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The Securities and Exchange Commission on Tuesday abandoned plans to radically restructure how stocks are traded, offering instead a more modest proposal to empower investors to make better trades. Rejected by the agency were proposals made in February to create a central limit order book, to bar brokerages from internalizing orders unless they improve upon the price and to require brokers to transact with the customer, offering the best price in the market before conducting similar deals at the same price with their own customers. Instead, the SEC unanimously proposed requiring brokers and market centers such as stock exchanges and electronic communication networks to periodically disclose details of how they route and settle trades. “The proposed execution quality disclosure rules marshal the most powerful force in our market – the relentless demands of informed investors – to drive the most efficient order-routing patterns and to stimulate market center competition based on superior execution,” SEC Chairman Arthur Levitt said. One proposal would require brokers to disclose data quarterly about where they send their orders for settlement. This would include the names of various market makers and electronic communication networks and the percent of business that went to each entity. Brokers also would be required to outline any ownership stakes or incentive contracts they have with the market centers. This would include deals such as when a market center pays the broker for routing a certain volume of business. The SEC also proposed forcing these market centers to disclose monthly, on a stock-by-stock basis, the quality of their order execution. This includes price improvements, speed of execution and percent of limit orders filled. The proposals stem from the SEC’s investigation of market fragmentation, which is the worry that trading in the same securities will occur in so many different places that the volume at any single market center will be insufficient to ensure everyone gets the best available prices. Comments are due 45 days after the proposals are published in the Federal Register. Separately, the SEC approved a plan by the American Stock Exchange, Chicago Board Options Exchange and the International Securities Exchange. The intent is for customers to get the best available price, regardless of which exchange is offering that quote. The agency did not mandate these three exchanges or any other options exchange participate in the linkage. However, brokers that trade on unlinked exchanges must disclose to their customers every time they execute a trade at an inferior price. About 5% of options trading is done at inferior prices. An agency official said the SEC expects brokers will push exchanges to link, so they won’t have to tell customers that a trade was executed at an inferior price. Copyright �2000 TDD, LLC. All rights reserved.

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