The New York Stock Exchange is abolishing a long-standing rule that limits where many companies can be traded, clearing the way for new competition at the world's biggest stock exchange.
The regulation, called Rule 390, forbids member brokerage houses from trading venerable blue-chip stocks that were listed before 1979. Today, the NYSE board abolished that rule, freeing up the potential trading forums of such companies as International Business Machines Corp., General Motors Corp. and others that account for about half of Big Board volume.
Combined with imminent action by the Securities and Exchange Commission, this will allow nascent electronic communications networks--which match buyers and sellers directly--to trade NYSE-listed stocks. Already, these networks have grabbed 30 percent of the Nasdaq Stock Market's volume.
"This is like the Berlin Wall coming down," gushed Gerald Putnam, chief executive of Archipelago, one of several electronic communications networks that have applied to the SEC to become exchanges. Putnam and other Wall Street executives pointed out, though, that it was just the first symbolic step in a series of changes to reshape the way stocks are traded.
Initially, it will mean that large securities firms such as Merrill Lynch, Goldman Sachs Group Inc. and Morgan Stanley Dean Witter & Co. will be able to match the buy and sell orders of clients directly--without routing them through through the NYSE or any other regional exchange.
"We're happy that the New York Stock Exchange is making that move," said John A. Thain, president and co-chief operating officer of Goldman Sachs. "However, we think it is only a step. And more steps need to be taken."
The next widely anticipated step is linking the stock exchange--and exposing all its trades--to other marketplaces. Also on the horizon is a centralized electronic limit-order book that picks up all the bids and offers for a particular security and makes it available to everybody--from the NYSE to Nasdaq to the electronic communications networks.
"That's the step that will fundamentally change the way stocks are traded in the country," Thain said.
Next week the SEC is expected to adopt a rule that will make it easier for market makers who want to make trades off the NYSE floor to send orders back and forth between the NYSE and Nasdaq. The NYSE board today recommended accepting the system. There is already a link, called the Intermarket Trading System, between the NYSE and Nasdaq for stocks listed before 1979. This will expand the ITS to include stocks listed after 1979.
The SEC is also proposing a rule that would allow regional exchanges to trade initial public offerings of NYSE-listed stocks on the first day of public trading. Currently the regional exchanges have to wait until the second day. These exchanges have complained that the restriction is unfair, since competitors such as electronic communications networks and foreign stock markets do not have to wait a day to trade initial public offerings.
The NYSE has asked SEC for a new rule saying that brokers can only "internalize" (trade among clients without the exchange) if it's the best price.
SEC Chairman Arthur Levitt has been pushing for the elimination of Rule 390 for months.
Rule 390 governs about 25 percent of the stocks traded on the NYSE--but 25 of the 30 stocks tracked by the Dow Jones industrial average.
The rule's elimination, said Richard Phillips, a securities lawyer at Kirkpatrick & Lockhard in Washington, "opens the possibility of cheaper and quicker executions."
The rule was put in place decades ago to avoid market fragmentation--a scattering of orders that makes it impossible to track who is buying and selling stocks and for how much.
"Rule 390--awful as it sounds--makes orders come to the same place and makes a pretty good price discovery process," said David Jeffrey, chief operating officer of the Arizona Stock Exchange.
The move is the latest in a series of steps the NYSE has taken to keep up with sweeping changes brought on by technology. Recently, it announced it would create an electronic communications network of its own, mainly to grab business from Nasdaq. The exchange is also seeking to buy out its members and convert itself to a for-profit in order to make a more radical shift into technology, which has been resisted by the brokers who own the exchange. The exchange has been under increasing pressure lately from electronic communications networks.
Still, for electronic communications networks there is a long way to go before they are on equal footing with the stock exchange. More important, they say, will be when they are included in a system that links exchanges--called an Intermarket Trading System.
"It is emblematic of a changing tide," said Matthew Andresen, president of Island ECN Inc., one electronic communications network. "But it is a very, very small step in part of a broad trend."
Staff writer Sandra Sugawara in Washington contributed to this report.