Exchanges, Brokerages Disagree

FRAMINGHAM (03/01/2000) - Brokers clashed with the heads of the nation's biggest stock exchanges yesterday in a heated discussion over the future of the U.S. securities marketplace at a government hearing at the World Trade Center yesterday.

The issue at stake is a proposal to create a central limit order book, where all U.S. stock buyers and sellers would meet electronically. Presently, there are a number of competing stock exchanges, including the New York Stock Exchange Inc. and the Nasdaq Stock Market Inc. A centralized structure would benefit the major brokers, which already route a high volume of their transactions to so-called electronic communications networks such as Archipelago and Instinet.

But a more centralized market could hurt small brokerages and discount firms because they would likely have to raise their fees if they were forced to give their customers access to a master stock clearinghouse.

Testifying before five members of the Senate Banking Committee, CEOs from four major U.S. securities firms argued for a more centralized market structure.

Meanwhile, the heads of NYSE, Nasdaq and discount broker Charles Schwab Corp. argued against what they called a "monolithic" stock exchange structure.

"Competition, and the innovation that stems from it, helps create more informed and better served investors," said Schwab Chairman and CEO Charles Schwab, in written testimony submitted to the committee.

According to Schwab, "The utopian vision of centralizing all trading in one system" would lead to a loss of innovation.

Competition has already led to a more efficient market, said Securities and Exchange Commission Chairman Arthur Levitt in his written statement. "Multiple listing is now a reality, and spreads are substantially narrower," he said.

Spreads are the differences in stock prices between what a seller asks for and what a bidder offers.

But the other brokers who spoke yesterday - including Philip Purcell, chairman and CEO of Morgan Stanley Dean Witter & Co.; Henry M. Paulson, chairman and CEO of Goldman, Sachs & Co.; and David Komansky, chairman and CEO of Merrill Lynch & Co. - argued in favor of streamlining a fragmented marketplace.

"In our experience, the more customer order flow meets in one central place, the more trading spreads narrow, prices improve and liquidity increases," Komansky said in his written testimony, arguing in favor of a marketwide mechanism for displaying and accessing the best possible bid or offer.

But according to Dana Stiffler, an analyst at Meridien Research Inc. in Newton, Mass., a central clearinghouse - which may provide investors slightly better prices - would also increase costs for discount brokers like Schwab, which currently keep prices low by keeping customers' trades in-house.

Big brokerages like Merrill Lynch, said Stiffler, are already in a position to take advantage of a centralized marketplace because of their affiliations - or ownership of - electronic trading networks.

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