US-wide linkup for markets is slow to develop
In 1973, James J. Needham, then the chairman of the New York Stock Exchange, said the concept of the Central Market System was in its ''11th hour.'' Since then, time - as measured by Mr. Needham's clock - has slowed down.
The central-market concept, which has since evolved into the National Market System, provides for a single electronically linked market for stocks, on which the public would ultimately get the best price on its transactions. It was first called for in 1971 by former Federal Reserve chairman William McChesney Martin Jr. and later mandated by Congress in 1975. In the eight years since then, there have been some innovations: a consolidated tape, listing trades as they occur on the major and regional exchanges; a composite quote facility that gives bids and offers on all the exchanges; and a central clearing facility, where payments are made for trades on what is now called the Intermarket Trading System.
Despite these accomplishments, some powerful voices on Wall Street are wondering why the complete National Market System has been so slow to develop.
According to a recent editorial in the Wall Street Journal, the New York Stock Exchange (NYSE), eager to protect its turf, has ''manufactured'' delays by lobbying against a true National Market System.
In a letter to the Journal, the exchange chairman, William M. Batten, accused it of making ''disturbing factual errors and misconceptions.'' He added that the exchange only wanted to ''maximize competition for and among customers' orders.''
But a later letter from Richard West, a dean at Dartmouth College, accused Mr. Batten of being hypocritical. ''. . . the exchange's behavior belies his words,'' wrote Mr. West, who is a governor of the National Association of Securities Dealers (NASD). He added that for years the exchange attempted to protect its own territory at the expense of nonmembers.
What is the fuss about? an investor might ask.
The issue is simple: money.
Currently, any member of the NYSE who has an order for an exchange-listed stock is required by the exchange to take the order to the floor. The ''order flow'' thus stays on the exchange floor. But what if Merrill Lynch, acting as a broker-dealer, decided it wanted to make a market in the same stock, competing with the specialist on the exchange floor? Under current NYSE rules it cannot.
The exchange claims the reason it prohibits such trades is to protect the customer, not its own market share. By going to the floor of the exchange, the specialist submits the customer's order to the auction process. In theory, the customer should be getting the best market price on his securities. In fact, the specialist on the floor has a ''fiduciary responsibility'' to ensure that the customer's order gets the best available price. For example, if a specialist in Chicago is making a better offer than the New York specialist, the person in New York must direct the order to Chicago.
The NASD would like to open up the trading to further competition. According to John Wall, an executive vice-president, allowing stocks listed on the Big Board to be traded away from the exchange would ''narrow the spreads,'' that is, the difference between the buying and selling price, benefiting the customer. This spread, which can vary from $25 to $60, depending on volatility and risk, represents profit for members of the New York exchange.
But the exchange maintains that the customer must be given a chance to obtain the best price available, which it claims may not happen under the broker-dealer system. After a lengthy study, it recommended that when trading occurs in NYSE-listed securities, an order must be exposed to the auction market for 30 seconds before a broker-dealer can execute it for his own account. More recently , the exchange suggested extending this to 45 seconds.
The NASD opposes this concept, noting that in a market where 100 million shares are traded, it's unworkable. ''Anyone can pick off your order,'' says Mr. Wall, ''so why risk your capital to make a market when you must expose your orders to others for 30 seconds. We feel it will create more risk, which you can interpret to mean dollars, since the spread between the bid and ask is based on the volatility and risk involved.''
A small-scale test of the 30-second rule is being made. The experiment involves 30 stocks listed on the Big Board and traded away from the exchange by nonmember broker-dealers and nonspecialists. Mr. Wall says the experiment has been inconclusive, since only about 100 to 200 trades per week take place. His association would like to see the test expanded - to include the 1,100 issues traded on the exchange. Richard Grasso, an NYSE senior vice-president, says he does not ''foresee the day when all the stocks are traded off the exchange.'' Merrill Lynch recently dropped out of the experiment, saying it was unprofitable and difficult to use. Shearson/American Express Inc. stopped trading in all but a few issues last year.
The Securities and Exchange Commission, for its part, is playing its views close to the vest. It has circulated a draft proposal requiring, something similar to the 30-second rule being tested on the Big Board. But it's not certain that the commission will agree to this. As a staff member puts it, ''They may not even feel there is a need for an order exposure rule.'' The aide indicated the decision will be made by June. The exchange considers the next few months ''sensitive,'' and was quick to answer the Journal's editorial.
Since Congress never developed any specific blueprints as to how it wanted the National Market System to develop, the SEC's decision is critical. The communications and data processing systems to develop the system further are in place and operational. How it is used is up to the SEC.