fair.

For most investors, the biggest change would be share prices quoted in increments as small as one-sixteenth of a dollar, or 6.25 cents. Currently, the smallest increment in stock prices is 12.5 cents, or one-eighth of a dollar. Eventually, shares should be traded in decimals with spreads as small as 5 cents, the report said.

"We were fairly comfortable with the overall status of the markets, but thought that changes were needed internally to make them more fair to investors," said Howard Kramer, associate director of the SEC's Division of Market Regulation, which drew up the study.

What spurred the study, Mr. Kramer said, was that the last major overview of the stock market was 20 years old. Since then, new technology and financial products have caused some to worry that the markets were not functioning properly.

Specifically, backers of the big stock exchanges, such as the New York Stock Exchange, have argued that over-the-counter stock markets, such as the Nasdaq stock market, are not fair to small investors because their rules are not transparent enough.

Most of the recommendations call for improvements to Nasdaq, but fall short of the big changes demanded by the exchanges.

The study, for example, suggests prohibiting broker-dealers from "trading ahead" in Nasdaq stocks. Trading ahead allows them to trade stocks on their own accounts at prices better than those available to their clients.

The study also calls on Nasdaq to display orders better. Currently, orders executed on Nasdaq's SelectNet system are displayed on monitors that are not available to all customers.

In Nasdaq's favor, however, is a proposal that would make it easier for companies to "de-list," or leave an exchange. At present, two-thirds of shareholders must vote in favor of such a move, making it nearly impossible. In the future, only the company's board of directors and its audit committee must vote in favor.

"We made a conscious decision not to choose between markets. Right now, both the New York Stock Exchange and Nasdaq are fierce competitors. The government shouldn't choose between the two," Mr. Kramer said.

Reactions to the report were predictably mixed. Supporters of the auction system of trading that takes place on the major stock exchanges said the report did not come down hard enough on Nasdaq.

"It's what I expected from the government. It's pretty middle of the road," said Cari Austin, head of the National Specialists Association.

Ms. Austin also criticized the decision to reduce the increments of stock prices. She said that stock dealers have about 4 cents a share in overhead, so reducing the increment between stock prices to 6.5 cents would limit a dealer's profit to 2.5 cents.

The New York Stock Exchange and Nasdaq stock market both commended the report, saying they looked forward to adding comments to the study. The study can be amended by the SEC before specific regulations are adopted or laws are adopted by Congress.

"The report described the pro-competition bias that led to the Nasdaq stock market being formed as positive and beneficial. That's a great conclusion. Also, the recommendation that it be easier for companies to de-list will level the playing field. We're happy," said Richard Ketchum, Nadaq's chief operating officer.

The report probably will result in legislation, but nothing as far-reaching as the study 20 years ago that resulted in Congress amending the securities laws to establish a national system for stock trading, said Hans Stoll, director of Vanderbilt University's Financial Research Center.

"This is not a massive effort," said Dr. Stoll, who participated in the previous study. "It's a useful effort that combines a lot about what we know of the markets, but nothing like the effort to reform the markets in the 1970s."

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