The New York Stock Exchange in testimony last week before the Securities and Exchange Commission, appeared to make some long-awaited concessions on how far it is willing to modify its own rules to aid development of the national market system that Congress has legislated.
But some of Wall Street's major firms are saying that the exchange has decided in its proposals to look out primarily for the interests of its floor members - the specialists and floor brokers who have the most to lose in a more competitive trading system - and is really just pouring old wine into new bottles.
Hearings being conducted by the SEC on whether and when to order the end of stock exchanges' rules "offboard" come at a crucial juncture. The rules are considered to bethe last major barrier to the development of vigorous competition in the trading of securities, and the burden is clearly on the exchanges to prove why they should be retained.
Elimination of the rules would open the way for large firms like Merrill Lynch, Dean Witter or Paine Webbee to start making their own over-the-counter markets in exchange-listed securities in direct competititon with exchange specialists.
The firm, acting as a dealer, could buy from or sell directly to a customer from its inventory and also could cross a buyer and seller "in house," in each case avoiding going to the exchange floor.
Many believe that taking off the restrictions would largely clear the way for going forward with the national market system that has been evolving slowly over the last three years. All that still would be required, in this view, is hardware in the form of a price quotation system to tell a broker where the best bid-and-asked quote is being offered, an electronic trading mechanism to let him transact in that market, and a rule requiring him to seek the best available execution.
But while direct competition among market makers certainly is enchanced if the off-board rules are eliminated, there is also considerable concern that simply to end the restrictions would lead in the short run to a proliferation of individual dealer markets and move things away from, rather than toward, a centralized system for trading securities.
In the hearings, the SEC therefore has asked for suggestions on possible safeguards that would avoid fragmentation as well as for proposals to prevent firms from "overreahing" or taking advantage of customers in pricing if they were to start functioning as dealers.
NYSE Chairman William M. Batten and other exchange officials, leading off the testimony, made a stab at suggesting that the off-board rules should be kept until the "key elements" of a national market system are in place in order to avoid some of the feared consequences. These inlcude not only a weakening of the exchange system but also possible further concentration in the securities industry as large, well-capitalized firms gobble up smaller ones.
But the commission has stated - and SEC Chairman Harold M. Williams reiterated the position in opening remarks - that the 1975 amendments to the Securities Act require the commission to come down on the side of more competition and to remove the off-board trading restrictions "at the earliest possible date," even if disruptions are th result.
So, having read the writing on the wall, the NYSE - which alone accounts for 85 per cent of all stocks traded in this country - was ready with its own alternative approach.
Big Board officials outlined a national market system that would depend mainly on a hook-up of existing exchanges, with each market center responsible for its own regulation and surveillance.
And, in a major concession, the exchange offered for the first time to make available "on request" to other qualified market makers the heretofore confidential public limit orders on the books of it specialists. (A specialist is a dealer on the exchange floor who is responsible for making orderly and continuous markets in stocks that have been assigned to him, usually on an exclusive basis.)
But if the off-board rules are to be eliminated, the NYSE officials recommended that there be a distinction made between public and professional investors, and that market makers, to avoid overreaching, be allowed to do business directly with public customers only if they better the market price displayed on a quote system at the time the trade takes place.
If, for example, a stock is quoted at 50 bid, 50 1/2 asked, a market maker who deals with the public would have to offer to buy shares at 50 1/8 and sell them at 50 3/8 - in each case improving on the market spread.
The idea is to allow a public customer in a new system to still get a crack at a price somewhere within the dealer spread, as he can now when his order is matched with another public customer at the specialist's post.
"What we're saying is that, as a retail customer, if you're not going to be given the opportunity to meet the other side, you should at least be given a better price than the best bid and offer," commented John Phelan, the vice chairman of the NYSE who heads his own spicialist firm, in an interview.
Furthermore, the exchange recommended that no commission fee could be charged by firms when they are acting as dealers, so that they would not be tempted to make deceptive price quotes and hope to make up the differential later when they tack on the commission charge.
But comments from executive at some of the large retail brokerage firms indicate that they believe th NYSE proposals, if enacted, would take away any incentive they could possibly have to act as market makers and therefore represent an effort to blunt potential competition for the exchange specialists.
The proposals "would not be acceptable to most retail firms because it means we would be noncompetitive" in acting as market makers, according to James W. Davant, chairman of Paine Webber, Jackson & Curtis, Inc., and until recently a member of the NYSE board.
"We really don't need such a rule because competitive rules and ethics now require a customer to get the best price available, not better than that price," Davant added.
"It seems to me it's a floor proposal," commented an officer with another large retail firm, who declined to be identified. "There's no question the exchange specialists still have the advantage because you're forcing what are potential qualified market makers out of the business of making markets in tightly traded securities." He noted that the 200 or 300 most actively traded NYSE issues generally trade within a 1/8 to 1/4 point spread and that, if a dealer were required to better the market price, he couldn't interpose between the bid and asked, or he would end up with no differential.
Donald E. Weeden, the head of Weeden & Co., the largest non-exchange dealer firm today, said "this business of having to better the market price and not charging a commission on top of it is like tying both hands behind you.
"The most interesting thing about the NYSE proposal," added Weeden, who has long done battle with the Big Board, "is that for the first time there is a clear difference between the economic interests of the floor and the economic interests of the upstairs people (the brokerage firms) who want to reduce costs and get into the market-making business."
And another official of a retail brokerage house, commenting on the exchange's offer to expose the specialists book, said the NYSE was saying "'here it is, but you can't use it. Let's compete, but let's not let any new competitors into the game.' It looks like a way of preserving the current system. They are putting up something to make it look like something new. But if you ask what the end result is, it is to leave things pretty much as they are today."
But NYSE Chairman Batten, in an interview, said the exchange in its plan is definitely opening itself up to more competition, and giving up some of its present advantages.
On balance, "if our plan were to go into effect as proposed, I would have to say in all honesty that the New York Stock Exchange would lose market share," he said. "We're willing to take a chance in a more competitive environment."
But the question is whether other market participants will see the NYSE plan as the competitive equalizer that Batten, formerly head of giant retailer J.C.Penney, claims it to be.
"I think you'll never get people to agree that things are equals as long as they don't happen to believe in that, because it's in the nature of things in our competitive system for there to be unequal market shares," Batten said.