ICI Comments on NYSE Hybrid Market Proposal, July 2005

Washington, DC, July 21, 2005 - The Institute recently filed a comment letter with the SEC regarding the New York Stock Exchange's proposal to create a hybrid market.

Background
In August 2004, the NYSE proposed to create a hybrid market that would allow investors to choose how their orders are executed: by automatic execution or through an auction market. NYSE proposed to accomplish this by, among other things, enhancing the Exchange's existing automatic execution facility, NYSE Direct+, making its speed and execution certainty available to a wider variety of orders. The Exchange also proposed to create a new order type - an Auction Limit order - and to modify the way market orders would be handled in the auction market, providing an opportunity for price improvement for those who desire it.

ICI Position
In its comment letter, the Institute reiterates its support for increased automation, but also the concerns it expressed about the proposal in a September 2004 comment letter. Among them:

specialists' access to information about investor orders in the hybrid market, when they obtain access to this information, and how this information is used in interacting with investor orders;
specialists' ability to provide "price improvement" to incoming orders. ICI states that allowing specialists to electronically interact with incoming orders in this manner and, in effect, step ahead of investor orders on the Exchange's limit order book, runs counter to the NYSE's goal of providing incentive to investors to place orders on the Exchange;
specialists' access to trading information. ICI opposes providing specialists with the ability to electronically "see" certain information before other market participants and to make quoting and trading decisions based on that information; and
brokers' ability to conceal their orders from other market participants. The Institute recommends that NYSE amend the proposal to eliminate such a priority system.