October 3, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention Jonathan G. Katz, Secretary
Re: File No. S7-16-97
Ladies and Gentlemen:
In Securities Exchange Act Release No. 38672 (May 23, 1997) (the "Concept Release"), 1 the Securities and Exchange Commission notes it is "reevaluating its regulation of the markets, particularly its oversight of alternative trading systems, registered exchanges, and foreign market activities in the United States." In soliciting comment on related issues, the Commission offers suggestions intended to "develop a more forward-looking and enduring approach that will permit diverse markets to evolve and compete, while preserving market-wide transparency, fairness and integrity." 2 The alternatives for market regulation suggested in the Concept Release, if adopted, would require a comprehensive restructuring of the securities markets in the United States.
We welcome the Commission's decision to examine whether securities regulation can be adapted to reflect such developments. Opening a dialogue on these topics will only increase the information available to the Commission as it attempts to guide the nation's markets into the next century.
While "technology has provided a vastly greater number of investment and execution choices, increased market efficiency and reduced trading costs" 3 We question, however, any inference that usage of technology, in and of itself, creates the need for greater regulation. Technology itself makes markets more responsive, efficient and transparent. Accordingly, fashioning new regulations to combat strictly potential problems might impose new layers of regulation without any tangible benefit. In particular, the Commission's suggestion that innovative market participants be restrained within the parameters of exchange regulation is unworkable and would ultimately operate to the detriment of the investing public.
While the current regulatory framework is not impeccable in its design, the Commission should carefully consider all the implications of altering market structure in the manner contemplated.
The Concept Release discusses possible revisions to the Securities Exchange Act of 1934 (the "Exchange Act") to address "two key developments (that) highlight the need for a more forward-looking, flexible regulatory framework: (1) the exponential growth of trading systems that present comparable alternatives to traditional exchange trading; and (2) the development of automated mechanisms that facilitate access to foreign markets from the United States." 4
Stating that the regulation of "alternative trading systems" ("ATSs") as broker-dealers "impedes effective regulation," and has caused "gaps . . . in the structures designed to ensure market-wide fairness, transparency, integrity and stability," 5 the Concept Release suggests two possible alternatives for enhanced regulatory oversight of alternative trading systems. One proposal calls for greater regulation of alternative trading systems as broker-dealers. Such an approach would entail: (i) mandating order transparency with respect to all system orders; (ii) requiring the operators of alternative trading systems to provide real-time information regarding trading activity, with all counterparties disclosed, to a self-regulatory organization ("SRO") on an automated basis; and (iii) adopting rules under the Exchange Act that impose capacity and operational standards. The Commission notes, however, that this approach may not address some concerns mentioned as the cause for the greater regulation of alternative trading systems. 6
The regulatory alternative apparently favored in the Concept Release would regulate alternative trading systems as exchanges. To facilitate such regulation, the Commission would revise its interpretation of the definition of an "exchange" under the Exchange Act to include "any organization that both: (1) consolidates orders of multiple parties; and (2) provides a facility through which, or sets material conditions under which, participants entering orders may agree to the terms of a trade." 7 The Commission would then use the exemptive authority granted to it by Congress in the National Securities Markets Improvement Act of 1996, 8 codified at section 36 of the Exchange Act, to fashion a three-tiered structure of exchange regulation.
The first tier would encompasses "exempted exchanges" that, while falling within the new exchange definition, are considered by the Commission to be less problematic from a regulatory perspective due to low volume or the "passive" nature of their pricing mechanism. 9 Upon the Commission's approval of an exemption application, operators of such systems would be subjected to minimal regulatory responsibilities, such as a requirement that a record be maintained of all trading taking place through the system.
All non-exempt alternative-trading-system exchanges would be required to register as national securities exchanges pursuant to section 6 of the Exchange Act, and to satisfy the attendant regulatory responsibilities, including:
(a) Filing an application for registration and obtaining Commission approval of said application;
(b) Creating rules to prevent fraudulent practices, promote fair trade and ensure orderly markets;
(c) Refraining from imposing unnecessary or inappropriate burdens on competition;
(d) Assuring regulatory oversight of their participants;
(e) Considering the public interest in system administration;
(f) Subjecting rule changes and service modifications to public notice and comment; and
(g) Joining market-wide plans related to quotations, trade reporting, and market coordination (e.g., the Intermarket Trading System).
The Commission would use its exemptive authority to "relieve alternative markets from requirements it does not believe are critical to achieving the objectives of the Exchange Act." 10
Current exchanges and the NASD would be subject to less Commission oversight in an effort to facilitate the competition of "traditional exchanges" with emerging alternative trading systems. Such exchanges would be given greater latitude to expedite rule changes and operate certain "pilot" trading systems set apart from traditional exchange facilities with far less Commission scrutiny.
Concerning foreign-market access by U.S. investors, after considering and apparently discarding the idea of registering accessible foreign markets as exchanges pursuant to section 6, the Commission suggests an approach focusing on the "access providers" that facilitate direct trading on foreign exchanges by U.S. investors. Non-broker-dealer access providers would be required to register as "securities information processors" ("SIPs") under the Exchange Act, and all access providers would be required to comply with certain recordkeeping, reporting and disclosure requirements.
While "regulation should not be static" 11 in the face of market evolution, this should not compel the Commission to engage in regulatory restructuring that would have seismic -- and probably unpredictable -- consequences without evidence to suggest that such an effort is necessary for the preservation of fair and orderly markets. The application of technology to the brokerage industry has produced benefits for investors and intermediaries alike, and we are not aware of any evidence that it has endangered market quality.
Technology, Competition and Market Structure
Improvements in market technology generally benefit the investor and advance the goal of a national market system by reducing trading costs while providing an increased number of trade-execution options. Moreover, technological change fosters competition, as market participants are forced by competitive pressures to offer new and improve existing services in the quest for order flow. While securities regulation should adapt to new technology, it should not co-opt it.
Throughout the Concept Release, the Commission suggests that technological developments -- namely the growth of alternative trading systems -- have created the potential for "unfair" market behavior, driving the need for additional regulation. References to instances where an alternative trading system "has no other serious competitor," 12 or captures "a significant percentage of institutional orders," 13 intimates that operators of alternative trading systems can use their position as a basis from which to discriminate against selected market participants.
While innovative applications of technology can give a broker-dealer a market advantage, any such advantage is likely to be short-lived in a competitive marketplace. So long as the marketplace for brokerage services is competitive, "market participants are able to substitute the services of one alternative trading system with those of another." 14
An examination of the current marketplace for alternative trading systems reveals a vigorously competitive environment where no alternative-trading-system operator could act unfairly towards market participants with impunity. While Instinet is now the most active electronic broker in terms of volume, other existing 15 and potential 16 competitors are emerging to challenge for market share. Competitive conditions inhibit any single alternative trading system's ability to impact negatively market quality.
Extensive regulation of alternative trading systems would squash competition, as high regulatory costs pose barriers to market entry and expansion. Technology, competition and investor preferences should dictate market evolution within the existing competitive framework. The Commission should preserve a competitive atmosphere among market participants, fulfilling its Congressional mandate of "enhanc(ing) competition and to allow economic forces, interacting within a fair regulatory field, to arrive at appropriate variations of practices and services." 17
Alternative Trading Systems under the Exchange Act
Alternative trading systems do not operate so as to warrant classification as a national securities exchange. An alternative trading system falls within the classic definition of a "broker": being engaged in the business of effecting securities transactions for the account of others. 18 Despite offering subscribers greater control over their orders, the idea that alternative trading systems merely supply the facilities by which subscribers execute securities transactions ignores the services provided by such systems. Alternative trading systems offer a wide variety of services to subscribers intended to optimize their securities trading. For example, certain alternative trading systems allow their subscribers to request that a representative monitor trading activity in a security and alert them when favorable trading conditions arise, and take other active steps to intermediate between subscribers where necessary. Alternative trading systems also provides a wide variety of analytical tools and other market information to subscribers. These activities are the hallmark of a broker.
Where alternative trading systems' provision of brokerage services differs from that of traditional brokers, that difference reduces transaction costs and increases subscriber flexibility, hardly cause for exchange classification. The following characteristics:
- increased reliance on technology;
- exposure of limit-order book to subscribers;
- increased subscriber order control;
- total anonymity of identity; and
- limited anonymity of strategy
are in stark contrast to the structure of a typical securities market, where subscribers are blind to the trading interest of fellow investors and reveal their identity and strategy to an intermediary (e.g., a specialist or market maker) in the hope that an intermediary will provide best execution for that order.
Alternative trading systems do not engage in activities commonly performed by a stock exchange as that term is generally understood and used in the Exchange Act. Alternative trading systems do not "list" securities in that they do not evaluate and accept issuers of securities according to pre-determined criteria and implicitly sanction the quality of securities accepted for trading. System operators offer no liquidity enhancement, unlike exchanges that have specialists or market makers at the ready to buy or sell to ensure orderly and continuous markets. Alternative trading systems do not gather market information for public dissemination. Moreover, alternative trading systems do not physically centralize trade counterparties.
To summarize, alternative trading systems merely provide brokerage services and allow investors to communicate with one another in an efficient, anonymous fashion. Replacing telephones with a more discreet and effective communication parameter does not transform a broker into an exchange.
The increasing utilization of alternative trading system hardly creates a need for greater regulation. A functional, rather than a size-based approach, is the most appropriate means of ascertaining the proper classification and regulation of market participants. Greater regulation should not be based simply on the growth in utilization of a market participant.
While the order flow routed to electronic brokers has increased in recent years, their market role is still auxiliary. Alternative trading systems collectively handle a relatively small portion of volume in exchange-listed securities, and Nasdaq market makers have maintained their primacy in the over-the-counter market. To the extent that an alternative trading system is considered "the market" in a security by any market participant, it is by subscribers who prefer, when possible, to trade through the system rather than through more conventional means. Similarly, market makers sometimes establish themselves as "the market" in a particular issue or issuer. A "market" in this sense -- the preferred broker for trading a security -- does not mean an "exchange" as defined in the Exchange Act.
Accordingly, a volume-based standard for regulation of alternative trading systems as exchanges is questionable in light of a marketplace where concentration of volume in one broker-dealer is common. For example, a five-day sample period in May 1997 revealed that 37.7% of all Nasdaq securities had one market maker involved in 50% or more of all transactions. 19 Such a convergence of trading volume do not warrant additional regulation where a competitive atmosphere exists and market participants have no barriers to routing volume elsewhere.
Ensuring a fair competitive field, rather than creating new layers of volume-based regulation, should be the focus. Alternative trading systems function as brokers, despite increased customer order flow. These systems have not "outgrown" the framework of broker-dealer regulation so as to warrant classification as national securities exchanges.
The Need for Exchange Regulation
We are not aware of any basis for the assertion that increases in the utilization of alternative trading systems has created regulatory deficiencies that "have impeded effective integration, surveillance, enforcement and regulation of the U.S. markets as a whole" 20 requiring exchange regulation. The manner in which alternative trading systems currently provide brokerage services, in and of itself, pose no threat to market quality, much less cause "gaps . . . in the structures designed to ensure marketwide fairness, transparency, integrity and stability." 21
1. Market Access and Fairness
In its Report Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the NASD and the Nasdaq Market, 22 which discussed anti-competitive and other abusive practices in the Nasdaq Stock Market, the Commission stated that "(n)othing . . . suggest(s) improper or illegal activity by Instinet." 23 No other alternative trading system is mentioned.
The operators of alternative trading systems are already subject to broker-dealer regulation that effectively bars unfair practices. NASD rule 2110 prohibits conduct inconsistent with "high standards of honor and just and equitable principles of trade." Additionally, compliance with rule 11Ac1-1(c)(5)(ii) under the Exchange Act (the "ECN Display Alternative") requires compliant alternative trading systems to provide access to order prices to all broker-dealers, subscribers and non-subscribers alike. 24 Any entity that was unfairly denied access to an alternative trading system would have remedies under these rules to pursue claims of unfair treatment. Moreover, the market for electronic brokerage is sufficiently competitive to penalize any operator that treats its subscribers unfairly.
The absence of evidence of specific wrongdoing, coupled with the existence of statutory guidance and remedies, renders unnecessary reclassification of alternative trading systems with a view to preventing unfair practices. While a more elaborate articulation of just and equitable principles would provide welcome guidance to all broker-dealers, exchange classification would impede alternative trading systems from acting competitively.
2. Market Transparency and Coordination
The need for additional regulation mandating order transparency is doubtful in light of recent reforms. Implementation of the ECN Display Alternative has made limit orders for Nasdaq securities placed in alternative trading systems as transparent as those placed with Nasdaq market makers, and adequately integrated such order prices into the national market system for such securities. All orders placed by a Nasdaq market maker into a compliant alternative trading system impact the Nasdaq best bid/best offer. Certain ECNs also give their institutional subscribers the option to display orders in the public quotation system. Such transparency could be duplicated for exchange-traded securities if existing exchanges fulfilled their Commission mandate to "work expeditiously with ECNs that wish to avail themselves of this (the ECN Display) alternative." 25
The Concept Release considers requiring the transparency of institutional orders placed in an alternative trading system. Institutional investors, unlike market makers, currently have no duty to expose their best-priced trading interest to the market-at-large, even when trading through an alternative trading system. Moreover, there is no apparent rationale for requiring exposure of only institutional orders placed in an alternative trading system versus orders brought to market via a traditional broker.
Institutional investors should be allowed to maintain control over the transparency of their orders. In an information-based marketplace, institutional investors realize value in the anonymity of strategy afforded by exposing trading interest strictly within one alternative trading system, rather than to the entire market. 26 Regulation of alternative trading systems aimed at mandating institutional order transparency would drive institutional order flow to less transparent brokerage mechanisms.
In stating that the non-display of institutional orders thwarts the national-market-system goal of transparent markets, 27 the Commission suggests that the orders of private investors should be treated as if they were public property. If the Commission believes that across-the-board order transparency is necessary to create a true national market system, such a requirement should be proposed apart from a discussion of the regulation of alternative trading systems. To single out users of such systems for such a requirement, however, would create an arbitrary distinction that would be a disservice to institutional investors. Concerns regarding "two-tiered markets" are inherently anti-competitive, and imply that all orders should be routed to a central location for display, regardless of the desires of the investors placing the orders.
3. Market Surveillance
The current supervisory framework is sufficient to surveil trading on alternative trading systems to ensure market integrity. We do not understand the Commission's complaint that "SROs' current (surveillance) programs . . . do not extend to observing quote activity on alternative trading systems." A lack of a surveillance program for alternative trading systems would run afoul of the NASD's obligations under section 15A(b)(2) of the Exchange Act to enforce member compliance with applicable securities regulations.
Alternative trading systems, as member broker-dealers, contribute to the cost of SRO operations. These operations have sufficient resources to ensure proper SRO surveillance of alternative-trading-system activity. Under Commission oversight, SROs that separate their market operations and regulatory responsibilities can oversee alternative trading systems without acting anti-competitively. The current NASD proposal regarding the Order Audit Trail System ("OATS"), 28 if implemented responsibly, should work to ally any concerns regarding the ability to surveill transactions in Nasdaq securities.
4. Market Stability/Systemic Risks
More experience with the implementation of the order-handling rules is necessary before concluding that "alternative trading systems may have serious capacity problems." 29 An evaluation of alternative-trading-system capacity during the initial months of such a major structural overhaul undoubtedly reveals transition-related systems issues. Quote traffic routed to ECNs increased significantly upon implementation of the order-handling rules, which taxed the resources of all market participants. Nasdaq market makers and the NASD itself faced similar challenges in adjusting to the rules, 30 and the New York Stock Exchange had analogous difficulties upon switching to quoting stock prices in one-sixteenth increments. 31 Such periods of transition are not representative to measure the capacity of market participants.
Competitive pressures and subscriber accountability are more than adequate to ensure that alternative trading systems maintain sufficient capacity. Investors will not trade through a broker whose systems they do not trust, which motivates all brokers to implement reliable and efficient technologies to deliver services in all market conditions. Alternative trading systems have handled steadily increasing amounts of volume in recent years with little difficulty.
5. Compliance with Inapplicable Regulation
The Concept Release suggests that the regulatory scheme for alternative trading systems should be modified because regulation as broker-dealers requires "compliance by these systems with obligations that, in many cases, are not pertinent to their principal activities." 32 Imposing exchange regulation on alternative trading systems, however, would only impose more and less relevant regulatory requirements on system operators.
Broker-dealer regulation is the appropriate regulatory context for alternative trading systems. Any concern regarding the inappropriateness of imposing certain broker-dealer regulatory obligations on such systems can now be easily dealt with by the Commission through the use of its exemptive authority, without restructuring market regulation.
An examination of the difficulties and consequences that would be associated with the regulatory alternatives proposed by the Commission suggests that, absent a clearly identifiable need, the Commission should tread cautiously before overhauling market structure.
Of the two alternatives put forward in the Concept Release, imposing targeted regulation on alternative trading systems as broker-dealers is clearly preferable, given the true nature of alternative-trading-system operations and the myriad problems that would flow from exchange regulation discussed below. Indeed, the Commission currently has regulations in place that subject electronic brokers to specialized regulations. 33 Moreover, the Commission has assumed additional de facto authority over alternative trading systems seeking to receive and maintain the Commission's sanction as being in compliance under the ECN Display Alternative. 34
Nevertheless, certain aspects should be carefully considered.
1. Transparency of All ATS Orders
Institutional subscribers to alternative trading systems should not be required to expose their orders to the national market system against their will. As discussed above, institutions and other non-market-maker subscribers 35 have no duty to disseminate publicly their proprietary trading interest and should not be required to sacrifice the benefits of limited exposure simply because of their utilization of technology. While the value of market-wide transparency of all investor orders may merit debate, partial implementation would create an unfair regulatory dichotomy. Moreover, such a proposal would do little to increase market transparency. A standard whereby transparency is required only for orders entered through alternative trading systems will simply cause investors to avoid such systems when seeking limited exposure. Market transparency would be diminished, therefore, as orders flowed out of alternative trading systems into less transparent brokerage mechanisms.
2. Disclosure of Trading Algorithms and Source Code
Alternative-trading-system trading activity should be incorporated into the real-time surveillance programs of self-regulatory organizations, which OATS should accomplish. The value of requiring alternative trading systems to disclose the specifics of system trading algorithms and programming source code, however, would not further this objective and raises competitive concerns. For any electronic broker, the mechanics of system operation are a valued asset which is not made publicly available. Disclosure should not be required unless a compelling regulatory purpose exists. Since such information is not necessary to monitor alternative-trading-system trading activity for fraudulent or manipulative practices by subscribers, requiring disclosure is inappropriate.
3. Contingency Plans
Requiring alternative trading systems to arrange for independent systems reviews, create contingency protocols and developing processes to ensure system operation is a reasonable requirement. Indeed, business considerations alone should prompt all broker-dealers to develop such plans. It the Commission were to create a regulatory requirement, query why it would not be applicable to all broker-dealers that utilize automated internal systems? A full-scale systems outage at a large market maker or agency broker, most of which also rely heavily on computer technology, would cause similar market disruption.
Even if the Commission used its best efforts to tailor exchange regulation to alternative-trading-system operations, regulation as an exchange is antithetical to the business purposes of alternative trading systems and would ultimately threaten their viability.
1. Expanded Exchange Definition
We question the wisdom of expanding the exchange definition to include any organization that consolidates orders of multiple parties and provides a facility through which participants entering orders may agree to the terms of a trade. In the Commission's own words, such "an expansive interpretation of Section 3(a)(1) results in potential conflicts with other central regulatory definitions under the (Exchange) Act as well as adverse effects on innovation and competition." 36
Current order-handling requirements accentuate the problems of such a broad definition even vis-a-vis traditional broker-dealers. The implementation of the order-handling rules and the enunciation of best-execution responsibilities 37 undermines the assertion that "traditional broker-dealer activities do not involve the systematic interaction of customer orders where the customers are informed of and have an opportunity to agree to the terms of their trades." 38 Broker-dealers are now required to match incoming customer market and marketable limit orders against contra-side limit orders the firm holds that improve upon current public quotations. These and other best-execution guidelines are the "terms" under which broker-dealers internally cross customer orders, which some do by automated means. How such order-handling procedures differ from that of alternative trading systems, and why such broker-dealers would not be exchanges under the proposed definition, is unclear.
While the Concept Release indicates a willingness to carve exemptions for market participants that are not alternative trading systems, regulatory uncertainty and the inherent inertia of the exemptive process is likely to retard market development. Moreover, the Commission should hesitate pursuing a subjective approach to exchange classification that effectively results in regulation by exemption.
2. Exempted Exchanges
Why does the Commission believe that small alternative trading systems and "passive markets" warrant less regulation, given its reasons for greater regulation of alternative trading systems? While certain of the Commission's concerns may diminish for ATSs with minimal volume (e.g., fairness, capacity), others may increase (e.g., surveillance, transparency). In addition, the lack of self-determined pricing mechanisms in "passive" markets do not diminish any of these concerns.
Moreover, the tiered structure envisioned by the Commission might have a variety of unintended consequences. The innovation and growth of alternative trading systems may be discouraged as substantial regulatory costs are imposed just as emerging alternative trading systems achieve necessary "critical mass" to maintain a sufficient continuous liquidity base. On the contrary, a multitude of small alternative trading systems may emerge that suppress volume to avoid "graduation" to full exchange regulation. The Commission should be mindful of the potential for such unintended adverse consequences.
3. Non-Exempt Exchanges
Alternative trading systems unable to claim an exception would face numerous new regulatory requirements, compliance with which would serve as a serious impediments to their future operation and viability.
Forcing non-exempt alternative trading systems to develop and maintain rules, procedures and surveillance and enforcement programs, 39 as required by section 6 of the Exchange Act would impose substantial costs on system operators that, combined with the reduced operational flexibility discussed below, would impair an alternative trading system's ability to offer cost-effective services to its subscribers.
While the cost of regulation is not always dispositive, its relation to the benefits to be realized should be critical in any attempt the Commission makes to adapt existing regulatory structures to new technologies. As discussed above, the need to radically alter the regulation of alternative trading systems is not readily apparent. Accordingly, the Commission should eschew exchange regulation as a regulatory approach that would not be cost effective.
Alternative trading systems could not be regulated as exchanges without surrendering an unacceptable level of operational control. As for-profit entities, it is essential that alternative-trading-system operators have control over certain core aspects of systems operations, such as standards for accepting new subscribers and fees. Moreover, as competitive entities system operators must have the flexibility to adapt to changing market conditions and subscriber preferences without hesitation.
Accordingly, the requirements contained in section 6 of the Exchange Act regarding the admission of any broker-dealer, 40 member representation in administration of affairs, 41 and equitable allocation of fees, 42 and the public notice-and-comment process for exchange-rule modifications, 43 present formidable obstacles. Despite the Commission's willingness to be flexible in addressing these problems, a solution is not feasible absent a re-writing of the Exchange Act. 44
Alternative-trading-system subscribers currently have an adequate level of input as to system management in the form of being able to "vote with their feet" and turn to a competitor when system quality or fees reach unacceptable levels. Under Commission and SRO oversight, free market forces, rather than regulation, should be the means by which alternative trading systems are held accountable to market participants.
c. Listing Standards
Current Exchange Act requirements allow exchanges to trade only exchange-listed securities and over-the-counter securities admitted to "unlisted trading privileges" ("UTP"), which the Commission to date has allowed for only Nasdaq National Market securities. 45 Alternative trading systems, however, typically allow the trading of any equity securities by its subscribers. Accordingly, trades in exchange-listed, Nasdaq National Market, Nasdaq SmallCap, OTC Bulletin Board and foreign securities are all traded by subscribers.
Current exchange regulation would therefore force alternative trading systems to halt subscriber trading in all but exchange-listed and certain Nasdaq securities and abandon an important segment of their brokerage business. Despite the Commission's willingness to "consider expanding the category of securities that would be available for UTP trading," it is unlikely that alternative trading systems would be able to continue to offer a full spectrum of execution services if regulated as exchanges.
d. National Market System Integration
Integration of alternative-trading-system order prices into national market system plans such as the Intermarket Trading System ("ITS") would likely be beneficial to all market participants, provided non-specialist subscribers had the option of exposing their orders to the market-at-large. Such integration, however, does not require regulating alternative trading systems as exchanges. Indeed, such integration is contemplated within the broker-dealer framework by the ECN Display Alternative, which would require integration of ECN prices into ITS. Over nine months after implementation, however, the exchanges have taken no tangible steps towards creating the necessary linkages to produce towards integration. Exchange resistance would only be heightened if alternative trading systems joined their ranks, which would require full admission into national market systems plans.
The Commission should be commended for examining market regulation in light of the technological evolution of the brokerage industry. Technology in and of itself, however, does not create the need for the wholesale revisions of the Exchange Act that the Concept Release contemplates. Only where a readily ascertainable deficiency exists should the Commission intervene in matters of market structure. The Commission would do well to avoid the inclination to adapt to technology by attempting to control it, and instead facilitate competition by ensuring a regulatory scheme free of unnecessary impediments to innovation. So long as a such an environment exists, broker-dealers, exchanges and investors will all contribute to market quality in the form of liquidity, transparency and information.
Very truly yours
Sam Scott Miller
Orrick, Herrington & Sutcliffe LLP
-- / 62 Fed. Reg. 30485 (June 4, 1997) (File No. S7-16-97).
-- / Concept Release at 8.
-- / Concept Release at 6.
-- / Concept Release at 6.
-- / Concept Release at 30.
-- / See Concept Release at 43-47.
-- / Concept Release at 74.
-- / Pub. L. No. 104-290, § 105, 1996.
-- / Such markets are defined as "alternative trading systems that match or cross orders at a price that is primarily or wholly derived from trading on another market." Concept Release at 53.
-- / Concept Release at 82-83.
-- / Concept Release at 12.
-- / Concept Release at 25.
-- / Concept Release at 44.
-- / Concept Release at 25.
-- / E.g. , Bloomberg Tradebook, Island. Island alone facilitated the execution of almost 1.2 million trades in the second quarter of 1997. See 17a-23 Quarterly Filing , at http://www.josh.com.
-- / See John A. Byrne, Market Makers Prepare ECN Battle Plans , Traders Magazine , June 1997, at 37 (stating that Bear Stearns, Goldman Sachs and Knight Securities are all contemplating alternative trading systems).
-- / H.R. Rep. No. 94-123, 94th Congress, 1st Sess., at 51 (1975).
-- / See Exchange Act section 3(a)(4).
-- / NASD Office of Economic Research.
-- / Concept Release at 20.
-- / Concept Release at 22.
-- / Exch. Act Rel. No. 37542 (August 8, 1996).
-- / Id . at 22 n.48.
-- / See Sec. Exch. Act Rel. No. 37619A (August 28, 1996), 62 Fed. Reg. 48290 (September 6, 1996) ("Order-Handling Release"). Currently Instinet, Bloomberg Tradebook, Island and Terra Nova all comply with the ECN Display Alternative with respect to Nasdaq securities, encompassing virtually all current trading in said securities currently being traded through alternative trading systems.
-- / Order-Handling Release, supra note 24, at 6.
-- / See, e.g. , statement of Jim Craig, Portfolio Manager, Janus Fund ("I like using alternative trading methods. I want to hide my tracks.") in Suzanne McGee, Like Gulliver, Giant Mutual Funds Can Be Tied Up , Wall Street Journal , August 28, 1997, at C1.
-- / See Concept Release at 29-30.
-- / See Exch. Act Rel. No. 38990 (August 28, 1997), 62 Fed. Reg. 47096 (September 5, 1997).
-- / Concept Release at 32.
-- / See, e.g. , No Day at the Beach: Nasdaq, Firms Struggle with Systems Glitches , Wall Street Letter , January 27, 1997, at 1.
-- / See Greg Ip, Big Board's Move to Sixteenths Brings Some Delays in Dissemination of Quotes , Wall St. Journal , July 14, 1997, at B4.
-- / Concept Release at 21.
-- / See rule 17a-23 under the Exchange Act.
-- / See, e.g. , letter from Richard Lindsey, Director, Division of Market Regulation, to Chuck Hood, Senior Vice President and General Counsel, Instinet Corporation, August 27, 1997 (requiring periodic review and testing of Instinet's system capacity in order to be considered in compliance with the ECN Display Alternative).
-- / This would include non-market-making broker-dealers and individual investors who access an alternative trading system through their broker.
-- / Exch. Act Rel. No. 27611 (January 12, 1990), 55 Fed. Reg. 1890, 1900 (January 19, 1990).
-- / See, e.g. , NASD Notice to Members 97-57.
-- / Concept Release at 77.
-- / Moreover, it is uncertain whether the transition to a regulatory entity will cost alternative trading systems in terms of customers, particularly institutions, who do not wish to submit to the authority of system operators.
-- / Section 6(b)(2).
-- / Section 6(b)(3).
-- / Section 6(b)(4).
-- / Section 19 and accompanying rules. See also Concept Release at 105 (noting that "the time required for the solicitation and review of public comments can delay exchanges' and securities associations' implementation of innovative proposals.").
-- / Moreover, alternative trading systems are likely to encounter new barriers under foreign securities regulation due to classification as an exchange in the United States.
-- / See section 12(f) and accompanying rules.