“Regulators hope to issue new rules later this year to modernize U.S. stock markets but are rethinking an idea that would allow customers to opt for speed over price, Securities and Exchange Commission Chairman William Donaldson said yesterday,” writes Judith Burns in today’s Wall Street Journal.

“The SEC floated a reform package in February and is now evaluating more than 600 comments on it, Mr. Donaldson told the Senate Banking Committee. He said regulators want to wrap up ‘just as soon as we can’ and expect to do so before the end of the year.”

“Mr. Donaldson indicated that regulators are reconsidering a controversial element of the plan involving the ‘trade-through rule,’ which bans sending orders to markets posting worse prices. The SEC proposed allowing investors to opt out of trade-through protections if they prefer speedy computerized markets over traditional markets that often have the best prices but can’t always fill orders as quickly.”

“The New York Stock Exchange is creating an electronic system to rival the speed of electronic markets, and if it succeeds, ‘I would question why we need to have an opt-out rule,’ Mr. Donaldson said. He suggested regulators might want to retain an opt-out for investors who want to route orders away from slower markets, however.”

“NYSE Chief Executive John Thain told the SEC that a ‘fast quote’ system could be in place at the Big Board sooner than any SEC reforms might be put into effect, said Mr. Donaldson. Given that, he told lawmakers ‘we’re now giving serious consideration to the fast-quote approach,’ as an alternative to the opt-out plan.”

“Mr. Donaldson, a former NYSE chairman, said regulators don’t want to favor one kind of market over another. But he noted that traditional markets offer benefits, especially in times of market stress when ‘it’s too easy to turn off an electronic market.’ “

“Sen. Charles Schumer, a Democrat of New York, urged the SEC to avoid reforms that would favor large institutional investors at the expense of small, retail investors or result in a number of small markets supplanting a big, liquid market such as the NYSE. He advised Mr. Donaldson to proceed carefully, particularly on the opt-out idea.”