FOR IMMEDIATE RELEASE 98-39 SEC TO CONSIDER ONE ITEM AT AN OPEN MEETING Washington, D.C., April 15, 1998 -- The Securities and Exchange Commission will consider one item at an open meeting conducted under the Government in the Sunshine Act on April 16, at 10:15 a.m. The meeting will be held in Room 1C30, at the Commission's headquarters building, 450 Fifth Street, N.W., Washington, D.C. The item for discussion is * consideration of a proposal regarding the regulation of alternative trading systems under the Securities Exchange Act. In addition, the Commission will consider proposed Rule 19b-5 and amendments to Rule 19b-4, under the Securities Exchange Act, that address the rule filing requirements for self- regulatory organizations. # # # Any member of the public who requires auxiliary aids such as a sign language interpreter or material on tape to attend a public meeting should contact Rochelle Franks, Office of Administrative and Personnel Management, to make arrangements. Ms. Franks can be reached at TTY number (202) 942-9558. If you are calling from a non-TTY number, please call the Relay Service at 1-800-877-8339. 1Summary of Releases Proposing Changes to the Regulation of Alternative Trading Systems and Relief from the SRO Rulefiling Requirements The Commission will vote today on whether to publish a release soliciting comment on a proposed new regulatory framework for alternative trading systems. This new framework would allow alternative trading systems to choose to register as exchanges or register as broker-dealers and comply with additional requirements specifically designed to address their unique role in the market. In addition, this release solicits comment on a proposed new rule, which would permit exchanges and the NASD to develop and operate pilot trading systems for up to 2 years before seeking Commission approval. The Commission will also vote on whether to publish a companion proposing release soliciting comment on amendments to Rule 19b-4, which would permit registered securities exchanges and the NASD to list and trade new derivative securities products without Commission approval. Reason for the Proposing Releases The releases seek public opinion on proposals to modernize the Commission's regulatory framework in light of the important role of technology in today's securities markets. The following developments prompted the Commission's proposals. The low cost of technology has enabled broker-dealers to establish markets that compete directly with the more traditional exchanges. As reported in the Commission's May 1997 concept release, volume on these markets -- or what today's release refers to as alternative trading systems -- has significantly increased in recent years, creating certain regulatory gaps. These systems now account for about 20% of transactions in Nasdaq securities and 4% of transactions in listed securities. In general, these gaps do not raise substantial concerns when an alternative trading system has limited trading volume. However, when an alternative trading system has significant volume, the existing regulatory approach does not provide investors with access to the best prices, fails to provide a complete audit trail or adequately surveil trading on alternative trading systems, and creates the potential for market disruption due to system outages. Some of the existing regulatory requirements for the registered exchanges and the NASD hinder their ability to effectively compete with alternative trading systems. In particular, registered exchanges and the NASD must solicit public comment on, and obtain Commission approval of, all changes to their rules. In some cases, this requirement can impede their ability to compete and is not always necessary to the Commission's ability to ensure the protection of investors. How the Commission is Proposing to Respond The two releases being considered by the Commission today would address these concerns by: (1) Proposing a new regulatory framework for alternative trading systems that would better integrate these systems into the national market and improve investor protection. This new regulatory framework would continue to provide alternative trading systems with the flexibility necessary to innovate by allowing them to choose between registering as an exchange and registering as a broker-dealer. (2) Proposing to allow the registered exchanges and the NASD to: (i) defer seeking Commission approval of low volume pilot trading systems for two years; and (ii) trade new derivative securities products without Commission approval. Proposed New Regulatory Framework for Alternative Trading Systems In the Commission's concept release on the regulation of markets published in May 1997,1 the Commission requested comment on two alternate ways to address its concerns about the regulation of alternative trading systems: (1) increased oversight of alternative trading systems through enhanced broker-dealer regulation; or (2) incorporation of these systems into modified exchange regulation. After reviewing the comment letters, the Commission is proposing a framework that would combine these two approaches by allowing alternative trading systems to choose to be a market participant and register as a broker-dealer, or to be a separate market and register as an exchange. This combined approach would allow a trading system to choose the role it wishes to play as a business. Choosing to Register as a Broker-Dealer Most alternative trading systems that choose to register as broker-dealers would have requirements similar to what they currently undertake. As registered broker-dealers, these alternative trading systems would continue to be covered by the oversight of one of the self-regulatory organizations. Provided an alternative trading system has only limited volume, it would only have to file a notice with the Commission describing the way it operates, maintain an audit trail, and file quarterly reports. The Commission is also proposing that alternative trading systems with substantial trading volume -- and therefore a potentially significant impact on the market -- comply with the following additional requirements. High volume alternative trading systems registered as broker-dealers would link with a registered exchange or the NASD and publicly display all orders (including institutional orders), and allow members of the registered exchanges and the NASD to execute against those orders. Only those orders that participants in an alternative trading system choose to display to more than one other participant would have to be publicly displayed. A high volume trading system would also have to ensure that its automated systems meet certain capacity, integrity, and security standards. This is intended to prevent the system outages -- and resulting disruption to the market -- experienced by some alternative trading systems during periods of heavy trading volume. The trading system would have to refrain from unfairly denying investors access to its system. This requirement would only prohibit unfair discrimination among investors and broker-dealers seeking access. The system would be free to establish fair and objective criteria, such as creditworthiness, to differentiate among potential participants. Choosing to Register as an Exchange The Commission is also proposing to revise its regulation of exchanges to accommodate for-profit alternative trading systems that choose to register as an exchange, instead of as a broker-dealer. Like all currently registered exchanges, an alternative trading system that chooses to register as an exchange would have to be able to enforce its participants' compliance with the securities laws. The Commission, however, is proposing to allow for-profit trading systems that choose to register as exchanges some flexibility in satisfying the "fair representation" requirement. Relief for the Registered Exchanges and the NASD Unlike alternative trading systems, registered exchanges and the NASD are required to submit all of their rule changes for Commission review. This requirement can impede their ability to compete effectively by slowing the development of innovative trading systems and the introduction of new products. Today, the Commission is soliciting comment on two proposals that would respond to this concern. First, the Commission is proposing to temporarily exempt registered exchanges and the NASD from the rule filing requirements so that they may operate -- for up to two years -- pilot trading systems. During this trial two year period, the pilot trading system would be subject to strict volume limitations. The operator of the pilot trading system would also have to ensure that the trading activity on that system is being adequately surveilled. This proposal would enhance the registered exchanges' and the NASD's ability to compete with alternative trading systems registered as broker-dealers and to bring innovative trading systems to market. Second, the Commission is soliciting comment on a proposal that would create a streamlined procedure for the registered securities exchanges and the NASD to quickly begin trading new derivative securities products. Under the Commission's proposal, if a registered exchange or the NASD has existing trading rules, surveillance procedures, and listing standards that apply to the broad product class covering a new derivative securities product, the new product could be listed or traded without Commission approval. _______________________________ 1 1 Securities Exchange Act Release No. 38672 (May 23, 1997). This release is available at the Commission's web site (http://www.sec.gov).