SEC Proposes More Disclosure on Stock Trades

The government thinks investors don’t know enough about how their stock orders are filled, and whether they’re getting the best possible price when they buy or sell.

To open market dealings to more sunshine, the Securities and Exchange Commission on Tuesday voted to propose rules that would require brokerages to disclose how often they fill customers’ orders from their own share inventories, versus selling orders to other firms for execution.

The SEC also on Tuesday approved an electronic linkage plan proposed by three major stock options exchanges, in a further attempt to improve pricing for investors.

But in both the order-disclosure proposal and the options linkage plan, the SEC gave the securities industry more leeway than some critics say is best for investors.

The SEC’s proposal on order-routing information, which the agency put out for public comment for 45 days, targets common brokerage practices that SEC Chairman Arthur Levitt said fragment the market and keep investors from getting the best prices.

The SEC move is part of Levitt’s effort to obtain a consensus for breaking down barriers among the growing number of competing securities trading venues. Although competition should be healthy, it won’t be if individual venues keep orders for themselves--rather than letting all investors have a chance to interact, Levitt has said.

The SEC said it would study stock trading “to determine whether further steps are needed to address internalization and payment for order flow.”

Internalization describes a practice in which brokerages use stock in their own inventory to fill customer orders rather than send the orders to the market at large.

Payment for order flow is the brokerage practice of selling customer orders to other brokerages for execution, for small fees.

The SEC said its proposals would allow investors to comparison-shop, as the financial news media published reports showing the performance of brokerages and other market players in filling orders.

But the data, which the SEC also wants posted on the Internet each quarter, would be aggregated; brokerages wouldn’t have to disclose to customers how individual trades were filled.

Also, investors wouldn’t be assured the right to request routing of their orders to a specific market or brokerage. And the rule would leave brokerages the flexibility to decide a customer may place a higher priority on quick execution than the chance for a better price.

The SEC’s proposal is the least aggressive of half a dozen original drafts. The most sweeping of these--an idea to form one central market for all stock orders--provoked sharp disagreement among turf-jealous U.S. markets and major brokerages. Another draft would have restricted internalization and payment for order flow.

In addition to the new disclosures regarding how orders are handled, the SEC proposed that specialists on stock exchanges, along with competing all-electronic stock trading networks, would have to issue monthly data on speed of execution and other measures for each stock traded.

In voting to approve the major option markets’ plan for linkage, the SEC said the plan will allow dealers to quickly get access to the best quotes on any exchange. The commission, though, didn’t order all five U.S. options markets to participate, as some critics hoped.

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To comment on the SEC’s proposals, investors can e-mail the agency at rule-comments@sec.gov.