The SEC is investigating evidence that at least one regional stock exchange had been failing to display limit orders broadly.
Securities and Exchange Commission Chairman Arthur Levitt did not name the exchange but said an investigation is ongoing.
The probe could be embarrassing — as well as a costly to the exchange in question — if one of the self-regulatory organizations is found to have allowed the SEC rules against it to be broken. The exchange could be fined. A source close to the SEC said it was a regional exchange — not the New York Stock Exchange, American Stock Exchange or Nasdaq.
But the source also said SEC investigators fear the problem may be widespread, driving the SEC to audit all of the exchanges to ensure that they are following the rules.
Levitt disclosed the probe as he called on the industry to develop a way for all the quotes for stocks on different exchanges and electronic trading networks to be collected and displayed in one central place.
“On one of our equity exchanges, at least one out of six limit orders was not properly displayed, according to preliminary examination results,” Levitt said in the speech last night. “I am deeply troubled by this apparent disregard for customer orders and systemic competition. In far too many cases, limit orders are being mishandled.”
Under current SEC rules, all limit orders for stocks must be displayed openly at the Exchange that is handling the order within 30 seconds of receiving the order.
While it is possible that a technical malfunction caused the problem of one in six orders not being properly displayed, according to SEC sources, it is also possible that the exchange in question deliberately did not follow the rules, to the detriment of investors who traded there. If limit orders are not posted, investors cannot know what the best price is for a stock they would like to trade.
Levitt would not only like to enforce that limit order posting rule, he’d like to take it one step further.
He wants to see a list of the 20 best prices for any given stock, instead of just the one best buy and one best sell price, as is now done.
Levitt also wants the different exchanges to post all the limit orders in a central place, where all investors would be able to see what prices are being offered by other investors.
“The ability of all investors to see the depth of supply and demand in any stock would be a giant step toward a true national market system,” Levitt said, adding that he would call a “public roundtable” in about a month to discuss the proposal.