Five More Years?

Congress is about to rubber-stamp Arthur Levitt's reappointment. First, it should find out where he stands.

But others contend that those who have come down on FASB over derivatives fail to understand that the financial markets need not be a contest between investors and issuers. Says FASB’s Jenkins: “The better information you provide to investors, the lower your cost of capital.” From that perspective, he insists, Levitt’s push for more disclosure is anything but a black mark, and his apparent retreat in the face of opposition is insignificant. “His emphasis and interest and support” on such issues “go well beyond” what previous SEC chairmen have shown, says Jenkins.

Electronic Trading: Too Cautious?

Maybe so. Yet Levitt has failed to pursue an equally aggressive tack in another arena in which the interests of U.S. issuers and investors are no less virtuously aligned. That arena is securities trading. Here proponents of reform contend he has an even greater opportunity to help both camps. How? By embracing electronic securities-trading systems that promise to challenge the dominance over the financial markets exercised by traditional stock exchanges and brokers. To the extent that electronic systems can reduce the role of brokers in handling transactions, the cost of trading securities should decline.

Electronic trading systems, such as Posit and Instinet, that are regulated as brokers and run by such companies as Investment Technology Group Inc. of New York and Reuters Group Plc of London, respectively, started out in the late 1960s as proprietary computer networks, but are increasingly accessible through the Internet and other networks, including those of other brokers. The Arizona Stock Exchange makes extensive use of such systems; so do several European bourses, including those of London, Paris, and Stockholm.

Not so the NYSE, Nasdaq, the American Stock Exchange, and other exchanges, which depend on traditional brokers and specialists to handle all but the smallest transactions. And while Nasdaq has announced plans to offer an electronic trading system, large transactions executed there and on the NYSE and other exchanges are still subject to so much intervention on the part of brokers that mutual funds and other institutions often cannot buy or sell before giving their intentions away to other investors.

Granted, specialists and other traditional brokers often put up their own capital to buy and sell stocks, which can provide liquidity when there is none, helping reduce volatility in the market. But critics of the current setup contend that buyers and sellers alone could provide sufficient liquidity if they could communicate more freely with one another, and that the middlemen simply drive up costs.

Investors have an obvious interest in lower trading costs. And issuers would also benefit. They, too, are investors when buying back shares or funding an employee stock ownership plan. And their role as overseers of pension plans subjects them to Department of Labor rules that require them to seek “best execution” for plan trades. CFOs also have a fiduciary obligation to shareholders, and higher trading costs do nothing to maximize shareholder value.

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