Securities and Exchange Commission Chairman Arthur Levitt Jr., setting the stage for a fierce battle over the shape of U.S. capital markets, yesterday proposed scrapping decades of tradition in an effort to breathe new competition into stock trading and regulation.
In a speech delivered at Columbia University Law School in New York, Levitt also made a surprisingly sharp attack on the lucrative monopoly of the powerful New York Stock Exchange. He said a rule that restricts where many NYSE-listed stocks can be traded--one of the pillars of the Big Board's central role in the securities industry--"may very well be on its ninth life."
The agenda put forth by Levitt could force dramatic changes in the securities industry, which has already been roiled by the advent of electronic trading, the Internet and a host of entrepreneurial competitors. Levitt's speech is expected to ignite a major lobbying fight in Washington, with the SEC scheduled to flesh out many of these proposals over the next year.
The tone and tenor of Levitt's speech stunned many executives on Wall Street and securities lawyers in Washington. "I think Chairman Levitt is a very courageous man to do this," said one securities lawyer.
John Brennan, chief executive of the Vanguard Group, a leading mutual funds group, said Levitt's agenda would benefit both retail and institutional investors because it would lower prices and costs.
Until now, the SEC has been rather quiet on how it planned to navigate the turbulence in the securities industry. Both the NYSE and Nasdaq Stock Market next year plan to convert to for-profit organizations from their current status as membership groups, raising questions about whether they should continue to police their members. In addition, new technology, the Internet and a surging bull market have triggered a wave of new competitors and cut costs. Online trading is popularizing after-hours stock buying and selling. Globalization is pushing trading into longer hours as well.
"Without strong leadership from the SEC chairman, there is a possibility of changes in market structure creating chaos," said Bob Gasser, head of U.S. equity trading for J.P. Morgan & Co., who applauded the approach outlined by Levitt.
With more than half of U.S. households invested in the stock market, any change can create a minefield. While regulators worry about the chaos that could result without a new road map, they are also aware that regulatory changes can have unexpected consequences. The NYSE is the largest and most important financial exchange in the world, and it functions relatively smoothly; some of America's most important companies trade there.
Levitt's frontal attack on the NYSE may have been surprising, but several market participants--from large investment banks to mutual funds and small newcomers--said the SEC needs to change an antiquated regulatory structure designed decades ago, when trading volume was a fraction of today's.
A source familiar with the thinking of NYSE officials said the exchange is strongly opposed to changes in Rule 390, which prohibits the trading of many NYSE-listed securities in other markets. It is also opposed to relinquishing the right to police itself, arguing that both systems have worked well in the past.
Levitt--who before becoming head of the SEC was chairman of the American Stock Exchange, a crosstown rival of the NYSE--said his underlying goals include making it faster and cheaper for customers to buy and sell stocks, making it easier for them to discover the best price and protecting them from fraud. He said the SEC will focus on restrictions that distort competition, singling out NYSE Rule 390.
"Now is the time to ask ourselves: Is there a valid justification for a rule that appears to be more a barrier than a benefit?" Levitt said.
He also said that a for-profit entity must be policed differently than a membership group. Currently, exchanges police themselves, with oversight from the SEC. Levitt said at the very least, the self-regulating function must be separate from the for-profit entity.
He said he was looking at two models. In one, a single self-regulating organization would handle all the markets, including the NYSE, Nasdaq, Amex and regional stock markets. In the other model, each market would handle functions related to its own activities, but other functions would be overseen by a single self-regulating organization.
Frank G. Zarb, chairman of the National Association of Securities Dealers Inc., the parent company of Nasdaq, said his group supports the idea of a single regulator and the elimination of NYSE's Rule 390.
Levitt called the appearance of a handful of new competitors--known as electronic communications networks, or ECNs--is "one of the most important developments in our markets in years--perhaps decades."
"They have provided investors with greater choices and have driven execution costs to a fraction of a penny," Levitt said. He said ECNs cannot be barred from networks that link exchanges, something that currently occurs.
Levitt also proposed pulling all orders and quotes together electronically, so that customers can see the prices being offered in all exchanges and markets.
CAPTION: Arthur Levitt of the SEC attacked the NYSE's monopoly.