(November 5 – 13:25 ET) —
Brokers must improve their order
execution practices and disclosure,
says Securities and Exchange
Commission chairman Arthur Levitt.
He made the remarks during a speech
today at the Securities Industry
Association’s annual meeting in Boca Raton, Florida.
Order execution has become
something of a holy grail for the
SEC over the past few years. “[T]he
duty of best execution is being
neglected by those who fail to
carefully review their order
routing arrangements. I worry that
best execution may be compromised
by payment for order flow,
internalization, and certain other
practices that can present
conflicts between the interests of
brokers and their customers,” said
Levitt.
The SEC has apparently uncovered
some unsettling imperfections,
including payment for order flow,
and insufficient execution
efficiency reviews by firms.
While the SEC has allowed payment
for order flow it has required
disclosure of the practice.
Levitt says those disclosures
may be following the letter of the
law but they are not adhering to
its spirit. “Unfortunately, today’s
payment for order flow disclosure,
while factually accurate, is just
not clear to investors. The typical
disclosure does nothing more than
list the variety of compensation
arrangements that may result when a
broker is paid for customer
orders… It’s like turning to a
weatherman and having him tell you
it may rain today, but then again,
it may not.”
Levitt stressed best execution
will become even more important as
markets link up to build the global
uber-exchange which seems to be in
the offing. But Levitt says the
SEC will not be using rulemaking
as the way to bring brokers in
line. “We must not enter the
millennium handcuffed by
potentially cumbersome, and perhaps
even soon outdated restrictions.”
He’d prefer moral suasion.
Levitt says the same pressures
are emerging in the options
markets. The SEC plans to stand
watch over practices there too.
-IE Staff
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