Junius W. Peake
Monfort Distinguished Professor of Finance
College of Business Administration
University of Northern Colorado
1075 F Kepner Hall
Greeley CO 80639-0019
August 21, 1998
Jonathan G Katz, Secretary
United States Securities & Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington D.C. 20549
Reference: File No. 4-208 Release No. 34-40204
I write to comment on the above proposed Rule to amend the Intermarket Trading System ("ITS Plan" or "Plan") to Link the PCX Application of the OptiMark System to the ITS System.
In the Amendments to the Securities Acts passed in 1975, Congress required the Commission to "facilitate the establishment of a national market system for securities." It is nearly a quarter-century later, and there is still no system which meets the congressional mandate.
For 23-plus years the Commission has been focused developing competition for where trading should take place instead of the prices at which trading should take place.
Shortly after the Amendments were passed, the New York Stock Exchange, concerned that the proper use of new data processing and communications technologies might obsolete their centuries-old method of trading, joined with other floor-based exchanges to create a system which would present the illusion of automation: the ITS System. It was testified under oath before congressional oversight hearings in 1979 by the then president of Merrill Lynch, William Schreyer, that ITS " is as far from the concept of an automated, efficient marketplace as a tom-tom is from a communications satellite."
He went on: "In our [Merrill Lynchs] view a national market system must have the following elements:
1. All orders come together so they have the opportunity to interact.
2. Automatic execution, particularly for active, liquid issues with narrow spreads.
3. Locked-in trades with automated comparison so that stock certificates can be immobilized or eliminated to a substantial degree.
4. Fair and equal opportunity to compete for all who have the capital and willingness to make markets.
5. Full limit order protection so that the public customer has an incentive to come into the market.
6. Finally, market information, such as firm bids and offers, sizes and transaction reports, is promptly and accurately available to all."
ITS meets none of those criteria.
The Commission has repeatedly stated in Releases and other public utterances that ITS is an essential component of a national market system. The other two components are the Consolidated Quotation System ("CQS") and the Consolidated Tape Association ("CTA), both also developed shortly after the legislation was enacted.
The ITS Plan in reality was carefully crafted by the New York Stock Exchange ("NYSE") to thwart the use of technology in the actual execution of securities trades, since the NYSEs business was based on the notion that trading must be done in an auditory arena with orders being executed only by a limited number of agents shouting at each other to effectuate a transaction. The concept of automated execution was anathema to the NYSEs members, since allowing buyers and sellers to interact directly would disintermediate floor brokers and specialists.
Unfortunately the Commission bought the NYSEs idea, and allowed the creation of a Rube Goldberg-like system for trading of stocks. For more than two decades the ITS System has created an almost impenetrable barrier to the development of the national market system envisioned by Congress. It allows any one of its members to veto innovations, requires that proprietary ideas be shared with competitors in advance of implementation, which could block their advantages, and has been strangled by the minutiæ of detailed regulations and procedures.
The latest attempts by the NYSE to prevent and/or delay the startup of the OptiMark Application on the PCX are but the most recent example of stonewalling by an exchange whose antiquated trading technology has made it the high-cost provider of trading services to the worlds investors.
Investors have but a single goal: Buyers want the lowest total cost; sellers want the highest total proceeds. The only way for this to occur is to maximize buying and selling interest into as close to a single trading arena as possible. Just as home sellers prefer multiple listing services, so investorsindividual and institutional alikewant their bids and offers exposed to the largest possible number of counterparties.
The ITS System is predicated on "linking" market centers, especially floor-based exchanges. It does not execute orders; it merely shows them to the ITS members.
Let me make an analogy: The system for trading promoted by the Commission during the past 23 years requires separate entities which are jointly owned and operated by competitors to perform the following functions: (1) Obtain price information (CQS); (2) Send buy and sell orders to several markets for execution (ITS); and (3) report the results of trade executions (CTA).
Compare that with an automated teller machine ("ATM") system. At an ATM, a customer can obtain information about; make transactions; and obtain information about the results of those transactions from a single machineand do so 24-hours a day.
What systems designer in his or her right mind would have built a bank system which required the customer to go to one machine to check a balance, to another machine to make the transaction, and to a third machine to find out the results of that transaction? But thats the exact effect of the Commissions almost quarter-century effort to "facilitate" the establishment of a national market system.
Customers, led by institutional investors (who, after all, are merely the representatives of individual investors), are tired of the convoluted, complicated, expensive steps required to execute securities trades under the present ægis of the Commissions supervision.
Along comes OptiMark, using modern technology to meet the needs of investors. Requiring an OptiMark system to interface with ITS is akin to asking that a jet engine be used to power a World War I Fokker triplane! Customers want a system such as OptiMark without the baggage of having to interface with ITS; why not let them have it?
The Commission should give ITS a decent burial. It was ill-conceived (although very cleverly designed, to be sure), does not meet either the needs of the industry or investors, and its continued existence may well threaten the preeminence of the United States in the trading markets of the world.
The rush to merge, consolidate and/or to change the structure of market centers worldwide from membership-based organizations to lean and modern for-profit entities should be a clear sign to the Commission that their past efforts have not worked as they wanted, and that obsolete stumbling blocks such as the three "alphabet soup" entities masterminded by the exchangesITS, CQS and CTAshould be relegated to the scrap heap on which already lie slide rules and buggy whips.
I recognize the Commissions reluctance to acknowledge major errors, but since we are at the cusp of a new millennium, perhaps now is the time for the SEC to clear the obstacles it created and let the marketplace do its job.
Very truly yours,
/s/ Junius W. Peake