Securities and Exchange Commission Chairman Arthur Levitt Jr. will announce a radical plan Thursday to create a single regulator for the nation's stock markets, capping months of behind-the-scenes lobbying by three major Wall Street firms seeking to consolidate the way stocks are traded in the United States.
The proposal, described by sources who have been briefed on it, could virtually dismantle the 65-year-old system that allows stock markets to regulate themselves.
The plan will likely spark fierce opposition from the New York Stock Exchange, the nation's biggest stock exchange. The Big Board sees its self-regulatory unit--encompassing a third of its staff, or more than 400 people--as at the heart of NYSE's venerable brand name.
But the chiefs of Goldman Sachs Group Inc., Morgan Stanley Dean Witter and Merrill Lynch & Co. have argued that the system through which stocks are traded in the United States has become disorganized and outmoded, as the markets seek to sell shares to the public and new electronic competitors threaten to further scatter the system. They have been pushing Levitt and leaders of the NYSE for months to create a central place where orders can be placed and an umbrella organization to govern securities dealers.
NYSE Chairman Richard A. Grasso has had numerous talks with Levitt, summing up his opposition in a July letter. Next week, he is to expound on that position at hearings on market reform before the Senate Banking Committee.
Grasso, sources said, has argued that creating a single regulator would disrupt NYSE's entire organization--culturally and physically. NYSE has argued that it would lose staff expertise and cost-efficiencies.
Levitt will unveil the proposal in a speech at Columbia University.
Federal regulators have been struggling to keep up with massive changes that are taking place in the stock markets, as new technology, the Internet and fierce competition have made trading faster, easier and cheaper, and brought a flood of middle-class investors into the stock markets. Lately, a slew of electronic networks have sprung up to link buyers and sellers of stock--and many have applied to become stock exchanges.
Each of these markets has a separate set of rules and "order books" that list available stocks and their prices. It's not efficient, some market sources believe. Encumbering this process further is a rule at the NYSE that prevents stocks listed there from trading on the Nasdaq Stock Market or other markets.
The issue intensified when the New York Stock Exchange and the National Association of Securities Dealers, which operates the Nasdaq market, moved closer to plans to transform themselves into for-profit organizations. The major Wall Street firms complained to the SEC that they could not be regulated by a public company whose shareholders could include their competitors. Federal policymakers worried that a for-profit entity might not be a rigorous enforcer.
Levitt's plan, first described today in an article in the Wall Street Journal, still faces months of scrutiny, especially in light of the NYSE's opposition. One possible alternative to spinning off the regulatory divisions, sources said, is to create a holding company for each market, thus making the regulatory arms distinct units.