Competitive forces are slowly pushing a reluctant Wall Street to accept the equity markets of the future. In December, the New York Stock Exchange agreed to eliminate Rule 390, which prevented NYSE member firms from trading anywhere but on the Big Board. Meanwhile, the US Securities and Exchange Commission has proposed to widen the access of non-NYSE dealers to NYSE stocks and to allow non-NYSE exchanges to get in on NYSE initial public offerings. So far, so good, but these pro-competitive changes don’t go nearly far enough.

Many practices still work against the interests of small institutions and retail investors, and few of them understand this. If the playing field is to be truly level, everything associated with the closed, broker-oriented environment of the past should be swept away; the exchanges should go public; and all investors should have access to the data they need to get the best possible deal whenever they trade. Those who claim that full competition will fragment the market into many inefficient little exchanges fail to recognize that any number of them can now be tied together with technology to assure maximum liquidity.

The industry can take four fundamental measures that would not only establish the competitiveness the SEC wants—and more—but also solve the problem of fragmented markets.

1. Sweep away all barriers to competition

Allowing NYSE members to trade on electronic networks by abolishing Rule 390 is a significant step, but other industry practices must go as well. Few retail investors know that buy or sell orders placed with an on-line broker, for example, may go to a broker-dealer who is paying the on-line broker to send them in its direction, not to the place where they will be executed most effectively.

A parallel phenomenon in institutional investing is the practice of "soft-dollar" commissions, in which the big broker-dealers charge flat-rate commissions on institutional trades. Broker-dealers make this practice palatable to larger clients by giving them free research and other services—benefits that the many smaller institutions don’t receive despite paying the same flat rate. Finally, the new electronic communications networks that have grown up in response to demand for cheaper execution should stop charging access fees, which effectively prevent the best price from being transparent to all investors.

2. Take the exchanges public

Today, the securities exchanges remain largely closed organizations that often try to protect the interests of their members by resisting changes that would benefit the investing public. If the exchanges were for-profit institutions instead of mutual structures, they would move aggressively to serve their clients—that is, institutional investors.

What would this mean? The exchanges might adopt new electronic-trading technologies more rapidly. They would be more willing to optimize the trading environment for investors rather than broker-dealers. (Today, for instance, NASDAQ, responding to the interests of the latter rather than the former, doesn’t give its stocks a single opening price based on beginning-of-day demand.) And the exchanges might try, on a commercial basis, to maximize the flow of information to everybody instead of simply to their members.

The interests of market makers and other intermediaries should be considered. But the interests of investors must come first.

3. Use technology to tie all the markets together

Those who would keep things as they are contend that full competition will mean fragmented markets and bad deals for investors. It is certainly true that little pools of liquidity in lots of mini-exchanges lead to bad pricing. But technology can tie them all together, much as you can now search the Internet for the best price on a car anywhere in the country instead of having to check each dealership one by one.

Right now, the only technology for this purpose is the Intermarket Trading System, which communicates the best prices on each exchange to all of the others. What we really need is a deep, virtual, central limit-order book—a much richer information pipeline that, for any given security, would display not merely the best price but the whole range of prices, everywhere in the market, for blocks of different sizes. Such a limit-order book would also ensure that trades were executed in strict order of priority based both on price and on the times when the orders were put into the system, not on relationships between brokers.

4. Make the entire market transparent to all investors

Retail investors who are willing to have their trades placed at any time over the course of a day can get better prices than they would get for trades executed immediately. Under the current system, investors have no way of knowing this, no way of knowing how good different on-line brokers are at executing trades, and, probably, no way of defining what "best execution" actually means. Brokers should be obliged to report to their investors on how well each trade was executed. With this form of pressure in place, the market will naturally develop "smart" order-routing systems that optimize each trade.

Right now, many of these ideas are resisted by people who perceive a benefit from the current arrangement or fear that such changes would doom the market makers. In reality, though there will certainly be winners and losers as the market evolves, market makers will always play an important role in less liquid and more complex transactions, such as block trades of more than 50,000 shares—that is, the most profitable transactions. More generally, any player willing to embrace the possibilities of the new technology is likely to benefit from it. In any case, this way forward will create a market responsive to the needs of all investors, and that is the kind of market we deserve.