1 See Memorandum to Equity Markets Advisory Committee No. 9-00 and SEC Rules Committee No. 26-00, dated February
25, 2000).
2 Securities Exchange Act Release No. 42758 (May 9, 2000), 65 FR 30175 (May 10, 2000) (“Release”).
3 Securities Exchange Act Release No. 42450 (February 23, 2000), 65 FR 10577 (February 28, 2000).
[11897]
May 22, 2000
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 33-00
SEC RULES COMMITTEE No. 79-00
RE: SEC APPROVES PROPOSAL TO RESCIND NYSE RULE 390
______________________________________________________________________________
As we previously informed you, the Securities and Exchange Commission issued a proposed rule
change filed by the New York Stock Exchange to rescind NYSE Rule 390.1 The SEC has issued a
release approving the proposed rule change.2
NYSE Rule 390 generally prohibited NYSE members and their affiliates from effecting
transactions in NYSE listed securities away from a national securities exchange. In its proposal to
rescind Rule 390, the NYSE stated that the intended purpose of the rule was to maximize the
opportunity for customer orders to interact with one another in agency auction markets and to be
executed without the participation of a dealer. The NYSE also discussed its concerns that broker-dealer
internalization practices and market fragmentation would increase after Rule 390's rescission.
In order to address these concerns, the NYSE urged that the SEC, in approving the rescission of
Rule 390, adopt a market-wide requirement that broker-dealers not be permitted to trade against their
customer orders unless they provide a price to the order that is better than the national best bid or offer
against which the order might otherwise be executed. The NYSE stated that such a requirement would
assure that investors receive the fairest pricing of their internalized orders, and would eliminate broker-
dealer conflicts of interest in trading against their own customer order flow to capture the spread.
The SEC did not take any action on the NYSE’s request in approving the rescission of Rule 390.
The Release notes, however, that the SEC’s concept release on market fragmentation3 sets forth the
NYSE's proposal as one of the six potential options to address fragmentation on which comment is
requested.
In approving the proposed rule change, the SEC states that Rule 390 is overbroad as a tool to
address market fragmentation, as it applies in many situations that do not promote investor order
interaction. In addition, the SEC states that Rule 390 effectively restricts the competitive opportunities
of ECNs and that to avoid the anticompetitive effect of Rule 390, some ECNs have indicated that they
would even accept the regulatory responsibilities associated with registering as a national securities
exchange. The SEC believes that the rescission of Rule 390 will eliminate these barriers to competition.
The SEC also states that to the extent the rule promotes the interaction of investors' orders, it does so in
an undesirable way, by attempting a direct restriction on competition.
Finally, the Release states that several commenters believed that the SEC should not approve the
rescission of Rule 390 until it had addressed market fragmentation concerns. The SEC states, however,
that it does not believe that the potential fragmentation of the listed market due to an increase in
internalization and payment for order flow arrangements warrants a delay in approving the proposed
rule change. The SEC notes that it already has begun its review of market fragmentation issues through
the issuance of the market fragmentation concept release. In addition, the SEC states that it intends to
monitor any significant changes in the order-routing practices of NYSE members as a result of the
rescission of Rule 390, particularly decisions to internalize their customer order flow.
Ari Burstein
Assistant Counsel
Attachment