Elimination of Rule 390 will allow member firms to effect transactions in any market, as agent or as principal, without first exposing their orders to the NYSE floor. Arguing that such a step will cause dealer markets in listed stocks to proliferate and draw order flow away from the Exchange, the brokerage industry is currently making frenzied preparation to build capital and increase captive order flow.
The real issue behind the elimination of Rule 390, however, is the economics of power and survival. The largest and most powerful member firms, while outwardly supporting retention of the rule, are pressing the Exchange to compromise on the issue of the floor brokerage fees of specialists. These firms are currently spending many millions of dollars annually for a function they believe could be automated or performed by a clerk. If Rule 390 is abolished prior to the elimination of specialists’ floor brokerage fees (and prior to the availability of a workable composite quotation system and intermarket linkage) these firms will no longer have any reason to automatically route orders to the floor for execution. Instead, they will proceed with plans to become dealers in listed stocks, crossing agency trades in house.
The specialists will probably give way on the floor brokerage issue in order to retain order flow in a post-Rule 390 environment. On the other hand, they are likely to push hard for abrogation of NYSE Rule 113, which prohibits them from accepting orders directly from non-member financial institutions, and Rule 104, which defines their “affirmative responsibilities” to maintain a “fair and orderly” market. If the SEC exerts forceful leadership in the creation of an effective composite quotation system, and in the establishment of an automated intermarket linkage system, it will be in a position to safely proceed with the removal of Rule 390.
The younger, more progressive leadership on the floor looks forward to the advantages of competitive market-making—given a viable flow of orders and inquiry. They will survive and prosper without Rule 390.