Westly Proposes Reforming NYSE ''Trade-Through'' Rule.

News Editors/Business Editors

SACRAMENTO, Calif.--(BUSINESS WIRE)--Jan. 30, 2004

The following is the text of a January 30th letter

sent by California State Controller Steve Westly

to SEC Chairman William Donaldson

Dear Mr. Donaldson:

As California's elected chief financial officer and a board member of the state's pension funds CalPERS and CalSTRS, I appreciate your ongoing efforts to reform the New York Stock Exchange. Still, as I discussed with interim Chairman John Reed, more action is needed, especially to revamp the NYSE's business model.

An important starting point is to reform the trade-through provisions of the Intermarket Trading System ("ITS"). The apparent success of the de minimus exemption for exchange-traded funds ("ETFs") indicates that change is not only possible, but also desirable. Accordingly, I urge you to expand the trial of the three-cent de minimus exemption to all listed stocks for at least a year and to make the exemption permanent if the trial is successful.

    Reforming the ITS trade-through provision is a sensible step:

    1. The trade-through provision is obsolete. As the SEC noted in
        establishing the exemption for ETFs, "these rules were
        designed... when the order routing and execution facilities of
        markets were much slower, intermarket competition less keen,
        and the minimum quote increment for exchange-listed securities
        was 1/8 of a dollar."(1) With changes due to decimalization
        and electronic technology, the trade-through rule may actually
        hinder market activity.

    2. Reforming trade-through will improve investor freedom. A de
        minimus exemption enables securities buyers and sellers to
        better choose how they prefer to execute a trade. The
        exemption allows them to consider factors that may be as
        important or even more important than the "best advertised
        price" proviso of the trade-through rule, including quality
        and speed of execution.

    3. The de minimus exemption preserves investor protections. As the
        SEC stated in establishing the current exemption for ETFs, a
        three-cent exemption "will, on balance, provide investors
        increased liquidity and increased choice of execution venues
        while limiting the possibility that investors will receive
        significantly inferior prices."(2) In an era of decimal
        pricing and an educated marketplace, even individual investors
        are unlikely to mind trading off a penny or two in exchange
        for a more competitive market and better execution.

    That the SEC chose to extend the initial exemption for ETFs
suggests that the trial reform of the trade-through rule has shown
success. Expanding the trial to all listed stock for a finite time
represents a low-risk path to broader reform of the NYSE. If such a
trial proves successful in fostering investor choice without
undermining protections, I would urge the SEC to make the de minimus
exemption permanent. The SEC should then explore options for further
adjusting the trade-through provisions to benefit all investors who do
business with the world's largest exchange.
    I plan to ask the boards and staff of CalPERS and CalSTRS to join
me in advocating expansion of the trial de minimus exemption to
include all listed stocks. I am happy to work with you and the
leadership of the NYSE to pursue this in the most appropriate way.

    Thank you for your attention to this matter.

    Sincerely,

    STEVE WESTLY
    California State Controller

    cc: John Reed, Interim Chairman, New York Stock Exchange John
        Thain, Chief Executive Officer, New York Stock Exchange

(1) "Securities Exchange Act of 1934, Release No. 46428," Securities and Exchange Commission, May 28, 2002.

(2) Ibid.