William Donaldson, chairman of the Securities and Exchange Commission, testified before a Senate committee amid concern about the potential impact of the market-shaping mergers on competition and investors.

As the NYSE plans to merge with all-electronic rival Archipelago Holdings Inc. and the Nasdaq finalizes its $934.5 million purchase of Instinet Group's electronic trading network, Donaldson said the mergers will combine with a sweeping new trading rule, narrowly approved by the SEC last month, to create a more competitive marketplace that should benefit investors.

"I believe the effect of the proposed consolidations, combined with the new trade-through rule, should be to increase market depth and liquidity and enhance order competition," Donaldson told the Senate Banking Committee. "Moreover, I do not agree, as some may fear, that the consolidations represent the death-knell for competition among markets."

The new trading rule requires brokers to accept the best quoted price for any transaction and may disadvantage smaller exchanges that cannot compete as effectively. But while noting that the proposed mergers would give the NYSE and Nasdaq an estimated 49 percent and 47 percent, respectively, of the market in stock trading, Donaldson said, "In spite of these large market shares, I believe that competition among markets should continue to thrive."

The chiefs of NYSE and Nasdaq and the heads of their electronic-market merger partners assured members of the committee Wednesday that the anticipated consolidation would give the American securities market an edge to compete globally and benefit U.S. investors. But the chairman of the Philadelphia Stock Exchange warned that smaller regional exchanges like his are "endangered entities" and that competitors are needed to force the NYSE and Nasdaq to keep trading costs low and the quality of executing trades high.

A key senator also expressed concern.

"These mergers will lead to the creation of two dominant market centers," Sen. Richard Shelby, R-Ala., chairman of the banking panel, said at Wednesday's hearing. Along with the new trading rule, he said, they "raise questions about industry consolidation and competition, the future direction of our (stock) markets and the ultimate impact on investors."

Donaldson previously has defended the trading rule before Republican critics in Congress - who have raised the possibility of a legislative challenge to the agency.

Within weeks of the rule's approval, the 213-year-old NYSE with its floor auction system of human traders - facing increased competition from Nasdaq and other electronic markets - announced a merger with Archipelago, a move that would turn the not-for-profit Big Board into a publicly traded company. Two days later, Nasdaq said it was buying Instinet's electronic trading network.

The mergers must be approved by the SEC and antitrust regulators at the Justice Department.

Under the trading rule, which takes effect in April 2006, brokers will be required to obtain the best possible price for customer orders even if it means going to another market and takes longer. Stock traders will no longer be able to ignore a better price in favor of sending an order to a preferred market, which might allow for faster execution.

Stock price quotes must be electronic and immediately available in order to qualify under the rule.

The NYSE, which has emerged from a scandal over its former chairman's compensation package and dealings of the specialist firms that operate on its trading floor, also plans to create a hybrid market, combining its auction system with an enhanced electronic system under development.

-- Marcy  Gordon