“If you’re a big organization, you already have quite a bit of liquidity,” says Michael Brown, former CFO of Microsoft Corp. and chairman of Nasdaq’s board. But, Brown adds, “midcap companies can get a lot more liquidity [via electronic trading systems], especially if they have employee stock ownership programs or stock buyback programs.”
Richard Lindsey, the SEC’s director of market regulation, says the commission is doing all it can to foster competition among the traditional markets and electronic systems. The commission is studying how it might overhaul the present regulatory scheme to allow for more competition, with proposed rules that would pave the way for such reform possibly as early as June.
Under one scenario suggested in a so-called concept release that the SEC issued last May, electronic trading systems would be regulated as exchanges instead of as brokers. But that, under the current SEC regime, would limit their competitive advantage by making it more difficult for them to let institutional buyers and sellers deal directly with each other.
That prospect, says Georgetown’s Angel, “is somewhat horrifying.” Levitt says the proposal was merely “the beginning of a dialogue.”
Others who want to see the SEC embrace electronic systems are more generous. Levitt “tends to be cautious,” explains Edward Fleischman, a former SEC commissionerand now a consultant to the London-based law firm of Linklaters & Paines. “Arthur is very careful not to tear down the temple walls without being fairly confident of the structure that will replace it.”
Change, of course, is always risky. And Levitt evidently worries that encouraging alternatives to the existing system might make the markets less transparent or accessible to small investors. Also, proponents of the current setup contend the U.S. markets are already the most efficient in the world, so why fix what isn’t broken? But even Fleischman says the potential cost savings from more competition in the financial markets more than justify the risk of less transparency or accessibility.
Exactly how inefficient U.S. markets currently are is hard to say. But Rutgers University finance professor David Whitcomb, who first began analyzing the price structure of the markets in 1981, testified before Congress last year that the system provides a “multibillion-dollar subsidy” to Wall Street firms each year. And former SEC commissioner Steven Wallman has estimated the potential savings from new competition at $5 billion annually.
“I have to go through seven people” to execute a trade on the New York exchange, complains Harold Bradley, portfolio manager for American Century Investments, a mutual fund management company based in Kansas City, Missouri, that handles $67 billion in assets. “There are simply too many proprietary, and predatory, interests at work.”
In fact, the barrier to the temple’s reconstruction may not be technological, but political. Taking on some of the country’s most powerful private interests–the brokerage firms that belong to the NYSE and the NASD — isn’t easy for anyone in Washington. Through campaign contributions, “Wall Street gives Congress even more than it gets,” observes Larry Fondren, founder and majority owner of InterVest Financial Services Inc., a Philadelphia-based electronic system that is struggling against firmly entrenched dealers for a toehold in the bond market (see “What’s a Bond Really Worth?” at the end of this article.)