Institute Recommends Changes Concerning NYSE Decimalized Trading

Washington, DC, March 5, 2001 - The Institute recently sent a letter to the New York Stock Exchange addressing problems that mutual funds and other institutional investors have had trading large blocks of securities on the Exchange since the implementation of decimalization.

The letter states that decimalization, by itself, is not a problem and that decimalization simply has made more apparent the difficulties that mutual funds and other institutions face commonly when trading on the Exchange. To resolve these problems, the Institute recommends that the NYSE implement certain changes to the NYSE's Institutional XPress system, which was created to facilitate the ability of institutional investors to trade large orders on the Exchange. In particular, Institutional XPress would provide that XPress orders, defined as an order of at least 25,000 shares to be executed against a displayed XPress quote (a published bid or offer of at least 25,000 shares that is displayed at the same price for at least 30 seconds), be executed without the risk of being broken up by other market participants.

Eliminate Institutional XPress Display Requirement and Reduce Required Number of Shares to Become XPress Eligible
The Institute recommends that the NYSE eliminate the 30-second display requirement in order for a quote to qualify as an XPress quote. In particular, the Institute believes that the display requirement is unnecessary, especially inappropriate in today's fast-moving trading environment, and will only serve to provide a "free look" to market participants who want to step ahead of large orders.

The Institute also recommends that the number of shares required for quotes and orders to become XPress eligible should be reduced. It notes that a significant portion of the orders that mutual funds and other institutional investors typically place on the Exchange for execution are below the 25,000 share threshold established by the NYSE for Institutional XPress, especially in the case of smaller-capitalization stocks. Therefore, many of the types of orders for which the XPress system was intended will not be covered under the current rules. The Institute believes that reducing the number of shares required for a quote and order to become XPress eligible would encourage the placement of more orders on the Exchange's limit order book, further enhancing the liquidity on the Exchange.

Eliminate Representation of Xpress Orders by NYSE Specialists to the Crowd
Under Institutional XPress, a specialist must represent an XPress order to the crowd prior to that order executing against an XPress bid or offer on the limit order book. The Institute believes that the practical effect of this requirement is that while the XPress order may receive price improvement (which could be by as little as one penny in a decimal environment), the large limit orders comprising the XPress quote go unexecuted. Consequently, the letter recommends that the NYSE revise Institutional XPress so that XPress orders placed by institutions would not be required to be represented by the specialist to the crowd, thereby promoting the placement of limit orders on the book by providing protection for, and rewarding the placement of, those orders.

Allow XPress Orders to Reach Through to Orders on the Book Below the Best Bid and Offer
To ensure that Institutional XPress will offer mutual funds and other institutions the ability to execute large orders on the Exchange, the Institute believes the XPress system should allow those institutions to reach through to orders on the book that are below the best bid and offer. However, to ensure that bids or offers on the book that are superior to the XPress eligible quote are protected, and to be consistent with the Exchange's desire to provide price improvement opportunities to smaller orders, the Institute recommends that all orders on the book at prices better than the XPress eligible quote be required to be executed and price improved to the price of the XPress quote in these circumstances.