Dear CIO...

Steve Silberstein is a managing director and the CIO of Lehman Brothers' Global Equities Division.

Question: How will Reg NMS impact broker-dealers?

The SEC's proposed Regulation NMS includes fundamental changes to the U.S. equities market model and significantly modifies the original NMS (National Market System) rules. Formulated before the huge expansion in the trading of Nasdaq-listed securities and the proliferation of ECNs, the existing NMS framework is out of date with the increasingly electronic marketplaces of today. While many of the changes proposed by Reg NMS impact the exchanges and ECNs, broker-dealers are also impacted by these changes, and our systems will have to reflect the new market model.

Adoption of Reg NMS will hasten increased electronic trading, and, as we have seen in the past, when compared to manual trading, electronic trading results in dramatic transaction-volume increases and average trade-size reductions. On a small scale, this was first seen many years ago when the New York Stock Exchange introduced the original DOT electronic routing facility. And today, given the market capitalization of the NYSE-listed stocks, we may see a jump in transaction volume like we've never before experienced.

While Reg NMS hopes to more tightly link the various marketplaces, the broker-dealer will still have to search for the best execution for customers. Very intelligent and adaptive routing will have to seek out liquidity for our clients, reacting in milliseconds to quotes that are changing hundreds of times per second.

Proposals in regard to factoring in cost of executions, handling of block orders and the determination of what price difference constitutes a trade-through are complex and challenging, with many subtleties. If Reg NMS is adopted close to its current form, determining the "best" way to execute our customers' orders will require levels of intelligence in our execution systems that go well beyond what we have today.