SEC Speech: Market Information - Searching for Consensus (P. Carey)
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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement on NASD’s Proposed SuperMontage and Streamlining the SEC Review Process for SRO Filings

by Chairman Arthur Levitt

U.S. Securities & Exchange Commission

SEC Open Meeting
Washington, D.C.

January 10, 2001

Good afternoon. The Commission meets today to consider approving the NASD's proposed SuperMontage, and proposing a rule to streamline the process by which the SEC reviews filings of self-regulatory organizations.

In my tenure, there has been no more time-consuming, controversial or divisive proposed rule-change than the SuperMontage. The policy issues are embedded deep in complex details, demanding that we examine closely difficult issues such as ECN access fees, order execution algorithms, and securities information processors. The proposal has drawn intense criticism from many whose opinion I greatly respect. And, after more than a year of debate, it has produced nine amendments to the original proposal.

The comment process, while difficult for all involved, has been highly productive. Advocates of the proposal have stressed the benefits for the Nasdaq market. Critics of the proposal – both those whose commercial interests would be affected and those whose would not – worked hard to expose and explain what they believe to be its flaws. The depth of their conviction is both obvious and admirable. Indeed, the evolution of markets that serve the public demands that seasoned market participants devote energy and attention – scarce commodities in these fiercely competitive times – to complex proposals such as this one. I want to applaud all those involved in this process.

I would also like to acknowledge the constructive role played by members of our oversight committees and, in particular, Senators Gramm, Dodd and Schumer and their staffs. To be sure, this proposal raised critical structural and policy issues that have been greatly clarified by the ongoing dialogue with Congress.

In my view, the SuperMontage is Nasdaq's effort to develop a more modern trading infrastructure in response to specific and concrete demands by its members. It constitutes the centerpiece of its strategy for competing with both domestic and global markets, and offers two principal benefits. First, the possibility of greater transparency of buying and selling interest below the top of the book – a critical element in a world of penny trading. Second, greater immediacy of order execution.

The core criticisms of the proposal, on the other hand, are directed at three related areas. The first is the matching logic of the SuperMontage's auto-execution mechanism. On this point, I believe the NASD has adequately addressed commenters' concerns by providing users of the SuperMontage a choice of whether or not they wish to take into account ECN access fees when orders are prioritized.

Second is the conflicts arising from the relationship between Nasdaq and the NASD – its regulator. I am satisfied that these conflicts can be restrained. Moreover, the structural changes the NASD and Nasdaq have and are implementing will effectively reduce any incentive of the NASD, as regulator, to favor Nasdaq as a market. The tensions that remain are, by and large, inherent in self regulation and simply underscore the need for continued vigilance on the Commission's part. They do not, however, call for a disapproval.

And third is concerns over the SuperMontage's impact on competition between Nasdaq and alternative markets. To me, this is the most serious of the concerns expressed. It would be an easier matter if we were at a different stage in our market's evolution, with the issues of demutualization and market data dissemination behind us. But, the fact is, we must act on proposals as we receive them. In short, I am comfortable that the NASD's commitment to maintain a facility through which alternative markets can comply with their legal obligation to display quotes ensures that market forces – not regulatory power – will determine the success of the SuperMontage and its competitors.

The SuperMontage does not meet every challenge faced by the Nasdaq market. It may do relatively little, for instance, to promote interaction. There are features, no doubt, that the Commission would add to or remove from the SuperMontage if we were in the business of designing markets -- but we are not. While there are structural reforms we might prefer before approving the proposal, the process of formulating and implementing such reforms would, in all likelihood, be difficult, disruptive and prolonged. As such, we should not force one of our leading markets to put its domestic and global competitive strategy on ice unless it is clear that the interests of investors would be otherwise jeopardized.

The question for us is simply "Is the SuperMontage an improvement in the Nasdaq market, and does it permit a fair interplay between Nasdaq and its competitors? By that standard, I believe it should be approved.

We also consider today a proposal – Rule 19b-6 – to streamline the filing process for self-regulatory organizations. The competitive landscape has shifted dramatically since the Commission first began reviewing filings over 25 years ago. But increasingly, SROs are facing competition from foreign markets and alternative trading systems, which as broker-dealers are not subject to the same procedures.

Currently, SROs must file rule changes with the Commission for notice, public comment, and approval, prior to implementation. But the revised rule would, among other things, require the Commission to publish a rule change within 10 business days, permit SROs to file proposed rules electronically, and allow most trading system changes to go into effect immediately. This leaner process will more fully accommodate changes in the marketplace and address the SROs need for greater certainty and flexibility.

I want to thank the Division of Market Regulation and the Office of the General Counsel for their ongoing and tireless efforts working on what are indeed complicated and complex issues. Your keen intellect, understanding of the broader landscape, and steadfast dedication deserve the highest praise, and continue to distinguish your staffs as the very finest.