FOR IMMEDIATE RELEASE                                    2000-59

     SEC Study Reveals Problems In Display Of Limit Orders;
    SRO Oversight And Disciplinary Programs Need Improvement

     Washington, DC, May 4, 2000 - A Securities and Exchange
Commission staff report released today reveals problems in the
display of limit orders in the equities and options markets and
inadequacies in the markets' surveillance and disciplinary
programs for limit order display.
     
     The report, prepared by the SEC's Office of Compliance
Inspections and Examinations and the Office of Economic Analysis,
found that samples of limit orders received by some market makers
and specialists revealed Display Rule violations.  The violations
included failures to display proper order size, failures to
display orders within 30 seconds after receipt, and failures to
properly transfer the order display obligation to another
exchange system or member.  In addition, the report concludes
that the SRO's surveillance and enforcement for the proper
handling of limit orders needs improvement.
     
     Chairman Arthur Levitt said, "Limit orders have been a
powerful force for competition in our markets -- narrowing
spreads, increasing transparency, and supplying liquidity.  The
report's findings of neglect and inattention on the part of some
market participants to display requirements should be a wake-up
call.  Market participants must redouble their commitment to
ensure that the full power of limit orders is felt in our
markets.  Their effect on the price setting process simply cannot
be compromised."
     
     Chairman Levitt has asked SEC examiners to increase their
scrutiny of compliance with the Limit Order Display Rule and to
make appropriate referrals to the Division of Enforcement.
Additionally, he has asked the Commission's Office of Economic
Analysis to undertake a broad study of limit order display and
execution quality in the equities markets.

Limit Orders -- Building Blocks Of Transparency and Stimulants Of
Price Competition

     In recent years, limit orders have become a powerful tool to
enhance the role of investors in setting prices.  Numerous
economic studies confirm the benefits of limit orders.  Key
research findings indicate that:
     
    Limit orders constitute two-thirds of all orders on Nasdaq,
  and two-thirds of all system orders on the NYSE;
    Limit orders constitute three-quarters of all automated
  orders on two options markets;
    Most quotes on the NYSE are set by limit orders;
    Spreads appear to be narrowest when set by limit orders;
    Limit orders supply additional liquidity to the market; and
    Spreads in Nasdaq stocks have narrowed by 30 percent
  following implementation of the Order Handling Rules.  More than
  half of the decrease in spreads was due to the Display Rule.

Study Findings -- Limit Order Display Weaknesses

    Significant violation rates were observed with respect to
  certain manually-handled limit orders.  For example:

O    Samples of limit orders received by three larger-sized OTC
  market makers revealed evidence that significant limit order
  volume was manually handled, resulting in Display Rule violation
  rates of 92%, 58%, and 46% of the samples reviewed.  Samples of
  eligible limit orders received by a fourth larger-sized market
  maker revealed an apparent Display Rule violation rate of 26.5%
  of the samples reviewed.  The violations included failures to
  display proper order size, failures to display orders within 30
  seconds after receipt, and failures to properly transfer the
  order display obligation to another exchange system or member.

O    One large OTC market maker's traders turned off the firm's
  automated display system for an entire day, which resulted in the
  manual handling of over 1,000 customer limit orders.  One trader
  on that day failed to display properly 83% of the eligible
  customer limit orders that he manually handled.  The violations
  included failures to display proper order size, and failures to
  display orders within 30 seconds after receipt.

O    An examination of another OTC market maker revealed that a
  firm employee turned off the automated display feature for the
  firm's entire OTC trading desk for a period of several months
  without detection by the firm.  A sample of eligible limit orders
  received during this period revealed an apparent Display Rule
  violation rate of 46%.  The violations included possible failures
  to display proper order size and failures to display orders
  within 30 seconds after receipt.

O    An earlier examination of the same market maker revealed
  that, prior to the time the firm implemented an automated display
  system, the firm failed to display properly 78% of a sample of
  eligible customer limit orders.  Subsequently, the firm
  implemented a display system, which, although automated, provided
  traders with extensive opportunities for manual intervention.
  Thereafter, an examination revealed an apparent Display Rule
  violation rate of 22%.  The violations consisted of failures to
  display orders within 30 seconds after receipt.

O    On one exchange, a sample of 400 manually handled customer
  limit orders eligible for display revealed that approximately one
  in six were not executed or displayed by exchange specialists
  appropriately, in violation of the Display Rule.  The violations
  included failures to display proper order size, failures to
  display orders within 30 seconds after receipt, and failures to
  transfer properly the order display obligation to another
  exchange system or member.

     These and other findings described in this report indicate
that specialists and OTC market makers need to take steps to
improve their compliance with display rules and should increase
supervisory efforts to ensure compliance.
     
    While automated display systems that are programmed properly
  typically result in a near 100% eligible limit order display
  rate, some systems are not programmed to comply fully with the
  Display Rule requirements.  Data reviewed by the Staff of samples
  of eligible limit orders received by two of the larger and more
  fully automated OTC market makers revealed programming
  deficiencies and apparent Display Rule violations of 19% and 11%
  of the samples reviewed.  The violations included failures to
  display proper order size and failures to display orders within
  30 seconds after receipt.

    Most market makers reviewed were unable to provide basic
  data on the display of customer limit orders critical to an
  effective supervisory and compliance program.  Most SROs were
  also unable to provide complete, accurate data on the display of
  customer limit orders by their members.  For example, in many
  instances, firms and SROs could not identify whether limit orders
  were eligible for display, or whether they subsequently became
  eligible for display.  Many firms and SROs were also unable to
  identify limit orders that were unexecuted or re-routed to
  another market.  The lack of complete, accurate data, as well as
  synchronized clocks and audit trails, impedes surveillance and
  makes determining overall compliance rates impossible.

SRO Surveillance For The Display Of Limit Orders
  
    Some SROs conduct no limit order display surveillance.
  Complaints serve as their only sources to identify customer
  orders that are not displayed.

    Some SROs do not conduct any automated surveillance for
  compliance with the Display Rule or SRO rules or policies
  requiring the display of limit orders.  Other SROs conduct random
  surveillance that, while partially automated, remains manually
  intensive and inadequate to detect all limit order display
  violations.  Some SROs surveil only for egregious patterns of
  violations.  This surveillance often covers only a small sample
  of potential violations and is extremely manually-intensive.  For
  example, one exchange, during a seven-day period, sampled only
  129 of 28,408 (0.45%) manually-excluded customer limit orders.
  These manual reviews often take many hours and involve the
  compilation and analysis of data from various sources.

    Several SROs that allowed their specialists and traders to
  override routinely their automated display systems lacked any
  surveillance review to determine whether these overrides were
  appropriate.

    Some SROs were slow in building surveillance systems or
  suspended surveillance for the proper display of limit orders due
  to technology development.  One SRO completely suspended
  surveillance for six months, and another SRO severely limited its
  surveillance for six months.

    Most SROs that did conduct automated surveillance failed to
  surveil for the immediate display of eligible customer limit
  orders.  Instead, they allowed specialists and traders to
  routinely display eligible customer limit orders at the 30th
  second after receipt without flagging such trading for review.

Disciplining Members For Violations of Display Rules

    Sanctioning guidelines for violations of limit order display
  rules vary greatly and some SROs impose fines that may not be
  adequate to deter violations.  For example, while one SRO may
  impose a $1,000 fine for a single violation, another may send a
  cautionary letter.

    In some cases, the disciplinary process for straightforward
  Display Rule violations is not conducted in a timely manner.  One
  SRO often imposed sanctions up to 18 months after the occurrence
  of the violative conduct.

Limit Order Display Rules In The Options Markets
  
    The options exchanges currently do not have specific rules
  requiring immediate limit order display.  Options markets are
  taking steps to adopt rules and enhance surveillance.  In
  addition, the options markets currently lack the capacity to
  publicly display the sizes of their quotes.

                             *  *  *

                     Limit Order Fact Sheet
     
What Is A Limit Order:  Investors use two principal types of
orders to buy securities: market orders and limit orders.  When
an investor uses a market order, a broker executes the order at
the best available price in the market.  In contrast, limit
orders permit investors to compete for better prices than the
market is offering by seeking to buy a security at a specified or
better price.

Adoption of Limit Order Display Rule:  Recognizing the importance
of limit order display, the Commission adopted the Display Rule
for equity markets in 1996.  The rule requires that, immediately
upon receipt, specialists and over-the-counter ("OTC") market
makers either display in their quotes qualified customer limit
orders that improve the price or add to the size of their quotes,
or execute or re-route those orders to other market centers.
Specialists and OTC market makers must comply with the rule, and
self-regulatory organizations ("SROs") conduct surveillance to
ensure that their members are complying with the rule, and
discipline members who fail to comply with the rule.  While there
is currently no comparable rule under the federal securities laws
that applies to options trading, each of the operating options
exchanges has a rule or policy requiring members to display
customer limit orders to some extent.
     
Inspection Review:  Following the adoption of the Display Rule,
the SEC inspected the SRO surveillance and disciplinary programs
in the equities markets to evaluate their effectiveness.  Those
inspections revealed serious deficiencies.  The SEC also
conducted follow-up reviews during March and April 2000.  In
addition, the Staff reviewed the quality of limit order display
by several large OTC market makers and in the options markets.

     Overall, the Staff found that, while significant
improvements have been made in some markets since the Staff's
initial inspections, there are still problems that must be
addressed.  Improvements have resulted from automation of the
markets' order routing and surveillance programs.  This
automation has allowed more of the markets to automate the
immediate display of eligible customer limit orders, which
provides less opportunity for specialists and market makers to
manually delay the display of eligible limit orders.  The Staff
concluded, however, that many exchange specialists and OTC market
makers should take steps to improve the prompt display of
customer limit orders, and that many SROs can take steps to
ensure better compliance with limit order display requirements.

Importance Of Limit Orders:  Limit orders serve a critical market
function by increasing the information available to the overall
market and by allowing all market participants to better
determine prices.  Further, limit orders have begun to level the
playing field between dealers and the investing public by
promoting the ability of investors to trade without the
intervention of dealers.

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