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In comments with ominous implications for the Securities and Exchange Commission’s proposal to reform the nation’s stock markets, a key lawmaker condemned a critical component of its plan as “the worst public policy I have seen proposed for the markets during my entire tenure in Congress.” Speaking at a congressional hearing on the SEC’s proposal for revamping the National Market System, Rep. Richard Baker, R-La., chairman of the House Subcommittee on Capital Markets, lashed out against a component of the plan that would extend the so-called trade-through rule to all U.S. equity markets. Currently in force only on the New York Stock Exchange, the 30-year-old trade-through rule bars brokers from bypassing the best price offered for a stock when executing an order. That effectively routes many orders placed on other exchanges to the NYSE. The SEC says extending the rule would give brokers access to the best quotes across all markets that are on automated execution systems. They would not have to access quotes that are available only on the slower, broker-driven NYSE floor. The nine-term congressman said the rule should be eliminated, calling it “anticompetitive and anti-investor” as well as a “relic of a bygone era” that serves only to preserve the NYSE’s 80 percent share of U.S. trade in listed securities. “Extending the rule to other market participants makes no sense,” he said. Testifying before Baker’s committee, SEC Chairman William Donaldson said the rule aims fundamentally to protect investors. “This simple point can get lost in all of the sound and fury unleashed by vested interests for whom a marketwide trade-through rule would require new ways of doing business,” he said. Donaldson also said that the rule promotes competition and that much of the debate over it has focused on competition between markets rather than competition between investors for order execution. “Both kinds of competition are essential for vibrant and healthy markets,” he said. The SEC proposal is an attempt to reconcile the demands of large institutions for faster trading using automated systems with a long-standing market principle that investors should get the best price possible for their orders. While it normally acts independently, the SEC answers ultimately to Congress, which could respond with legislation to kill or modify its reform proposal. Any such effort would most likely begin with Baker’s committee. Copyright �2005 TDD, LLC. All rights reserved.

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