Sometimes you don't know just how complicated -- even bizarre -- a system is until you set out to describe it. At that point you may wonder whether it is time to make it a whole lot simpler.
That may be what has just happened to the effort by the Securities and Exchange Commission to force brokers to disclose more about the controversial practice known as payment for order flow.
More than a year ago, with some fanfare, the SEC proposed rules to force disclosure. But Friday, the commission quietly disclosed it was abandoning the rules.
The move is at least a temporary victory for the brokerage firms that pay for order flow. But whether or not it represents a backing away from change by Arthur Levitt Jr., the SEC chairman, remains to be seen.
The practice of paying for order flow determines just where a retail order is sent by a broker. It is common for many brokers to send orders to a favorite market maker, which executes the order and, if all goes well, makes a nice profit by selling stocks at the higher "asked" price and buying them at the lower "bid" price.
To get that business, many market makers will pay 1 or 2 cents a share to the broker. Some people think that is an outrage; others think it is a perfectly acceptable way to do business. And they add that in many cases the savings are passed on to customers through lower commissions.
The payments take place both in stocks that are listed on exchanges, but that can be traded away from the principal exchange, and on those that are traded in the Nasdaq market.
Currently, brokers have to disclose to their customers, in fine print that is seldom read, that they may sell order flow. The SEC proposal called for disclosing much more, although stopping short of saying whether a particular order was sold.
What may have undone the SEC's proposed rules was that they tried to take into account things similar to payment for order flow, such as firms that "internalize" order flow -- that is, direct it to themselves for execution. In that case, there is no need to pay a penny or two, but the incentives are just as real.
The issue of how well markets function is at the heart of the various investigations now going on regarding Nasdaq, and it appears the decision to drop the disclosure proposals on payment for order flow may be related to that.
Those investigations are being carried out by the SEC, the Justice Department and a commission headed by former Sen. Warren Rudman, R-N.H. That commission was appointed by Nasdaq, but with SEC encouragement.
It is at least possible that Mr. Levitt has in mind moving beyond disclosure of payment for order flow to initiatives that would either ban it or, by reforming the market, make such payments much less likely because they would not be economical. Commission officials would not comment on that Friday.