By Peter Silvern, JD, Writer/Analyst, Federal Securities Law Reports, Mutual Funds Guide, Investment Adviser Newsletter

The board of directors for the New York Stock Exchange voted unanimously on December 2^nd to repeal Rule 390 which bars brokerage members from trading in certain stocks away from the Exchange floor. The change comes at a time when the Exchange is attempting to modernize itself to compete in an ever-expanding world of electronic trading practices.

The board's action was largely in response to a call from SEC Chairman Arthur Levitt to do away with the 200 hundred year old practice. Levitt, in a September speech before a gathering at Columbia Law School in New York, suggested the Rule "should not be part of our future." Rule 390 dates back to the Exchange's beginning in 1792 when brokers agreed to trade only with each other. The rule has evolved as a way to cut down on self-dealing activities and the selling of shares at higher than market prices. The Rule was amended over the years to allow trading outside the Exchange under certain circumstances. Preferred stocks currently exempt from the Rule include utilities such as Baltimore Gas & Electric and Detroit Edison.

The SEC must approve the change and will likely do so in light of Chairman Levitt's stated desire to see the prohibition done away with. While agreeing in general with the need to repeal the Rule, Richard Grasso, Chairman of the NYSE, asked the SEC to impose certain regulations governing trading practices and insure securities firms do not make trades away from the floor unless they can offer a better price.

One positive result of the Rule's demise may be faster and more efficient trading. It is also hoped trading will be less expensive. Electronic trading networks and nonmember brokers will be able to trade covered companies listed prior to April 26, 1979. Covered companies include GE, IBM and AT&T. Approximately 23% of the Exchange's members will be affected by the rule change.

Those who may be hurt the most by this change are the "specialists" to whom all buyers and sellers come to trade in a given stock. A Specialist handles the trading account for individual stocks and is therefore able to maintain an overview of the orders being placed and the trading patterns developing for a given security. Brokerage firms, especially those that have significant investments in the electronic communications networks, want to use the rule change to take away some of the profits now going to specialists.

"This is a continuation in a series of steps to redevelop the exchange's model for the new millennium," Exchange Chairman Richard Grasso said. "Investors deserve the best possible prices wherever they exist. If the best price is on an alternative system or on the NYSE, that's exactly where they should be executed."