Comment to File No. S7-16-97; Regulation of Exchanges Concept Release.

Dan Jamieson, Huntington Beach, Calif.

Commentator's Disclosure Statement:
The opinions expressed in this comment letter are the personal beliefs of the commentator only, and are submitted as a private investor. The commentator has no financial stake in any kind of trading system, and is not employed or retained in any capacity by a securities firm, trading system or exchange. Commentator is employed as the editor of a trade journal for stockbrokers.

A summary of this commentator's comments (underlined in the entire letter) follows:
concerns raised by the growth of alternative trading systems and the

needs of the market? Is the current approach the most appropriate

Split the SRO function from the market function; the two cannot co-exist effectively. The SEC's general exemptive authority, the Order Handling rules, and establishment of NASD-Regulation are steps in the right direction. The Commission should avoid intrusive rulemaking.

Question 4: What should be the objectives of market regulation? Are

the goals and regulatory structure incorporated by Congress in the

Exchange Act appropriate in light of technological changes? Are

business incentives adequate to accomplish these goals?

Objectives are stated in the 75 Act Amendments--a national market system. The Exchange Act, as a 60-year-old, shows some signs of age--namely, the integration of regulation with the function of the market. Regulation by the NASD or NYSE of systems that compete with Nasdaq or the Big Board, respectively, will not work. Furthermore, even effective self-regulation of these markets will always be fraught with the appearance of conflict.
There are business incentives galore for new systems, existing broker/dealers and exchanges to provide new types of trading and execution services. The markets will reward dealers who can commit capital to execute large trades. A number of diverse trading systems will evolve to meet the needs of niche markets. These disparate trading centers and systems will increase demand for reputable intermediaries and custodians. Investors will likely become better educated about best execution and will be willing to pay commissions or fees for a quality print. Firms will likely be able to charge retail trades for immediacy services. Improved efficiencies that lower trading costs will boost volume and benefit underwriting, research, trading, etc. Many agency functions and other services are likely to benefit, such as limit-order and best-execution services, trade and information services, and surveillance/compliance services. There will be many more opportunities.

Question 5: Are the regulatory categories defined in the Exchange Act

sufficiently flexible to accommodate changes in market structure? If

not, what other categories would be appropriate? How should such

categories be defined?
Categories defined in the Act are not flexible enough. Other categories should be defined as simply as possible, with the least amount of regulation as possible. In addition, the Commission should not hesitate to use its general exemptive authority to deal with innovative new trading systems.

Question 6: Can the Commission regulate markets effectively through

standard-oriented regulation of the type described above?
Yes, with active enforcement.

Question 7: How could the Commission enforce compliance with the

Exchange Act under such a standard-oriented approach?
Set clear standards in simple terms. Then require trading records in electronic form--no exceptions, no unexplained delays in reporting trades or displaying orders. This will facilitate new electronic anti-fraud screening tools. Further, normal sources of market intelligence and enforcement leads should be actively pursued, including arbitration hearings won by customers, or by brokers against dealers. Plus, with a real-time true tape, customers and registered representatives will have the tools to police many of their own trades for suspect activity detrimental to their interests.
Aside from electronic oversight tools, another way the SEC could enforce compliance is to establish a trading-compliance hotline for customers and brokers. This would facilitate widespread oversight beyond the Commission's and SROs' resources. Knowledgeable brokers or customers are likely to have trading records in hand. Licensing exams and continuing education requirements could also cover basic best-execution duty and definition.

Question 8: Is the current regulatory framework an effective form of

oversight, in light of technological changes? Are there other

regulatory techniques that would be comparably effective? If so,

would the implementation of such techniques be consistent with

congressional goals reflected in the Exchange Act?
The current framework is dated. The best technique is to maximize competition and enforcement, and minimize rule complexity. This is absolutely consistent with the Exchange Act, and expressly stated in the 75 Acts Amendments.

Question 10: What types of alternative trading systems would it be

appropriate to regulate in this manner [with various display, access and capacity mandates]?
Display of orders should be mandatory. Mandatory access and interaction are not appropriate. The Commission has let the securities industry ignore the 75 Acts Amendments for 21 years, until the recent Order Handling rules. Do not try to solve this problem overnight. Initially, insist on price transparency for anything that could be considered an "order," go to one-cent ticks (or less) and enforce for best execution. Let dealers decide whether to access the best markets or protect against trade-throughs. Let entrepreneurs decide how to let the public trade directly.
Capacity is a competitive issue. A full audit trail, however, should be Job 1 for the Commission.

Question 11: If the Commission decided to further integrate

alternative trading systems into the NMS through broker-dealer

regulation, should it require alternative trading systems to submit

all orders displayed in their systems into the public quotation

system? If not, how should the Commission ensure adequate

All markets should display orders regardless of how they're classified for regulation purposes. But the Commission may have to define "order." The working definition of a firm quote being an order is appropriate. Going forward, however, new systems are likely to muddy that definition. Do you let solid "indications of interest" for blocks of stock on alternative systems go undisplayed? Indications that seem to be readily executable via either automated systems, or are well-known to be executable, might be deemed orders that should be broadcast. Patterns of posted indications that are readily executable per verbal OK might also be considered orders and subject to transparency requirements. However, the owner of an "order" should always have the option not to display it.
The Commission will also likely need to address single-price auction rules for purposes of price transparency: For example, should the public see pricing and size information in auction queues? Should such systems be required to give indications of likely prices at the next auction? Single-price auctions might consistently deliver superior executions; under best execution obligations, dealers may have to evaluate likely prices in single-price systems and inform customers of these options. This will be difficult if single-price auction pricing information is not broadcast.
Further, significant improvements and oversight of the NMS facilities are in order to ensure transparency.

Question 14: Are there any reasons that orders available in

alternative trading systems should not be available to the public?

Yes. An institutional-trading system, for example, should not have to offer access to all. However, prices of bona fide orders must be displayed in the NBBO, and marketwide trade-through protection guaranteed (but with regulatory flexibility until access systems develop and are improved). Mandating access, however, could kill innovative block trading systems, as well as any other system that want to operate as a private network.
The Commission has allowed the industry to collude on price for decades. It must now show some patience in letting the industry first sort through the Order Handling, Millennium and other technical challenges and expenses. Do not mandate access. Competition, price transparency and best execution enforcement will solve this problem.
However, for any market that handles significant volume or makes meaningful price-discovery, the Commission should ensure that facilities exist for reasonable access-- no more Instinet problems should be allowed to surface.

Question 16: If the Commission requires alternative trading systems

to allow non-participants to execute against orders of system

participants, how should it determine whether the fees charged to non-

participants by such systems are reasonable and do not have the effect

of denying access to orders?
The current monopoly/cartel markets create a simple case: Access must be available, and cost should be minimal or non-existent. If there were robust competition for order flow, rather than the cartel situation, markets would compete by offering the best access terms. Indeed, markets with the most efficient access would be expected to offer the best prices.

Question 17: Are there any reasons that non-participants should not

be able to execute against orders of participants in alternative

trading systems?
Yes. Again, mandating access could kill innovative trading systems that serve niche markets. Government mandates placed upon entrepreneurial innovations will abort many new systems. Insist on price transparency, enforce best execution and trade-through rules, and watch access to the best prices spring forth. This will be a non-issue since the NBBO in the future will be set by systems that offer the best access.

Question 18: Should the Commission require alternative trading

systems to provide additional information (such as identifying

counterparties) to their SRO in order to enhance the SRO's audit trail

and surveillance capabilities?

Yes. How can surveillance be done otherwise?

Question 20: Should SROs be required to surveil trading by their

members in securities that are not listed or quoted on the market

operated by that SRO?

Possibly. But SROs should not be operating markets. The Commission should also encourage and streamline the regulatory process for any third-party surveillance firms that might develop in the new market environment, and which this release anticipates. Such independent, innovative, for-profit regulators will seek to establish good reputations and will likely be key elements in effective oversight of trading systems. Systems may even compete based on the "Good Housekeeping" ® seal such firms may offer. The Commission's limited resources, and the self-conflicts within the current SRO/market structures, make marketwide surveillance virtually impossible. A new approach is needed and should be encouraged.

Question 21: Should alternative trading systems be required to follow

guidelines regarding the capacity and integrity of their systems? If

not, how should the Commission address systemic risk concerns

associated with potentially inadequate capacity of alternative trading

systems, particularly those systems with significant volume?

Let alternative systems worry about capacity and integrity. If they don't work, people won't use them. The Commission should worry about operation of the current monopoly primary markets in providing day-to-day pricing efficiency and transparency. The Commission shows far too much worry over market panics--no continuous trading system will work in a true panic.

Question 22: With what types of standards regarding computer

security, capacity, and auditing of systems, should alternative

trading systems be required to comply?
None. New systems with security and capacity problems will go out of business. However, the Commission must be on guard for crooks who take advantage of faulty systems or set up systems for fraudulent activity, and supervise systems for adequate clearing and settlement.

Question 24: Is access to alternative trading systems an important

goal that the Commission should consider in regulating such systems?

If so, are there circumstances in which alternative trading systems

should be able to limit access to their systems (for example, should

the Commission be concerned about access to an alternative trading

system that has arranged for its quotes to be displayed as part of the

public quotation system)?
Quality of access and openness could be cause for Commission action when a system's orders meet a threshold of significance, such as percentage of time its orders set one side of the NBBO, or the system is the only facility or main facility for trading a particular instrument. In other words, no system that operates as the de facto market should be allowed to run a closed system or a shoddy operation. Experience shows that various access systems tend to emerge with the purpose of offering access to otherwise closed systems that are principal markets. The Commission must ensure that de facto markets do not inhibit access.
However, it's likely that participants with similar needs may want to establish their own private systems. For example, block traders may benefit from a private network that facilitates a large volume of trades with minimal market impact, possibly inside the NBBO. The Commission should consider a hands-off approach with these systems since mandated access by the public could make them uneconomic. The prices obtained on such systems must be immediately printed, of course, and will probably serve as important price points since they're established by well-informed buyers and sellers. Retail-oriented systems may well key off of last-sale trades done on completely closed institutional systems.
The bottom line on closed systems may be that the Commission should allow them when they serve unique needs such as block trading for institutions or oddlot trading for small investors, and do not act as principal markets. Future Instinet problems will be unlikely as long as collusion is not allowed, competition is encouraged, and trading increments are narrowed. Therefore, access to all alternative systems will probably not be necessary.

Question 26: Are commenters aware of any unfair denials of access by

broker-dealers operating alternative trading systems, where there were

no alternative trading venues available to the entities denied access?

Allegations by Datek Securities of denial to Instinet, despite Instinet's promise to the Commission of allowing access. An important point, because as one trader cited in the SEC's August 1996 21(a) report issued in conjunction with the NASD settlement , Instinet IS the market in OTC stocks. Nasdaq, through the NASD, has attempted to restrict SOES firms. The 21(a) report documents OTC traders' harassment and refusal to deal with SOES traders who narrowed spreads, quoted "incorrectly," or entered smaller but legal orders.
The Commission must remain diligent in this regard--monopoly markets will tend to impede access. When alternative markets become available, access problems will diminish.

Question 27: Would enhanced surveillance of alternative trading

systems by their SROs raise competitive concerns that could not be

addressed through separation of the market and regulatory functions of

the SROs?
Competing trading systems cannot supervise each other. The only option is to require basic day-to-day oversight and record keeping by each system, and then delegate investigation and enforcement to a truly independent regulator.

Question 29: What is the feasibility of establishing an SRO solely

for the purpose of surveilling the trading activities of broker-dealer

operated alternative trading systems, that does not also operate a

competing market?
Hopefully good. The industry could use an SRO independent of the conflicts of running its own market.

Question 30: If alternative trading systems continue to be regulated

as broker-dealers, how can the Commission address anticompetitive

practices by such systems?
See following comment on the alternative regulatory system, which is the preferred approach. If the broker-dealer structure is kept, the Commission can best address anticompetitive practices by focusing on the few exchanges and systems that do the bulk of volume or NBBO price discovery to ensure reasonable access to these markets. Once true competition for order flow develops, access problems will be a non-issue--markets will compete via quality and easy access.

Question 31: Would this approach be an effective means of addressing

the issues raised by the growth of alternative trading systems? What

would be the benefits of such an approach? What would be the

drawbacks of such an approach?
The drawback of retaining the broker-dealer structure is that it saddles trading systems with unneeded regulatory baggage.

Question 33: Is broadening the Commission's interpretation of

"exchange" to cover diverse markets, and then exempting all but the

most significant of these new exchanges from registration, the most

appropriate way to address the regulatory gaps discussed above and

provide the Commission with sufficient flexibility to oversee changing

market structures?
Yes. This is the preferred approach.

Question 36: What measure or measures should be used in determining

whether a market has a low impact? What is the level above which an

alternative trading system should not be considered to have a low

impact on the market? At what level should an already registered

exchange be able to deregister?

Probably some percentage of volume and the market's impact on NBBO. Systems that 1) execute between the spread or can show a reasonable basis for believing the trade to be at or better to NBBO at the time of the execution, and 2) maintain reliable real-time electronic records, should have minimal further regulation regardless of location and form.

Question 37: Should an alternative trading system be considered to

have a low impact on the market and be treated as an exempted exchange

if it trades a significant portion of the volume of one security, even

if the trading system's overall volume is low in comparison to the

market as a whole?
Yes. Beware systems that dominate trading in particular issues.

Question 38: In determining whether an alternative trading system has

a low impact, what factors other than volume should the Commission

consider? Should this determination be affected if the operator of an

alternative trading system was the issuer of securities traded on that

"Impact" should be defined by some threshold in which the system accounts for a "significant" presence within the NBBO; crossing systems should be afforded less regulation. Significant and continuous markets should have tighter oversight; smaller and occasional markets could be allowed experimentation with minimal regulation. Special attention should be paid to any market that sets either side of NBBO for any period of time, especially if the public does not have easy access to that market, and if the market executes few if any trades.
Issuers of securities who trade their own securities could be "significant" players, depending on activity. A penny stock promoter who underwrites and dominates the market obviously has a large impact; a major corporation that runs a market for its securities may have other motives than profiting from trading in those securities, and may or may not have a major impact, depending on the characteristics of its market.

Question 39: Should passive markets be regulated as exempted

exchanges, rather than as broker-dealers?
Yes. Passive markets should have minimal regulation.

Question 40: Are the requirements described above appropriate to

ensure the integrity of secondary market oversight?
Question 41: Should any other requirements be imposed upon exempted

exchanges, such as requirements that an exempted exchange provide fair

access or establish procedures to ensure adequate system capacity,

integrity, and confidentiality?

Question 44: Should the Commission allow institutions to be

participants on registered exchanges to the same extent as registered

broker-dealers? If so, should the Commission adopt rules allowing

registered exchanges to have institutional participants, or should the

Commission issue exemptive orders on a case-by-case basis, upon

application for relief by registered exchanges?
Rules are probably appropriate. Why not allow institutions to join exchanges? In the meantime, expedite exemptive orders.

Question 45: Should the Commission allow exchanges to provide

services exclusively to institutions?
Yes. In fact, in the future we may see exchanges whose members are exclusively institutional investors. These institutions should be allowed to trade in private, subject to immediate public prints of all trades.

Question 47: Is it foreseeable that exchanges will wish to permit

retail investors to be participants in their markets? If so, should

the Commission allow retail participation on registered exchanges to

the same extent as registered broker-dealers?

Yes and yes. But let exchanges set their own rules for access, subject to exceptions for markets with major impact.

Question 48: Should the Commission allow registered exchanges to

provide services exclusively to retail investors?

Question 49: Could exchanges have various classes of participants, as

long as admission criteria and means of access are applied and

allocated fairly? Would it be in the public interest if new or

existing exchanges sought to operate primarily or exclusively on a

retail basis? What would be the advantages and disadvantages if new

or existing exchanges were to admit as participants only highly

capitalized institutions or only highly capitalized institutions and

Let markets serve their appropriate customers. Retail- and institutional-only markets can exist side-by-side. They will likely end up discovering price for each other, competing for order flow, as well as mingling for execution.

Question 50: Should non-membership exchanges (including alternative

trading systems that may register as exchanges) be exempt from fair

representation requirements?
Question 51: Should all exchanges be required to comply with Section

6(b)(3) by having a board of directors that includes participant

Question 52: If not, are there alternative structures that would

provide independent, fair representation for all of an exchange's

constituencies (including the public)?
Yes. Competition. Let alternative exchanges structure themselves to best serve their customers. Kill the representation idea.

Question 53: Would the revised interpretation of "exchange" being

considered by the Commission adequately and clearly include

alternative trading systems that operate open limit order execution

systems (even those that also provide brokerage functions)?

Question 54: In light of the decreasing differentiation between

market maker quotes and customer orders in trading, should the

Commission consider an "order" to include any firm trading interest,

including both limit orders and market maker quotes?

Question 57: How should a revised interpretation of exchange

adequately and clearly distinguish broker-dealer activities, such as

block trading and internal execution systems, from market activities?
Access by outsiders vs. a firm-specific system or policy.

Question 59: How should a revised interpretation of the term

"exchange" adequately and clearly distinguish broker-dealer

activities, such as block trading and internal execution systems, from

market activities?
The extent to which outsiders have access, and whether such activities involve bona fide "orders" that should be broadcast versus a broker-dealer acting as an agent for a client in a private transaction.

Question 60: What factors should the Commission consider in

determining whether an organization of dealers is sufficiently

"organized" to require exchange registration?
The extent to which the organizations activities involve bona fide "orders."

Question 61: Does the revised interpretation of "exchange" described

above clearly exclude information vendors, bulletin boards, and other

entities whose activities are limited to the provision of trading

information? How should the Commission distinguish between

information vendors, bulletin boards, and exchanges?
Once transaction services are offered, you know you've got an "exchange." A bulletin board that broadcasts without affiliated transaction services would likely be excluded from regulation, such as a posting forum where participants indicating willingness to trade can seek their own execution mechanism, which would be an "exchange."

Question 62: If the Commission expands its interpretation of

"exchange," should the Commission exempt interdealer brokers that deal

only in exempted securities from the application of exchange

registration and other requirements?
Question 63: How could the Commission define interdealer brokers in a

way that would implement congressional intent not to regulate

traditional interdealer brokers as exchanges, without unintentionally

exempting other alternative trading systems operated by brokers?
By creating the new category of exempted exchanges, and perhaps regulatory gradations within that category.

Question 65: How would the requirement to have rules in place for

trading unlisted securities affect the viability of alternative

trading systems that are required to register as national securities

See answer to Question 69.
Question 66: Would the specifications in the OTC-UTP plan relating to

the trading of Nasdaq/NM securities pose particular problems for

systems that are required to register as national securities

See answer to Question 69.
Question 67: Should the Commission extend UTP to securities other than

NM securities, such as Nasdaq SmallCap securities? What effect would

an inability to trade Nasdaq SmallCap and other non-Nasdaq/NM

securities have upon alternative trading systems that are required to

register as national securities exchanges?
See answer to Question 69.
Question 68: What effect would the prohibition on UTP trading of

newly listed stock until the day following an initial public offering

have upon systems that are required to register as national securities

See answer to Question 69.
Question 69: How should existing exchange rules designed to limit

members from effecting OTC transactions in exchange-listed stock be

applied, if the Commission's interpretation of exchange were expanded

to include alternative trading systems and organized dealer markets?

What customer protection and competitive reasons might there be to

preserve these rules if alternative trading systems are classified as

The Commission should eliminate all such trading restrictions, which are blatantly anti-competitive. Alternative markets will trade different types of stocks more efficiently than existing markets and should have access to all issues.
In addition, if the Commission streamlined regulation for systems that maintained a real-time electronic tape, market data quality would be improved, as would surveillance capabilities on many issues that trade on existing markets. Customer protection would likely be improved.

Question 70: What effects would linking alternative trading systems

to NMS mechanisms have on those systems? For example, how would such

linkages affect the ability of alternative trading systems to operate

with trading and fee structures that differ from those of existing

exchanges or to alter their structures? To what extent could revision

of the NMS plans alleviate these effects?
NMS plans will have to be amended to accommodate a free market, including changes in fee structures, qualifications, quote increments, etc. Or, alternatively, the Commission could streamline approval of new NMS systems linked to alternative markets, especially those new linkage systems with efficient access, a real time electronic record, and time and price priority within the system. If these alternative markets increasingly set a superior NBBO, existing market centers would then be faced with linking to the new NMS systems, which would be an easier way to achieve marketwide linkage technically and politically. The Commission may have to actively encourage currently dominant market centers to link with alternative markets offering superior prices and access.
Currently, the NMS and its systems act as a cartel. The Commission will likely need to take strong steps to open the NMS cartel, as it has recently begun, and also consider alternatives.

Question 71: Are there any insurmountable technical barriers to

admission of alternative trading systems into the CTA, CQS, OPRA, or

OTC-UTP plans?
There are no insurmountable technical barriers. The most significant obstacles will be current members of CTA, CQS, OPRA and OTC-UTP, who will act as a cartel to limit new entrants. Technical barriers will likely be used as excuses to inhibit new members.

Question 72: What costs are associated with the admission of new

applicants to these plans?
The marginal costs are near zero. New, non-traditional members should be added at minimal or no cost, and with a minimum of technical requirements.

Question 74: What effect would the admission of newly registered

national securities exchanges to the CTA, CQS, OPRA, and OTC-UTP plans

have upon the governance and administration of those plans?
New entrants could help open up the NMS.

Question 75: Do admissions fees for new participants required by the

terms of the plans present a barrier to admission to the plans? Do

the plans' provisions that all participants are eligible to share in

the revenues generated through the sale of data affect commenters'

views on this issue?
Yes, fees are a barrier designed to maintain the cartel.
Participants do not own the data and should not be allowed to sell it. The Commission should not accept the common belief that operators of the NMS systems "own" price and volume information. Orders, from which market data is derived, belong to customers. If such data is sold, it should be rebated to customers.
Market data is a public good. Public policy considerations demand that the public have ready access to this data. Yet currently, the public must pay hundreds of dollars per month for real-time equity quotes. This high cost results from the cartel/monopoly vendor. The prohibitive cost of real-time market information acts as a significant barrier to full participation by the public and to formation of new financial-service providers.
Due to the monopoly/cartel position of current market centers, the Commission should anticipate continued NMS entry barriers, and push to open up access through its oversight powers, and /or facilitate alternative linkages. Public policy would be best served if transparency and access became a public good, or close to it, with little or no cost to all alternative trading systems and markets.

Question 76: What effect would the admission of new, highly automated

participants have upon the operation of the ITS?
Admission would force it to modernize.
Question 77: How would compliance with the current ITS rules and

policies affect trading on alternative systems that may be regulated

as exchanges? How appropriate are these rules and policies for

alternative trading systems?
Current ITS rules are not appropriate for any modern exchange. ITS is designed for old-style cartel markets. Compliance with existing ITS rules would kill alternative markets. The Commission should be commended for recently addressing many of the non-competitive features of ITS, and continue to push for modernization and open access to this key piece of public infrastructure.

Question 78: What costs would be associated with newly registered

exchanges joining ITS? Would those costs represent a barrier for newly

registered exchanges to join ITS?
Current costs would likely be a barrier.
Question 79: Are there any ITS plan rules or practices that would

prevent newly registered national securities exchanges from obtaining

fair and equal representation on the ITS?
Nearly all the current ITS rules would prevent fair representation. The unanimous vote requirement to admit new members is proof of the anti-competitive nature of ITS. The exclusion of OTC market makers from ITS is absurd. The special right of review for the Cincinnati Stock Exchange is further proof ITS is a "closed society": The NYSE itself says in a comment letter that "the CSE can be used as a vehicle for non-members to access the NYSE through ITS" (Securities Week, July 14, 1997), a strange argument because access by outsiders to such a primary market is a key element in the 75 Amendments. The status quo argues that outsiders should be kept out of ITS for oversight reasons, but a real-time electronic tape provided by alternative markets trading ALL stocks will actually improve surveillance.

Question 80: What effect would the admission of newly registered

national securities exchanges to the ITS plan have upon the governance

and administration of the plan?
Hopefully, new participants will open up these systems. NMS systems should be getting away from this "governance" idea. These are public or quasi-public systems and should be regulated as such until alternative access systems emerge.

Question 81: What effect would the requirements to impose trading

halts or circuit breakers in some circumstances have upon alternative

trading systems if such systems were regulated as exchanges?
Trading-halt rules would suppress development of alternative trading systems. "Trading halts" are unneeded regulatory baggage, and are primarily used to protect specialists and market makers. Volatility is not necessarily bad and shouldn't be "restrained" by top-down edicts. Uncertainty regarding a particular security is something investors will have to live with; if people want to trade in periods of high uncertainty, let them. If exchanges themselves want to halt trading during times of uncertainty, let them. Meanwhile, new, more efficient exchanges will likely avoid trading halts and market collars, and will compete to outdo each other in times of market stress. The Commission should in no way encourage trading-halt rules. Alternative markets should be allowed to test themselves in market turbulence, and may well improve market function during order imbalances.

Question 83: If the Commission allows institutions to effect

transactions on exchanges without the services of a broker, to what

extent should an exchange's obligations to surveil its market and

enforce its rules and the federal securities laws apply to such

Any member of any exchange should have to follow the exchange's rules. Exchanges of any type should be responsible for providing a real-time electronic audit trail, with the order owner's identity available to regulators. Powerful electronic oversight tools, together with proactive enforcement by regulators, will ensure a much more honest market than we can be assured of now.

Question 85: What, if any, accommodations should be made with respect

to an exchange's surveillance, enforcement, and other SRO obligations

with respect to institutions that transact business on that exchange?
See below.
Question 86: How could institutions that directly access exchanges be

integrated into existing systems for clearance and settlement?
Institutions such as mutual funds, which directly represent individual investors, should have full access to any exchange that allows them. Mutual funds, for example, should be allowed to become members of the New York Stock Exchange. Lack of access to primary markets by such important intermediaries has stifled liquidity, efficiency and innovation on those markets.
Qualified institutions should have no restrictions on joining clearance and settlement systems. Such restrictions are blatantly anti-competitive.

Question 87: Under what conditions should an entity be subject to

both exchange and broker-dealer regulation?
Eliminate duplicate regulation. Use the exempted exchange model. Rules should help create market structures that are separate, pure and efficient. Competition from more efficient alternative systems will necessitate that brokerage firms and SROs move toward stand-alone trading systems.

Question 89: Would this approach [less regulation for some small systems,

more for larger ones, and adjustments to the NMS] be an

effective means of addressing the issues raised by the growth of

alternative trading systems? What would be the benefits of such

an approach? What would be the drawbacks of such an approach?
Yes, this would be effective. The Instinet problem needs to be fixed with more oversight. Upstarts need minimal regulation. And the NMS structure needs significant work and attention by the Commission. The drawback is that the status quo will howl; the benefits will be vastly more efficient capital formation and greater national wealth.

Question 90: Would it be feasible for the Commission to expand the

scope of rules eligible for expedited treatment pursuant to Section

19(b)(3)(A) without jeopardizing the investor protection and market

integrity benefits of Commission oversight of exchange and other SRO

rule changes? If so, to what types of rule filings should immediate

effectiveness, pursuant to Section 19(b)(3)(A), be extended?
Yes, this is feasible, and should apply to standardized products, administrative changes for existing systems, and probably other items as well. The Commission should concentrate resources on enforcement, not needless approval processes.

Question 92: Should the Commission exempt markets' proposals to

implement new trading systems, separate from their primary trading

operations, from rule filing requirements? If so, should SROs be

permitted to operate pilot programs under such an exemption if they

trade the same securities, operate during the same hours, or utilize

similar trading procedures as the SRO's main trading system? Should

there be a limit on the number of pilot programs an SRO can operate

under an exemption at any one time? What other conditions should

apply to such exemption?
Yes and yes. SROs will have to start new systems if they're to compete. No limits should be imposed. The same conditions should apply to SRO systems as to all other systems.

Question 93: Do differences between automated and non-automated

trading require materially different types or degrees of surveillance

or enforcement procedures?
Yes. Non-automated systems are nearly impossible to supervise. The Commission said as much in the 21(a) report. This was THE cause of Nasdaq problems where traders were allowed to hide orders, delay reporting, and file false reports. All trades must be automated on a real-time tape. No exceptions. This should be the No. 1 SEC priority. Where humans are involved in handling orders, they should be trading from electronic terminals, either on a desk or with devices on a floor, with automated order display and transaction reporting. Human intervention in the trading process will always require more oversight resources.

Question 94: Which Exchange Act requirements applicable to registered

exchanges, if any, could be minimized or eliminated without

jeopardizing investor protection and market integrity?
Probably most. The law is 60-plus!

Question 95: If an automated exchange contracts with another SRO to

perform its day-to-day enforcement and disciplinary activities, should

this affect the exchange's requirement to ensure fair representation

of its participants and the public in its governance?
That's up to participants who use it. Forget the "governance" thing--it's a relic. Alternative markets will take various forms of organization.

Question 96: If an exchange contracts with another entity to perform

its oversight obligations, should that exchange continue to have

responsibility under the Exchange Act for ensuring that those

obligations are adequately fulfilled?
Yes, exchanges must be responsible for basic oversight. Let competition take care of capacity concerns. Contractual arrangements with SROs or competing exchanges could raise concerns about conflicts. However, with demand, a specialized SRO that offers day-to-day oversight services may well develop and could be an important factor in allowing alternative systems to develop. Conflicts will also be lessened if exchanges have choices in contracting for oversight. The Commission's focus may need to shift toward overseeing private surveillance firms or SROs.

Question 99: What regulatory costs can be shared by markets operating

simultaneously as self-regulatory organizations, and what regulatory

costs must be borne by each market individually? What are the

relative magnitudes of these costs (as a proportion of total costs)?
Each market should provide a real-time electronic market data, and be responsible for day-to-day oversight and record keeping, pursuant to oversight by independent regulators, and be individually responsible for these costs. With higher degrees of automation, regulatory costs will decline to a nominal level.

Question 100: Are there innovations or adjustments that can be made

to market wide plans such as CQS, CTA and ITS that will lead to lower

regulatory costs for exchanges under any of the alternatives for

regulating domestic markets?
The development of an efficient and flexible NMS structure should be a top regulatory priority--it is an important public infrastructure now being run inappropriately by profit-seeking interests. The Commission should eliminate all anti-competitive aspects, and encourage alternatives.

Question 104: Will the alternatives discussed above impose costs on

systems that differ depending on the nature of the trade? For

example, will the proposed regulatory revisions change the costs of

trades directly between customers relative to the costs of trades

between a customer and a dealer?
Implementation of the `75 Acts Amendments, which this release envisions, will significantly lower costs of trading by significantly reducing the role and cost of intermediaries.

Question 105: What regulatory approaches would best address the

concerns raised by the development of automated access to foreign

markets? Would these approaches differ if U.S. investors accessed

foreign markets in ways other than those described above, such as

through the Internet? Are there any other alternative approaches that

could be more appropriate?
Many foreign markets are well ahead of U.S. markets in offering direct access to investors. This should not be regulated by the Commission. Warnings of market abuses in corrupt foreign markets may be in order, but the government should limit itself to addressing concerns directly with the foreign markets and countries involved.

Question 106: If the Commission were to rely solely on a foreign

market's primary regulator, how could it address the investor

protection and enforcement concerns discussed above?
Better to worry about the U.S. markets, major parts of which the Commission has just admitted are basically unsurveilled.
Public education of the worst abuses and markets overseas will have to suffice. The government has no authority to regulate foreign markets, nor should it attempt to prohibit U.S. investors from accessing foreign markets. Indeed, the quick adaptation of electronic technologies combined with open access may very well cause foreign exchanges to soon offer best execution on some U.S. stocks. The Commission should think carefully before limiting access to foreign markets in any way.
Fraud enforcement must always be a concern, however, including on U.S. markets. If the Commission had reason to believe a fraud was taking place via a foreign market, it should address its concerns to that foreign market, and make those concerns know to U.S. investors on a case-by-case basis.

Question 126: Should the Commission permit SIP and broker-dealer

access providers to transmit orders to foreign markets for the

securities of U.S. issuers or only for the securities of non-U.S.

Let securities be traded anywhere. Best execution rules must apply, however, and a foreign Instinet problem cannot be allowed to happen. However, with penny or smaller trading increments and lively competition in U.S. markets, the opportunity for a foreign Instinet problem will be minimal.

Question 136: Is it sufficient to merely disclose to investors that

the information available about a foreign security may significantly

differ from the information that would be available about U.S.

securities? Do public policy concerns dictate that the Commission

make distinctions based on whether investors receive adequate

Disclosure is all the Commission can do. Investors must accept responsibility that foreign shares are inherently dangerous in many regards. But again, the Commission has much work to do in the domestic market and should concentrate enforcement efforts there. The cleanest markets will attract the most worldwide order flow, which in turn will create the best and deepest markets.