October 1, 1997 Mr. Jonathan G. Katz, Esq. Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Response to request for comments on The Securities & Exchange Concept Release; File No. S7-16-97 Dear Mr. Katz: The Ashton Technology Group, Inc. ("Ashton™") appreciates the opportunity to comment on the Securities Exchange Commission's extensive Concept Release on regulation of markets appearing in the Securities Release No.34-38672 (May 23, 1997). Ashton™ applauds the Commission's Release which examines how traditional exchanges, and less traditional trading systems should be regulated in the wake of the continuous technology revolution. Ashton through its subsidiary, Universal Trading Technologies Corporation (UTTC™)has a keen interest in all of the issues raised in the Release as a result of our business objective of designing, developing and implementing securities trading systems and facilities. Recently, UTTC™ has completed the development of The Universal Trading System ("UTS™") and is ready to deploy its first product module, the VWAP™ trading system ("VTS™") which, when operational, will be a Philadelphia Stock Exchange ("PHLX") facility for electronic trading and pricing of exchange-listed and certain NASDAQ National Market System ("NMS") securities through the PHLX. The VTS™ product module is intended to enable institutional money managers and other users to trade more efficiently by providing low commission rates and by lowering the market impact generally associated with large block trades. The VTS™ product module its expected to generate "liquidity" for the execution of block trades and provide complete anonymity for users and end-to-end data security within a neutral electronic environment. The VTS™ product module has also been designed to provide automated payment, clearing and settlement. All trades through the VTS™ product module will be executed on the PHLX at the VWAP™, the average price for a specific stock weighted by the volume of shares of such stock traded in the "regular way" during the day on all securities exchanges throughout the U.S. as reported to the Consolidated Tape. VWAP™ has been recommended by some industry experts as providing the measurement of the theoretical best trade execution at the lowest cost. I. Regulation of Domestic Markets UTTC™ requests the Commission assure the responsible development and implementation of all securities trading systems in accordance with a proven and effective regulatory scheme. Specifically, UTTC™ believes that the exiting regulatory scheme is utterly fragmented with systems operated by self-regulatory organizations ("SROs") subject to comprehensive requirements and others operating under virtually no requirements. We do not support the continuation of this approach which is reflected in the "tiered" or "exempt exchange" systems as posed in the Release. The twin goals of protecting public investors and facilitating the National Market System ("NMS") demand that all trading systems and entities which function as exchanges be regulated by the highest and not the lowest regulatory standards. UTTC™ believes that the Commission should broaden the definition of an "exchange" under the Exchange Act to include most broker-dealer automated systems, all exempted exchanges, all institutionalized dealer markets and all alternative trading system ("ATSs"). In addition, the Commission should consider any systems or entity that functions to provide price discovery, price formation, passive pricing and/or derivative pricing to be included in the definition of an exchange. The Commission should not create categories of exempt and varying tiered exchanges, but should subject all exchanges to high regulatory standards without stifling innovation by requiring ATS developers to hurdle the high entry barriers of creating a new SRO. Under our approach, no new regulation for exempted exchanges is necessary as all exchanges will come under the auspices of existing SRO regulation of trading facilities. We believe that all exchanges whether small, start up, matching, crossing, derivative, or low impact should be subject to identical regulations. Such a policy will preclude regulatory gaps and will lead to a stronger National Market System. In order to insure the public protection and the integrity of the securities markets in a newly redefined regulatory scheme, the Commission should use its authority to declare that all ATS systems must operate as facilities of an existing SRO in lieu of establishing a new SRO to cover such system or facility . All existing SROs must be compelled to accept the ATS System(s) as part of the newly created SRO framework. The exchange(s) and NASDAQ should continue to operate their present marketplaces as trading facility designated "A" Exchanges equivalent to Tier 3 exchanges mentioned in the Concept Release. All ATSs must seek an A Exchange sponsor to operate in the status as a designated "B" exchange. An example of how this would work in practice is the Universal Trading System which is being developed by our subsidiary The Universal Trading Technologies Corporation ("UTTC™") for launch through the Philadelphia Stock Exchange, Inc. ("PHLX"). In this case, the PHLX, and A Exchange is sponsoring UTTC's™ UTS ™ as a B Exchange. Accordingly, the UTS™ has been fully described in a Rule 19b-4 rule filing and is subject to notice and public comment and Commission review and approval prior to the trading system's launch. Moreover, the Commission will review the systems capacity, security precautions and integrity before allowing it to be used by the public. All UTS™ trades will be subject to surveillance by the PHLX , and transparency requirements available through existing NMS facilities. Before any modifications can be made to the system, another Rule 19b-4 filing must be submitted with its attendant process. Through the rule filing process, the Commission will assure that the UTS™ operates in a fashion consistent with all standards of the Exchange Act, particularly Sections 6 and 11a thereunder. Operating through the auspices of an SRO, access and discrimination issues respecting the system are fully addressed. The B Exchanges would be regulated as an SRO, its personnel as broker-dealers, all in an expanded definition of exchanges and broker-dealer categories. In effect, the entities that undertake one or more of the following functions should be designated as a B Exchange: 1. Consolidate orders of multiple parties, or, 2. Provide a facility where material terms and conditions to the trade are set, or, 3. Create and provide an electronic trading link between non- affiliate parties, or 4. Compiles orders for delivery via the Internet. The B Exchange concept should spur creativity and innovation in new trading systems and techniques by tapping talent and capital existing outside of an SRO, but bringing the ultimate system back into the regulatory structure of an A Exchange. This approach perfectly harmonizes the comparative strenghts of entrepreneurial driven ATSs with the proven public protection environment of existing SROs. II. Costs and Benefits of Revising Regulation of Domestic Markets By using the B Exchange concept to link ATSs into SRO oversight and NMS mechanisms, the issue of the cost of such linkage is efficiently addressed. The inclusion of ATSs into existing SROs allows for the imposition of proven and effective regulations with controlled cost of such regulations. All of the questions regarding technical barriers, costs, admission fees (if any), CTA, CQS, OPRA, OTC-UTP, etc. are much more easily addressed by using the B Exchange concept of regulatory integration. III. The Integration of the ATS into the Existing Regulatory Structure UTTC supports functional regulation and urges that the Commission separate various ATS functions with a clear delineation between the ATS as an exchange and the ATS personnel's activities as a broker-dealer. The Commission should strenuously impose a distinct delineation of function between the ATS as a facility and the ATS broker-dealer activities. Under all circumstances the ATS's trading system functions should be subject to exchange facility regulation, and its expanded broker-dealer activities be exempt from exchange regulatory requirements. A possible means of effectuating this approach is to require the exchange facility and the broker-dealer operations to be effected through separate affiliates or subsidiaries. A. Intermarket Trading System Revision Ashton believes that a ITS must be enhanced or revamped for many reasons, to allow larger size trades to efficiently be executed without creating trade throughs or resulting in locked or crossed markets. IV. Requirements for Registered Exchange Rule Filings In the release the Commission raises an interesting question on how to streamline SRO procedures for changing rules without sacrificing investor protection and market integrity. A. Mandatory Rule Filing by ATSs Ashton's position on this important issue is that all ATSs will be B Exchanges and thereby will comply with rule filing requirements through A Exchange channels. No Exceptions! B. Acceleration of Certain Proposed Rule Filings We support the expanded use of the "effective upon filing" status arising under Section 19(b) (3) (A) of the Exchange Act. For example, competitive fairness dictates that innovative systems should be launched immediately to obtain the lead time that should inure to investors. Extensive comment periods and delays in Commission approvals of new trading systems reduce incentives to innovate and allow less creative competitors to copycat such systems. C. Innovation and Investor Protection We point out that under our A/B Exchange concept there is no need for "pilot program" exemptions because under our B Exchange Concept, innovation will not be sacrificed, but encouraged. In addition, we believe that oversight by an SRO of an ATS facility as a facility and the ATS personnel as broker-dealers provides all the guarantees of compliance and enforcement. It will also reduce the costs imposed on the ATS systems as posed in the Release. In effect, the ATS would be required to adopt rules to prevent fraud and manipulation; promote principles of trade; and not impose any burdens on competition while insuring the regulatory oversight by the SRO sponsoring the particular ATS. D. Market Stability & Systemic Risk In the process, we propose that to insure that market stability and systemic risks are reduced to a quantified minimum, the Commission should insist that each ATS, ensure at its own cost, sufficient capacity, data integrity, and end-to-end security to handle its projected growth and extraordinary usage occasions. Guidelines regarding growth and extraordinary usage should be formulated by the Commission in consultation with the industry and mandated through SRO rules. Likewise, each SRO should provide sufficient capacity, data integrity, and end-to end security to handle its growth, and extraordinary usage for itself (if applicable) as well as the aggregate ATSs that the SRO is sponsoring as B Exchanges. Such an approach will better assure market stability and mitigate system risks through uniform standards and review. V. Regulations of Foreign Market Activities in the United States Technology has permitted the mushrooming of new means of making money and has changed the international traders' role in the world of banking, currency and financial speculation. Technology in the meantime has actively increased competition from outside the U.S. as the buying and selling of securities from anywhere in the world magnifies the risk. The ingenuity of the financial market participants know no bounds. We implore the Commission to take the first step to completely consolidate our U.S. markets and provide the "market information standard" which replaces the dichotomy in our own markets which is caused by attempting to placate all the participants in the U.S. market in a framework, that truly no longer exists. Technology and the World Wide Web of the year 2001 has changed all of this already. It is our suggestion that Foreign rulemaking be set aside and reintroduced under a "Foreign Concept Release" separate from the release of May, 1997 and at that time we will comment. SUMMARY: We believe all of the questions regarding appropriate trading facility standard, including the administration trading halts, circuit breakers, and non-broker access are effectively answered if the A/B Exchange concept is adopted. This concept will provide full supervision and transparency of all trading and market participants through proven SRO regulatory scheme. The new approach would provide for the SRO to regulate itself a well those formerly non-registered ATSs for which the SRO now sponsors. It is true that our approach would have effects on existing exchanges, ATSs, and market participants, but in our view many benefits are derived from this concept including providing all of the benefits of the existing SRO regulatory market structure. It further allows the Commission to foster a stronger U.S. market by encouraging technology and innovation to move forward into the Global Electronic Market which is likely to be the next likely structure for securities markets. Respectfully Submitted, _____________________________ Fredric W. Rittereiser President & CEO