Philadelphia Stock Exchange, Inc.

June 17, 2003

Jonathan Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Request for Comment on Nasdaq Petition Relating to Regulation of Nasdaq-Listed Securities
Release No. 34-47849
File No: S7-11-03

Dear Mr. Katz:

On behalf of the Philadelphia Stock Exchange, Inc. ("Phlx" or "Exchange"), I am responding to the Securities and Exchange Commission's ("Commission") request for comment on the petition for rulemaking submitted by the Nasdaq Stock Market, Inc. ("Nasdaq") concerning the regulation of Nasdaq-listed securities. Specifically, the Exchange will address the concerns you raise regarding Nasdaq's request that the Commission amend the rules of all markets that trade Nasdaq-listed securities. In addition, we will comment on the proposal set forth in the Release to establish uniform trading rules across markets trading Nasdaq listed securities, and to ensure equal surveillance and enforcement of those rules.

As well, we will address the Nasdaq request to order that the exchanges trading Nasdaq securities to aggregate and deduct from the market data revenue collected pursuant to the Joint Self-Regulatory Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privilege Basis (the "Nasdaq UTP Plan"), the costs of regulation, including costs associated with proper data collection, surveillance, and enforcement.

Last, we will comment on the Nasdaq request to prohibit the launch or the continuation of trading in Nasdaq securities by any market that fails to protect investors as required under the Securities Exchange Act of 1934 ("Act"). The Phlx appreciates both the opportunity to comment on the Release, and to raise some of our own concerns regarding the possibility of a third-party regulator having responsibility for the regulation of trading of Nasdaq securities on all markets on which such securities trade, as we discuss below.

For purposes of clarity and organization, we have restated the questions from the Release below and responded to them with the PHLX comments.

Request for Comments on the Need for Uniform Trading Rules and Surveillance:

Q1. Do commenters agree with Nasdaq that there is unequal regulation of trading in Nasdaq securities?

We are not aware of specific instances of "unequal regulation" in the trading of Nasdaq securities and we therefore cannot speak to the question of whether there is a uniformly high standard of regulation among the markets that currently trade Nasdaq securities. However, as described more fully below, PHLX believes that the premise of this question is flawed and that the use of the term "unequal regulation" is, in and of itself, somewhat obfuscatory.

Although PHLX is a member of the UTP Plan, PHLX does not currently trade Nasdaq securities. However, the Exchange has submitted a proposed rule change under Rule 19b-4 to institute such trading under the Plan and hopes to do so in the near future, following approval of such proposed rule change.1

Concerning this proposed rule change; PHLX submitted to the Office of Compliance, Inspections, and Examinations ("OCIE") a comprehensive plan of surveillance in respect to trading of Nasdaq securities in its market. This plan covers, among other things, Best Execution, Tape Painting, Unbundling, Trade Cancellation, Wash Trading, Interpositioning, Trading Ahead, Frontrunning, Unusual Post-Trade Activity, Marking the Close, and Insider Trading. PHLX believes that, in light of the specific methods of trading on the Phlx that are contemplated by Phlx's proposed trading rules and trading facilities, this plan is adequate to ensure that it meets the standard set forth in Sections 6(b)(1) and 19(g)(1) of the Act (discussed below), which PHLX believes are the pertinent legal requirements.

The Exchange recognizes that for exchanges and national securities associations trading the same securities because of multiple listings and unlisted trading privileges, there is a degree of coordination required. This ensures that the overall marketplace for these securities is "fair and orderly" and that the markets meet the other objectives set forth in Section 11A(a) of the Act2. The exchanges effect this coordination through (among other things):

    (a) The Nasdaq UTP Plan;

    (b) The participation of markets trading Nasdaq securities as Members of the Intermarket Surveillance Group ("ISG") (whose function is described in somewhat greater detail below);

    (c) The allocation of certain regulatory responsibilities among SROs pursuant to Rule 17d-2 under the Act;

    (d) Review by the Division of Market Regulation of all proposed rule changes of all of these markets filed pursuant to Section 19(b) and Rule 19b-4; and

    (e) Oversight of all of these markets by OCIE.

The Phlx believes that this overall scheme works reasonably well in the context of the "listed" equities and options markets. On a daily basis, SROs, both with each other and with the SEC, cooperate in investigations, share regulatory information, refer cases, and where appropriate bring joint regulatory proceedings. We see no reason why this process should not be adequate in the context of the market for Nasdaq securities.

The Phlx is prepared to coordinate (subject to the SEC's regulatory oversight) with other regional markets that trade Nasdaq securities in order to ensure that there is a uniformly high standard of regulatory oversight in the market for these securities and look forward to doing so, when we receive approval to trade Nasdaq securities.

The term "unequal regulation" is a vague and ambiguous expression which is not relevant to the applicable statutory standards. We believe that Nasdaq uses the term "unequal regulation" as a rhetorical device to imply that the other markets trading or that may trade Nasdaq securities are not up to the task. Further, Nasdaq implies that competing exchanges market themselves to broker-dealers trading and routing orders in respect to Nasdaq stocks because of lax regulatory standards. Perhaps the Commission should consider the possibility that Nasdaq may have economic, business and competitive motives, other than a desire to set the highest regulatory standard, in suggesting that "unequal regulation" exists.

The Phlx believes that the Commission should apply the following principles to its analysis of, and regulatory approach towards, SRO regulation of the Nasdaq market (and other markets):

    (a) Markets should not (and should not be permitted to) compete based on relaxed or incomplete surveillance, examinations, or enforcement. Each market must meet the uniform standard set forth in Sections 6(b)(1) and 19(g)(1) of the Act.3

    (b) Although it is appropriate that markets cooperate and coordinate (and for the SEC to require such coordination) in order to achieve the objectives set forth in Section 11A(a) of the Act (cited in footnote 1 above), different markets have different systems and provide for different trading modalities, and have different techniques and modes of operation. For example, one market may have thousands of market makers operating at physically separated remote locations, connected by various private or market-sponsored systems. Others may have a small number of members trading at a single physical location on a trading floor. Naturally, each market will have surveillance and regulatory processes that differ from the others in light of how trading occurs on each market. The Exchange does not envision how it could be otherwise.

    (c) Different markets will naturally (and should) have different trading rules, reflecting the different modalities of trading on those markets. Nothing in the Exchange Act requires uniformity of trading rules. Indeed, this is a legitimate and appropriate basis for competition among markets (so long as the trading rules and exchange systems are subject to fair and uniform standards of review by the SEC). One of the basic tenets (and mandates) of the Exchange Act is to promote "fair competition among ... markets" See Section 11A(a)(1)(C)(i) of the Act. If the SEC were to require extensive uniformity of trading rules among markets, it would inevitably stifle competition among markets, to the detriment of investors and in contravention of the Act. Moreover, it would stifle innovation that allows markets to offer varying trading methods (e.g., auction versus dealer markets, Primex, eVWAP, Block-trading, etc.) that allow investors and their agents to achieve the trading results that they seek (e.g., price improvement through negotiation, versus speed of execution, etc.)4

    (d) If the Commission believes there are gaps in regulation that exist as a result of fragmentation of trading, then it should focus on those specific problems rather than forcing all markets mindlessly into a common regulatory and market structure. Forcing uniformity would inevitably serve to entrench dominant players and make competition extremely difficult.

Q2. Should all exchanges and associations trading Nasdaq securities have rules requiring detailed audit trail information?

The Exchange believes that a detailed order audit trail is an integral tool that assists in the identification of suspicious trading patterns, and supplements the pursuit of investigations. As such, the Exchange welcomes the opportunity to work with the Nasdaq, in conjunction with the ISG, to modify, develop, or otherwise enhance existing techniques that serve to meet the joint surveillance goals and objectives of all SROs.

The Exchange notes that the establishment of any consolidated audit trail requirement and related intra and inter-market systems is a major undertaking (depending upon the manner of implementation) both for markets and for member firms. Therefore, markets should take great care in developing such systems and to design them with a view towards capturing data that truly would be useful in self-regulation and SEC oversight without placing unnecessary burdens on the resources of firms and markets. As such, it is important for markets to focus intensely in developing the goals and functionality of such a system. The Exchange would be pleased to work with other SROs and the SEC (preferably through the ISG) to evaluate whether there are significant gaps in currently available information for Nasdaq listed securities that an audit trail system would address.

Q3. Should all exchanges and associations trading Nasdaq securities be required to automate their surveillance and examination of Nasdaq trading on their markets?

The Exchange believes that all SROs should, and do, consider the advantages associated with the automation of their surveillance and examination techniques relative to the amount of activity they experience, or reasonably anticipate in Nasdaq securities, other listed securities, and associated derivative instruments. Automation enhances the capability of a market to process information efficiently and effectively when the volume of trades and associated information exceeds the capabilities of manual processing in meeting its regulatory obligations. SROs can, and do, deploy the necessary levels of technology to attain, and maintain mandated standards of regulation. However, SROs should have the flexibility to utilize different levels of automation, manpower, and the combination of both, as long as they achieve the statutory objectives described above. Naturally, OCIE has, to date, conducted frequent inspections of SROs to ensure that this standard is satisfied. When a market falls short of this standard, OCIE has been very instrumental in suggesting or requiring specific upgrades in the use of automation to address deficiencies.

Q4. Should all exchanges and associations trading Nasdaq securities have similar rules to regulate short selling?

Whether and how short selling should be regulated respecting Nasdaq securities is a complex policy issue, not limited to the trading of Nasdaq securities. Indeed, the Commission's 1999 Concept Release on its short sale rule solicited comment on a number of approaches, including eliminating short sale restrictions altogether. It also recognized that there are diverse views about the efficacy of the short sale rule. Accordingly, whether the Nasdaq's short bid test is the right approach bears further study and should not necessarily be extended to the trading of Nasdaq securities on all venues simply to impose similar rules. Since the law does not mandate short sale rules in the Nasdaq market, we do not recommend that they be required by SEC rulemaking or otherwise.

Q5. What other trading rules should be uniform across all markets?

In some instances, uniformity of rules can serve a legitimate regulatory purpose in furtherance of the policy objectives or mandates of the Exchange Act. For example, we support uniformity in the trade-through rules implemented pursuant to the Intermarket Trading Systems ("ITS") Plan and the Options Linkage Plan. Absent such uniformity, individual markets could subvert or defeat the entire basis of the plans for competitive purposes. That, in turn, would undercut the SEC's ability to implement the mandate set forth in Section 11A(1)(D) of the Act.

However, the SEC should be extremely reluctant to require uniform trading rules absent an important statutory mandate or regulatory objective so as not to undermine competition. Indeed, the Commission MUST consider the competitive implications when it engages in rulemaking itself or when considering proposed rules of SROs pursuant to Section 3(f) of the Act.

Consequently, the Exchange supports any discussion(s) on rules, policies, or procedures that may result in a better regulatory infrastructure across all markets, and in general supports standardization when it serves an important regulatory purpose but does not serve to unfairly or unnecessarily affect competition.

The Exchange believes that such discussion is more appropriate within the context of the ISG, as a comparison of the rules of all exchanges and associations is not possible within the constraints of the response period for the Release. The Exchange is aware that the ISG is addressing this issue currently, is in the process of soliciting comments on this issue from its constituent exchanges, and will slate it as an agenda item for future meetings.

Q6. How should the Commission address any regulatory gaps that can arise when trading in the same security is fragmented across different SROs?

The Exchange believes that the Commission (acting through OCIE) has been effective, both in the equity and derivatives markets, in evaluating the policies, practices, and procedures of the exchanges, including offering constructive criticism in regulatory areas deemed necessary to implement or improve regulatory environment. Since OCIE has the opportunity to review the regulatory practices of all exchanges and only they are in the best position to evaluate regulatory programs across all markets to ensure parity in regulatory practices. Thus, they enhance the regulatory infrastructure of all exchanges as they evaluate individual regulatory practices. The Exchange believes the Commission already has in place the process to identify and address regulatory anomalies in an increasingly fragmented market structure, and believes that the use of OCIE is the effective way to continue to address the issue of regulatory gaps across markets.

Q7. To what extent is ISG a useful mechanism for coordinating intermarket regulatory efforts? Does ISG fully address the regulatory gaps Nasdaq contends exist? Does the fact that the Commission does not have direct oversight of ISG limit the sufficiency of the ISG framework in ensuring adequate regulation of violative conduct in the trading of Nasdaq securities that can occur across markets, such as insider trading or certain market manipulations?

For more than twenty-years the ISG has served as a framework for ensuring adequate and consistent regulation across capital markets.5 The basis for the ISG coming into existence resulted from the equity exchanges' recognition of the need to share regulatory information for the benefit of the investing public. With respect to identifying regulatory gaps between or among markets, the ISG would state that this issue is the cornerstone on which the founding exchanges based their planning, development, and introduction of the ISG concept. The ISG has Sub-Groups for Technology, Surveillance Practices, and Investigative Practices, which serve to reduce regulatory gaps and enhance the quality of our individual Market Surveillance Programs.

With respect to direct Commission oversight of the ISG, a number of Commission staff members actively participate in the ISG meetings under the current structure. At this time, we do not envision that Commission `direct oversight' would further enhance an effective and cooperative process that exists today. The Exchange, however, has no objection to discussing possible scenarios that may enhance the effectiveness of the SROs within the context of the ISG.

The ISG is currently in the process of developing a comment letter to the Commission, which will put forth a clear understanding of the ISG model and the role that it serves as being key to a proper and complete review of the Nasdaq Petition. It will establish an overview of ISG and the important functions it performs with the regulatory framework of the U.S. securities markets.

The PHLX notes that Nasdaq has stated that, since it is not a member of the ISG, it cannot avail itself of that venue for the discussion of these issues. However, Nasdaq's designated SRO, the NASD, is an ISG member. Surprisingly, to date the NASD has declined to participate in discussions that have and continue to take place within the ISG context, relating to the single regulator concept proposed by NASDAQ. Until the Nasdaq, through its SRO, the NASD, exhausts all opportunities afforded it through the ISG to address the issues set forth herein, the Exchange believes any action contemplated by the SEC to address any of the Nasdaq regulatory concerns would be premature. We again invite the Nasdaq to attend the ISG so we can hold meaningful discussions on the issues they wish to address.

Q8. Are there models sufficient to address potential concerns raised by fragmentation of regulation by multiple SROs trading Nasdaq securities?

The Exchange believes that the ISG currently offers the best model to address potential concerns raised by fragmentation of regulation by multiple SROs trading any securities, not only those that are Nasdaq-listed. The effectiveness of the ISG lies in the participation and cooperation of its participants, in conjunction with consultation with Commission staff. As such, the Exchange has no better model, nor does it believe it needs to consider an alternative to the ISG at this time. .

Q9. Are there advantages or disadvantages to a single market regulator with regulatory oversight across all markets trading Nasdaq securities?

The Exchange sees no advantages to a single market regulator with oversight across all markets trading any type of securities, not just Nasdaq securities. The very concept of a "self-regulatory organization" envisioned in the Act establishes and mandates each exchange and national securities association to regulate the trading within its market, and the behavior of its members conducting that business. To consider an alternative framework would alter the regulatory framework in ways the Exchange could only venture to imagine at this time.

However, we do see numerous disadvantages to a single regulator concept, especially if that regulator has authority over members that hold memberships on competing markets. A single regulator, as Nasdaq proposes, might easily result in a burden on competition, where a competing exchange or market center has power over the competitor to control the application of rule enforcement in a manner that may be to the detriment of that market, if it so desired. Under a one-regulator environment, that regulator would be in a position to dictate or impose policies, practices, and rules on competing exchanges that may be anti-competitive by their very nature, yet cloaked under the veil of regulatory oversight. In this environment, the single regulator of an exchange could decree changes to the policies and practices of competing exchanges, and not the OCIE, who has that responsibility today. It is unfathomable that the Commission would even consider the concept of a single regulator beyond itself for equities and derivatives for which it has exclusive authority. The Exchange does not envision, nor could it agree to any structure that would not have the SEC as its single regulator conducting its oversight responsibility on a fair and impartial basis.

Q10. Should a competitive bidding process be required to determine which entity will serve as the single regulator?

The Exchange believes that it effectively addressed the issue of a single regulator in its answer to Q9 above. Since we do not see a reasonable basis for a single regulator in any form, beyond the SEC, we believe the question regarding a competitive bidding process for a single regulator is moot.

Request for Comments On the Allocation of Regulatory Costs:

The Commission welcomes comment on all aspects of Nasdaq's petition requesting the reallocation of regulatory costs, including the following matters:

Q1. Should proceeds from the Nasdaq UTP Plan be withheld to pay for regulatory costs?

Regulatory costs are an intrinsic part of the self-regulatory function of an SRO, which includes obligations for surveillance, compliance, and enforcement of its rules and those mandated by the Act. As such, each SRO has an obligation to budget sufficiently to develop and maintain such surveillance, compliance, and enforcement practices and procedures to meet its regulatory obligations as evaluated by OCIE in routine or special purpose oversight inspections. The revenue streams used by each SRO to meet these obligations is a matter within the purview of each SRO's system of corporate budgeting, not the various plans that address the dissemination of quote and last sale information, nor the revenue derived from same. To those process that lend themselves to benefiting from the regulatory umbrella that extends over multiple markets, the Exchanges looks forward to constructive dialogue on any reasonable proposal to share costs that benefit the whole, and not individual markets. For those regulatory processes indigenous to a specific market, the Exchange believes that such market must absorb those costs pertaining to their own methods, processes, and systems for regulation.

Q2. Would Nasdaq's proposal to aggregate and deduct regulatory costs from market data revenue result in adequate regulation? If so, what costs would appropriately be considered regulatory costs and therefore, appropriately deducted from the market data revenue?

The Exchange has addressed this issue in Q1 immediately above. However, we will take this opportunity to amplify our opinion. The Nasdaq UTP Plan incorporates provisions for revenue generating opportunities for the dissemination of last sale information, the collection of said revenue, and the distribution of the proceeds to the participating exchanges. The Exchange cannot contemplate an equitable formula that would equate trades and volume in Nasdaq issues with the quantity or quality of adequate regulation for those trades and volume. We firmly believe that the assessment of the SRO regulatory processes inherent to each exchange or market firmly resides with OCIE, and has no necessary direct relationship to trades and volume. Only the Phlx, with oversight from OCIE, can determine the effectiveness of its regulatory programs, and at this time, the Exchange is not aware of a trade or volume criteria that affects objective evaluation of regulatory programs.

Q3. Should other methods of fairly allocating regulatory costs be considered?

The Exchange firmly believes that exchanges and markets should bear regulatory costs associated with their respective markets, and trading thereon. For all of the aforementioned reasons, the Phlx does not feel that a single regulator type of market structure has merit and therefore we have no particular opinion on a model for sharing regulatory costs across multiple markets. However, the Exchange would welcome the opportunity to discuss this matter further, entertain and evaluate alternative models to pay for joint regulatory procedures between and among exchanges, and debate how SROs can fairly allocate joint regulatory costs, if the SEC thought the process might be fruitful. In this regard, we believe a method for fairly allocating regulatory responsibilities exists today, and has existed for some time within the framework of the ISG, which allocates costs among participating exchanges for joint programs.

Q4. Should the NASD be required, as suggested by the CSE, to alter its systems to include more data from inter-market trading to improve inter-market surveillance? If so, who should pay for this enhancement?

The Exchange believes that the CSE made constructive recommendations in its response letter to the Nasdaq Regulation White Paper that may assist the NASD in effectively addressing one or more of its stated regulatory issues. However, since the Exchange does not have specific knowledge of, or information relative to the NASD regulatory system, we are not in a position to effectively evaluate the CSE recommendations, nor would we know for sure that a specific suggestion, if implemented, would address an issue to the satisfaction of the NASD or the Commission. With respect to paying for enhancements to the NASD regulatory infrastructure, as previously stated, the costs of surveillance systems, their development, improvement, or maintenance is an inherent cost of doing business for any SRO. In addition, the NASD already has substantive regulatory fees in place that they charge to its members. To be clear, the NASD and not all exchanges trading Nasdaq listed securities should pay to improve Nasdaq inter-market surveillance.

Q5. Who would determine what are legitimate regulatory costs? On what basis should such a determination be made?

If we are discussing self-regulation of trades and volume executed within a marketplace by members of that exchange or association, each SRO must make the determination as to what is, or is not, a regulatory cost within its own market, and justify that to the Commission, if necessary. If the question addresses a joint effort among competing marketplaces for the benefit of the participants, and the investing public, as is done within the context of the ISG, for example, then the matter must be negotiated and agreed upon by the participants that are the beneficiaries of the new policies, practices, and procedures. This process works effectively today within the cooperative efforts of the ISG.

Request for Comments on the Application of Nasdaq's Recommendations to Exchange Listed Securities:

The Commission requests comment on whether the same regulatory concerns raised by Nasdaq for Nasdaq securities, such as regulatory fragmentation and arbitrage, exist for exchange-listed stocks and options. In addition, the Commission specifically requests comment on the following:

Q1. Do commenters believe that there is unequal regulation of exchange-listed securities among the markets trading such securities? If so, do commenters believe that the proposals made by Nasdaq with respect to Nasdaq securities would address such unequal regulation in the listed markets? If not, what other approaches do commenters recommend?

As stated previously above, in addressing the question of equal or unequal regulation of trading in Nasdaq securities, the interpretation of `unequal' in the context of regulation among markets trading any securities on a UTP basis is overly broad. Each market center utilizes diverse methods, and employs different technology to attain the required level of surveillance, compliance, and enforcement policies and procedures to meet the standards set by the Act (and implemented and interpreted by the Division of Market Regulation and OCIE) to which each SRO must comply. OCIE's routine oversight inspections evaluate the adequacy of SRO regulatory programs, the competence of the SRO regulatory staff, and the SRO's compliance with their own rules and those of the Act. Only OCIE is in a position to make a determination regarding inequality between and among markets, which in the Exchange's opinion, OCIE does on a routine basis. More importantly, the global perspective of OCIE affords it an opportunity to constructively criticize SRO regulatory programs as well as make suggestions for regulatory improvements for the benefit of the public customer and the national market system.

Further, the Exchange believes there is no basis for a Nasdaq recommendation to institute a single regulator to address the perceived problems of regulating Nasdaq listed securities. The Exchange believes the same logic applies to the listed markets. If the other primary equity markets, the NYSE and Amex, wish to proffer a similar single regulator concept for listed securities as an intermediary between SROs and the SEC, the Exchange would welcome an opportunity to comment on those proposals also. However, we do not anticipate changing our position, if the substantive issues remain the same. The Exchange firmly believes that the participating exchanges developed and implemented the ISG to address many, if not all of the issues the Nasdaq Regulation White Paper raised and restated in this Release.

Q2. Should the Commission require an intermarket consolidated order audit trial system for Nasdaq-listed and exchange-listed securities, other than options?

The Exchange believes that an open and robust discussion on the development of an intermarket consolidated order audit trial system for Nasdaq-listed and exchange-listed securities, (other than options that are subject to COATS requirements) has merit. However, as noted above, because of the costs and burdens on exchanges and members in implementing such a system are considerable, care must be taken to ensure that such costs and burdens are considered in the development of the system to ensure that the regulatory value of the specific information captured by the system (and the means employed to capture it) justifies those costs and burdens.

The Exchange would look favorably on discussing the issue with and among other potential participants, and with the Commission staff present to introduce its perspective into the development of the discussion, and design of any potential solution. As stated previously, the Exchange would consider the opportunity to work with Nasdaq, in conjunction with the ISG, to modify, develop, or otherwise enhance existing techniques that serve to meet joint surveillance goals and objectives, that being primarily the protection of the investing public.

* * *

In summary, the Exchange believes Nasdaq clearly falls short in their attempt to make an effective argument that a single regulator is in the best interest of the investing public, for either Nasdaq listed securities, or those securities listed primarily on other SROs. The Nasdaq presented neither a clear, nor convincing position that other SROs are deficient in their regulatory oversight of Nasdaq listed securities. They have presented a preponderance of non-substantive rhetoric regarding their speculation and hypothesis about the surveillance, compliance, and enforcement polices and practices of other SROs.

At this time, the Exchange will not attempt to speculate on the impetus behind the transparent assertions made by Nasdaq, nor speculate on other potentially self-serving motives behind the Petition, but rather close with a statement of fact. Nasdaq has failed to avail itself of an established mechanism that would appear to offer solutions to many, if not all of their perceived problems, if they chose to do so, namely the ISG.

We appreciate the Commission's consideration of our comments. If the Commission or its staff should have any questions regarding the matters discussed above, please contact Charles A. Rogers, Executive Vice President Chief Regulatory Officer at (215) 496-1615 or me, at (215) 496-5193 to further discuss the Phlx's views regarding this proposal.

Sincerely,

Meyer S. Frucher

____________________________
1 SR-Phlx-2002-73
2 These include: (a) economically efficient execution of securities transactions; (b) fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets; (c) the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities; (d) the practicability of brokers executing investors' orders in the best market; and (e) an opportunity ...for investors' orders to be executed without the participation of a dealer. This provision also encourages the formation of linkages among markets to "foster efficiency, enhance competition, increase the information available to brokers, dealers, and investors, facilitate the offsetting of investors' orders, and contribute to best execution of such orders." This section of the Act also directs the SEC as follows: "...having due regard for the public interest, the protection of investors, and the maintenance of fair and orderly markets, to use its authority under this title to facilitate the establishment of a national market system for securities...."

The Commission is further authorized, among other things, to: (a) "authorize or require self-regulatory organizations to act jointly with respect to matters as to which they share authority under this title in planning, developing, operating, or regulating a national market system (or a subsystem thereof) or one or more facilities thereof", and (b) "conduct studies and make recommendations to the Congress from time to time as to the possible need for modifications of the scheme of self- regulation provided for in this title so as to adapt it to a national market system."

3 Section 6(b)(1) provides that a national securities exchange must be ".... so organized and has the capacity to be able to carry out the purposes of ... [the Act] and to comply, and ... enforce compliance by its members and persons associated with its members, with the provisions of ... [the Act], the rules and regulations thereunder, and the rules of the exchange."

Section 19(g)(1) provides that every national securities exchange "shall comply with the provisions of ... [the Act], the rules and regulations thereunder, and its own rules, and ...absent reasonable justification or excuse enforce compliance ... with such provisions by its members and persons associated with its members.

4 Indeed, the Commission implicitly recognized the principle that trading rules are a key competitive tool by proposing that markets be able to file such rules under Section 19(b) on an immediately effective basis in order to respond to business objectives and market conditions, when it proposed Rule 19b-6 in Securities Exchange Act Release No. 43860 (January 19,2001), 66 FR 8912 (February 5, 2001).
5 ISG members who are self-regulatory organizations under the Act must enforce compliance with the provisions of the Act, includes sharing of information relating to, or collected under the CTA Plan, the OPRA Plan, the Nasdaq UTP Plan, or any similar plan or system for the public dissemination of trading information. Any ISG member or affiliate may request of any other ISG member or affiliate member to provide the requesting party with information or documents relating to an investigation by the requested party against any of its members, member organizations, or persons associated with its member or member organizations for the purposes of enforcing compliance with the Act or for other regulatory purposes. Each self-regulatory organization agrees to maintain surveillance programs and procedures which, given that organization's responsibility for conducting intermarket surveillance as set forth, will make the appropriate use of the Market Surveillance Reports or Market Surveillance Information designed to identify instances of market activity that may fall within any of the categories listed: Trading on Inside Corporate Information, Trading Prior to Research Reports, Trading on Non-Public Market Information (Frontrunning), Capping and Pegging, Mini-Manipulation, and Price Manipulation.