ROBERT C. WEAVER, JR. ATTORNEY AT LAW 4475 Mission Blvd., Suite 216 San Diego, CA 92109 (619) 270-3466: FAX (619) 270-5575 EMAIL: bweave@bweave.com October 2, 1997 Via e-mail to: rule-comments@sec.gov Jonathan G. Katz, Secretary United States Securities & Exchange Commission 450 Fifth Street, N.W. Washington DC 20549 Re: File No. S7-16-97 Release No. 34-38672 Concept Release on regulation of exchanges and other markets Dear Mr. Katz: It is especially timely that the Commission is evaluating it's system of regulatory oversight in the nations securities trading markets. The fast paced innovations in computer networking technology are driving a revolution in the methods by which securities are and will be traded. The ultimate goal of regulation in the trading arena should be to foster our country's economic growth through the enhancement of the mechanisms and infrastructure which promote access to capital. Trading or secondary markets enhance capital market efficiency by enabling purchasers of primary issued securities to sell these securities to third-parties thereby enhancing their liquidity, freeing up their funds for reinvestment, and permitting them to better balance their asset and liability portfolios. These secondary market functions correct imbalances between the supply of capital and the demand for capital on many levels: geographic, type of investor, type of security, and type of issuer, in a dynamic fashion over time. A trading market also enables primary securities to be marketed to a larger pool of potential investors and fosters the creation of multiple investment products to match a myriad of investor liquidity, risk, and investment objectives. The net result is a higher level of capital availability to foster business and economic growth at a lower cost and higher yield to all participants. The Commission now has a unique opportunity to use technology to make and keep the U.S. the model trading arena for the planet. The objectives of the "1975 Amendments", to: promote (1) economically efficient execution of securities transactions, (2) fair competition, (3) transparency, (4) investor access to the best markets, and (5) the opportunity for investors' orders to be executed without the participation of a dealer, are now realizable to a degree never before possible. Confidence in, and the use of, our markets is in direct correlation with how the participants perceive these objectives are being met. The key to attaining these objectives is market transparency, i.e., full disclosure of the trading rules and the trading data (trade forum, bid, offer, trade, volume, intermediate parties and ultimate parties, special circumstances) by all market participants. It is my belief that the centralized collection of adequate market data in a timely manner, which data is then, both surveiled by regulators and disseminated to potential participants quickly, sharpens competition, engenders confidence in the process, is the best defense against market fraud and manipulation, and a superior weapon for investor protection. The technology is finally here which enables the Commission to do this function in a cost effective manner. Comprehensive, accurate and timely trading information subject to review by regulators and the market is the best way to find and prevent fraud. The Commission has long operated on the premise of full disclosure with respect to issuer business, management, operating results and financial condition. The same full disclosure should operate in the trading of securities of issuers. Using the standards of full disclosure and market surveillance coupled with minimum standards for trading rules can ensure that U.S. trading markets allow for innovation and continue to be the most effective and efficient in the world. In implementing any change in regulatory structure the Commission will be pitted against the current market participants who with market power and political power, are resistant to change. In the face of this situation, a major event, the advancing state of computer networking technology is precipitating the change. Broker-dealers have been slow to embrace universal computer networking, like the internet, for their clients (especially retail clients), because this technology has the to potential to allow the client to bypass them entirely. Is it important for the Commission to recognize that the existing political power structure can not prevent these changes, they can merely delay them. If this delay allows foreign trading infrastructures to develop better capital allocation systems than we have in the U.S. our economic growth will suffer. Question 1: The Commission seeks comment on the concerns identified above and invites commenters to identify other issues raised by the current approach to regulating alternative trading systems. See below. Question 2: Are the concerns raised in this release with regard to the operation of alternative trading systems under the current regulatory approach unique to such systems? To what extent could these concerns be raised by broker-dealers that do not operate alternative trading systems, such as a broker-dealer that matches customer orders internally and routes them to an exchange for execution or a broker-dealer that arranges for other broker- dealers to route their customer orders to it for automated execution? The goals should be to improve the efficiency of capital flows and investor education. SRO's should not be allowed to operate exchanges or quotations systems, there is an inherent conflict of interest between concerns for making money in the market trading and regulatory oversight. It is not necessary to require that the public be provided with access to specific alternative trading systems, let competition create systems for them. Just require all trade reporting be standardized and reported to a central market surveillance and dissemination function. Current proprietary alternative trading systems are used to exploit exchange differences through arbitrage. This is detrimental to many investors who are unable to participate. The best way to correct this is eliminate barriers to entry as alternative trading systems. Then let the internet and communications technology revolutionize trading. What is inevitable is the decline of the use of an intermediary, the party who intersperses itself between the buyer and the seller and who makes a commission or spread and often promotes a security, not on the basis of value, but because they make money on the transaction. Exchanges should not be required to have membership, just effective audit & monitoring procedures. The proposed redefinition of an exchange is the best approach. Require registration, recordkeeping, reporting, disclosure, and antifraud but give the maximum flexibility to adapt to technology. Allow electronic communications networks to become exchanges. Question 3: What regulatory approaches would best address the concerns raised by the growth of alternative trading systems and the needs of the market? Is the current approach the most appropriate one? Continue the current approach, regulating exchanges and SRO's, but ease the barriers to creation of exchanges and SRO's to allow prospective participants to experiment with new forms of operation. This would facilitate the flexibility in the current market trading system allowing for changes to the market place to be achieve through competition rather than through a radical change in the system which would impose undue cost to existing market participants and well as disrupt the stability of the marketplace. Market surveillance should not be only at the SRO level. The most important focus at the Commission should be on trade reporting and surveillance - real time, current quotes, trade price, volume with party, counter party information. There should be uniform reporting for all markets. All quotes, trade price & volume information into a uniform tape. Only when we have real time price discovery on all trading will we have a true national market system. 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? All markets should have the same trade reporting requirements and there should be one central market surveillance function. The markets should be transparent with disclosure and reporting to the Commission. There should be a level playing field with low barriers to entry which foster competition. There should be adequate standards of trading integrity to protect from fraud & manipulation. The markets should be coordinated by a consolidated reporting system and any exchange should be able to trade a security. Securities should be registered with the Commission and not for any particular exchange. 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? It would appear the proposed redefinition of an exchange would be appropriate. Using the Commission's conditional exemptive relief when a new entity comes along and before it acquires a "statutory" definition is an appropriate procedure. Question 6: Can the Commission regulate markets effectively through standard-oriented regulation of the type described above? Yes. Question 7: How could the Commission enforce compliance with the Exchange Act under such a standard-oriented approach? Use a central market surveillance function which receives real time trade data, determines suspicious trading activity or patterns and acts on them immediately. 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? Yes, the critical element in market regulation is the provision of trading information on a timely basis for market surveillance. All other information is secondary. All trading information should be provided on a instantaneously to the Commission via computer access. Question 9: Are there viable alternatives within the existing Exchange Act structure, other than those discussed below, that would address the concerns raised by the growth of alternative trading systems and congressional goals in adopting the Exchange Act? There are three primary areas of fraud in the securities markets today, trading, company information disclosure, and sales practices. The Commission should concern itself primarily with trading and information disclosure, and let the SRO's concern themselves with sales practices. As it stands now the SRO's run the trading systems (exchanges, NASDAQ, etc.) which they are regulating. It does not work, witness the recent NASDAQ debacle. Congress, when it sought to lower the costs of business to access capital by fostering uniformity in securities regulations through the Market Improvements Act of 1996, sought to distinguish between what the Commission should do and what the states should do. Congress or the Commission should do the same thing by taking away the SRO's regulation of their own trading forums. In the very least trade reporting should be centralized and surveiled by one agency. Precedent for this type of action in the securities industry is the creation of the Central Registration Depository ("CRD") currently administered by the NASD Regulation, Inc. The Commission should administer CRD and a central market surveillance operation. Technology will make these activities easier and more automated. Question 10: What types of alternative trading systems would it be appropriate to regulate in this manner? As discussed in the concept release, the tiered approach to regulating alternative trading systems as new exchanges is likely to allow for the most innovative alternative trading systems, however, since many alternative trading systems currently exist as broker-dealers the Commission should continue to allow for development within the broker-dealer track. Let the alternative trading system choose which approach it wishes to take. Perhaps, as regulations develop, the broker-dealer alternative trading systems will switch to become regulated as exchanges under a tiered approach. 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 transparency? Yes. Question 12: If the Commission requires alternative trading systems to submit all orders displayed in their systems into the public quotation system, how can duplicate reporting by alternative trading systems and their participant broker-dealers be prevented? Reporting standards and computer technology should be able to identify each trade and at the aggregate dissemination level the duplicates can be dropped out. Question 13: Are there other methods for integrating all orders submitted into alternative trading systems into the public quotation system? Probably. The objective of the Commission should be to foster competition to develop them, not force them to integrate. Question 14: Are there any reasons that orders available in alternative trading systems should not be available to the public? Yes, as long as price discovery, including the name of the alternative trading system from which the data came from is fully disseminated. When this occurs on a systematic basis, the non- participants who have a need to participate will join the appropriate alternative trading system or create or assist in creating a new one to compete with the one they are unable to join. Question 15: If the Commission requires alternative trading systems to allow non-participants to execute against orders of system participants, how should it ensure that non-participants are granted equivalent access? The Commission should not require full access of non- participants. The Commission should create centralized price dissemination and let a standards based compliance system allow competitive alternative markets to develop that will, in time, ensure access for all parties to an execution system which was created to satisfy their needs. 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? See the answer to question 15. Question 17: Are there any reasons that non-participants should not be able to execute against orders of participants in alternative trading systems? Yes, in a new standards based competitive trading market place, where enough parties are denied participation, a new alternative trading system will be created to satisfy the needs of these parties. Let the market place open up the trading markets. Do not let the existing market trading institutions stifle competition. 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. Question 19: What other methods could the Commission use to enhance market surveillance of activities on alternative trading systems? The Commission should itself or via a newly established quasi- governmental corporation (i.e., a "Price and Trade Reporting Agency"), collect all trading data on a real time basis, prior to immediate dissemination to information vendors. At this collection level, computers should be used to analyze for data patterns which create a suspicion of illegal activity. Question 20: Should SRO's be required to surveil trading by their members in securities that are not listed or quoted on the market operated by that SRO? No. Surveillance should be at a centralized level where all trade data can be unified and analyzed. A big problem with securities surveillance now is that, like many local law- enforcement agencies, the myriad of surveilers watching the same security are unable to coordinate their surveillance to determine what is happening. They see only parts of a jigsaw puzzle. 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? Yes. Through the standards based, tiered approach stated earlier. Set the parameters and let competition operate within the standards to create optimal trading systems. Question 22: With what types of standards regarding computer security, capacity, and auditing of systems, should alternative trading systems be required to comply? Develop a minimum level of standards the alternative trading system must comply with and then require each alternative trading system to furnish the Commission and all participants with full information as to it's compliance with those standards and any actions taken to exceed those standards. The Commission should be especially interested with practices and technology which exceed the standards. The standards should evolve as technology evolves. Question 23: To what extent would complying with systems guidelines similar to those implemented by exchanges and other SROs require modification to the current procedures of alternative trading systems? What costs would be associated with such modifications? How much time would be required to implement the necessary modifications and systems enhancements? Please provide a basis for these estimates. Using the tiered approach, infant and small alternative trading systems would have less burdensome requirements. The key issue is the flexibility to try new approaches with a minimum of cost while the economic impact on the market place is small, i.e., the volume of trading is small. 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)? As long as (1) an alternative trading system provides real time trade data, and (2) there are low barriers to the creation of new alternative trading systems, there should be no requirement of access by non-participants because the awareness of an opportunity to create an alternative trading system for those denied access to a current alternative trading system will spur the creation of the alternative trading system. Question 25: If alternative trading systems were to continue to be regulated as broker-dealers and were subject to a fair access requirement, should the Commission consider denial of access claims brought by participants and non-participants in alternative trading systems? If not, are there other methods that could adequately address such claims? There should be no fair access requirement. 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? No. 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? Market surveillance should be with one central organization, the Commission or a quasi-governmental organization. Question 28: If alternative trading systems continue to be regulated as broker-dealers, are there other ways to integrate the surveillance of trading on alternative trading systems? See the answer to question 27. 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? Assuming the SRO's continue in their function as market surveilers of the trading systems they regulate, the central trade data collection agency should surveil any alternative trading systems which do not already have a surveilling agency. Question 30: If alternative trading systems continue to be regulated as broker-dealers, how can the Commission address anticompetitive practices by such systems? Broker-dealers and SRO's (composed of broker-dealers or market- making members) are inherently anticompetitive. Look at the recent NASDAQ spread scandal for proof. The best way to create competition is to lower the barriers to creation of an alternative trading system that can compete with existing alternative trading systems. Use trade data dissemination as the instrument to allow potential creators of alternative trading systems to find market opportunities. 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? As long as you allow for alternative trading systems to choose to be regulated either as an tiered exchange or as a broker-dealer, the benefits are the familiarity with the current process and there are no drawbacks. Remember, flexibility fosters innovation. Question 32: If the Commission reinterpreted the term "exchange," are the factors described above (i.e., (1) consolidating orders of multiple parties and (2) providing a facility through which, or setting conditions under which, participants entering such orders may agree to the terms of a trade) sufficient to include the alternative trading systems described above? The wording in question 32 appears to cover the primary function of an exchange. 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? As long as the Commission obtains a timely and continuous data feed of trading for market surveillance, this approach allows for the maximum flexibility to create competition for exchanges, use technology, and give the investor the best forums for trading. Question 34: Are there any other categories of alternative trading systems that have sufficiently minimal effects on the public secondary market that they should be treated as exempted exchanges? Yes, as stated in the release. Subject to trade reporting. Question 35: Should low impact markets be regulated as exempted exchanges, rather than as broker-dealers? Yes. The current broker-dealer associations limit competition. Fostering new exchanges requires allowing them to began outside of the broker-dealers. 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? Under 10% of total market trading volume should be the threshold for low impact and deregulation. 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? As long as trade reporting is being done to market surveillance only the volume in the whole market should not be considered. Any other approach will limit the ability of new exchanges to startup. 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 system? Possibly, market price times volume to put a dollar value to the volume indicators. Question 39: Should passive markets be regulated as exempted exchanges, rather than as broker-dealers? Yes, as exchanges. Question 40: Are the requirements described above appropriate to ensure the integrity of secondary market oversight? No, what is need is active market surveillance at a central data collection point of all exchanges and alternative trading systems. 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? The Commission should have minimum standards for an exchange before an exemption is authorized as stated in the answer to question 22. Question 42: Should requirements vary with the type of alternative trading system (e.g., should passive systems be subject to different conditions than systems exempted on the basis of low impact)? No. Question 43: Should the Commission require that securities traded on exempted exchanges be registered under Section 12 of the Exchange Act? Should different disclosure standards be applicable to such securities if they are only traded on such exchanges? Yes. All publicly traded securities should be Exchange Act registered with the current "small business" issuer differences. 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? The Commission should not dictate the structure of an exchange. The Commission should set minimum standards and let the marketplace create innovative structures within these standards. Foster competition and let the participants decide these issues. Question 45: Should the Commission allow exchanges to provide services exclusively to institutions? Yes. See the answer to question 25. Question 46: If the Commission allows institutions to participate in exchange trading, should the Commission view all entities that have electronic access to exchange facilities as "members" under the Exchange Act and then exempt exchanges from Section 6(c)(1)? No. See the answer to question 44. 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. Foster competition. 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 broker-dealers? Yes. Competition is fostered by allowing many different configurations in the structure of exchanges, using minimum standards as the threshold. Question 50: Should non-membership exchanges (including alternative trading systems that may register as exchanges) be exempt from fair representation requirements? Yes. Question 51: Should all exchanges be required to comply with Section 6(b)(3) by having a board of directors that includes participant representation? No. 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. Use the minimum standards and let competition create them. 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)? Yes. 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? Yes. Market maker quotes are basically limit orders. Question 55: What should the Commission consider to be "material conditions" under which participants entering orders may agree to the terms of a trade? For example, should an alternative trading system be considered to be setting "material conditions" when it standardizes the material terms of instruments traded on the market, such as standardizing option terms or requiring participants that display quotes to execute orders for a minimum size or to give priority to certain types of orders? Let the alternative trading system decide what is material, just set minimum standards. See the answer to question 22. Question 56: Is it appropriate for the Commission to consider the activities described above as broker-dealer activities? Yes, although some of them could be considered exchange activities. Allow alternative trading systems to opt to be regulated as a broker-dealer or as an exchange. 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? Use the current system. See the answer to question 22. Question 58: Are the distinctions discussed above accurate reflections of exchange and broker-dealer activities? Are there other factors that may better distinguish a broker-dealer from an exchange? Yes. A broker-dealer has a fiduciary obligation to his client. 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? See answer to question 57. Question 60: What factors should the Commission consider in determining whether an organization of dealers is sufficiently "organized" to require exchange registration? Use the broadened definition of an exchange. 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? When an entity provides a trading forum it becomes an exchange and is regulated as such. 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? No. 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? In the dual optional system of exchanges and broker-dealers, the brokers would just choose not to be regulated as an exchange. Question 64: How could the Commission foster the continued trading of all securities currently traded on alternative trading systems if these systems are classified as exchanges under the interpretation described above and some of these systems are required to register as national securities exchanges? For example, what would be the effect on alternative trading systems that wish to trade securities exempted from registration under Rule 144A if those systems are required to register as national securities exchanges? Once a security is registered under the Exchange Act it should be tradable on any exchange or alternative trading system as long as trade data is submitted to market surveillance. 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 exchanges? It would stifle the creation of alternative trading systems and the trading thereon. This will lessen competition, exactly what the established exchanges want to happen. 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 exchanges? OTC-UTP specifications should relate to trade data reporting only. 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? Yes. See answers to questions 64-66. 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 exchanges? Don't know (DK). 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 exchanges? They should be eliminated. 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? The key is to have all trading data reported to a central unit with market surveillance capability and then disseminated to the marketplace, identifying which exchange or alternative trading system was the source of the data. Once anomalies are identified in the linkages two things will happen: (1) Arbitrage will narrow the differences in prices from one alternative trading system and exchange to another, and (2) Through competition, new alternative trading systems will be created to cater to those potential participants which are denied access to existing markets. Let competition deal with the fees. Just setup a level playing field. By the way, either the Commission needs a new name for the "National Market System" or it should make the NASD change the name of their system "NASDAQ/National Market System", it is confusing to all participants. Question 71: Are there any insurmountable technical barriers to admission of alternative trading systems into the CTA, CQS, OPRA, or OTC-UTP plans? No. Question 72: What costs are associated with the admission of new applicants to these plans? The system advocated here would standardize reporting and should entail minimal costs, especially since costs of technology are spiraling exponentially downward. Question 73: Are there any CTA, CQS, OPRA, or OTC-UTP plan rules that would prevent newly registered national securities exchanges from obtaining fair and equal representation on these entities? DK. 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? As stated before, all of the reporting services should be consolidated into one entity for better market surveillance and dissemination. A system modeled after EDGAR should be set up for accumulation the data and then spun off to a government sponsored enterprise (GSE). 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? See the answer to question 74. Question 76: What effect would the admission of new, highly automated participants have upon the operation of the ITS? Obviously there will be bugs that have to be worked out, the key issue is data reporting. 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? DK. 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? DK. 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? DK. 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? DK. 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? All trading halts and circuit breakers should be administered by the Commission for the reasons it imposes them now, as well as for reasons identified by a centralized market surveillance function. Question 82: What impact would registration of an alternative trading system as an exchange have on the institutional participants of that trading system, including registered investment companies? DK. 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 institutions? As stated before all market surveillance should be centralized, either as an enhancement to exchange and SRO market surveillance or superseding them entirely. Question 84: How could an exchange adequately supervise institutions that effect transactions on an exchange without the services of a broker? They can not, but a central market surveillance function should be more effective. 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 answers to question 83 and 84. Question 86: How could institutions that directly access exchanges be integrated into existing systems for clearance and settlement? Clearance and settlement should be, as long as it conforms to minimum standards, in any manner which the exchange or alternative trading system wishes. Question 87: Under what conditions should an entity be subject to both exchange and broker-dealer regulation? An exchange which also performs the function of a broker (having a fiduciary obligation of clients) or dealer (holding out simultaneous offers to buy and sell the same security) should be required to register as a broker-dealer. Question 88: Should a dually registered entity be required to formally separate its exchange operations from its broker-dealer operations (e.g., through use of separate subsidiaries)? DK. Question 89: Would this approach be an effective means of addressing the issues raised by the growth alternative trading systems? What would be the benefits of such an approach? What would be the drawbacks of such an approach? An exchange based approach would foster the growth of alternative trading systems because new alternative trading systems would not be burdened with the broker-dealer requirements which do not apply. Under a dual system which also allows a broker-dealer which operates an alternative trading system to opt to be regulated as a broker-dealer there are no drawbacks relative to the current system. 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? DK. Question 91: If the Commission expands the scope of rule filings eligible for treatment under Section 19(b)(3)(A) to include, for example, certain types of new products, what conditions or representations should be required of an SRO to ensure that the proposed rule change is eligible for expedited treatment under Rule 19b-4? DK. 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? There should be some provision for pilot programs and reporting of the results. The important issues are full disclosure to participants and investor protection. Question 93: Do differences between automated and non-automated trading require materially different types or degrees of surveillance or enforcement procedures? No, as long as all trade data reporting is done electronically in an timely manner to a central market surveillance function where it can be reviewed using algorithms which look for fraud and manipulation. Question 94: Which Exchange Act requirements applicable to registered exchanges, if any, could be minimized or eliminated without jeopardizing investor protection and market integrity? DK. 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? Under the new definition of an "exchange" which does not require "members", participants and the public do not need "fair representation" and a voice in governance, they need to be "treated fairly." 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? No, unless they contractually bargained for dual responsibility. Otherwise, what would be the purpose of contracting out? Question 97: What costs to investors and other market participants are associated with the current regulation of alternative trading systems as broker-dealers? Specifically, what costs are associated with the potential denial of access by an alternative trading system? Potential denial of access of an alternative trading system because they were not a broker-dealer would be alleviated by a dual system of alternative trading system regulation either as a broker-dealer alternative trading system or an exchange under the tiered approach. Question 98: What costs are associated with each of the alternatives for revising market regulation discussed above? For example, would either of the two principal alternatives discussed in Section IV above impose costs by limiting innovation? Would these costs be greater than those imposed by the current regulatory approach? See the answer to question 97. 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)? DK. 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? Bring all market surveillance and trade dissemination into one organization. Question 101: Total regulatory costs vary with a variety of factors (e.g., volume of trade, degree of technology applied in trade). Of these factors, which are most relevant in considering the alternatives discussed above? For example, recognizing that some market mechanisms may rely on some factors more than others, to what extent are regulatory costs greater for particular mechanisms than others? Market data transmission has relatively minimal cost. Market surveillance, using a piecemeal approach at the SRO and exchange level costs far more than a centralized approach. Centralize and automate market surveillance for cost savings and timely investigation of potential fraud and manipulation. Question 102: What costs are associated with the responsibilities of an SRO? Will the costs to existing SROs be reduced by registering significant alternative trading systems as exchanges? Ninety percent of securities regulatory problems will show up in the trade data. With a centralized market surveillance function, use this data to pinpoint the problems as they occur. Then use enforcement teams to bring focused attention immediately on the identified problem. If this were done, there would be a significant decrease in costs because (1) problems are addressed before they have time to mushroom, and (2) quick action will deter the culprits and other potential culprits from attempting the same fraud twice. Question 103: What regulatory burdens currently inhibit innovation of trading systems? How will the alternatives discussed above change the incentives for innovation? The high barriers to entry currently established to create a new exchange or to become a broker-dealer and create an alternative trading system. The tiered approach to exchange registration seems to be the best approach for a fostering alternative trading systems. 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? It is likely that the cost to customers will decrease as alternative trading systems are created that bypass the broker. The internet will revolutionize the way the markets are traded. 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? Use a three pronged approach: (1) Certify or approve specific exchanges, as is now done for Regulation S; (2) Allow for foreign stocks to register under the Exchange Act regardless of which exchange they trade on; and (3) Use disclaimers and investor education to provide disclosure about the rules and practices of problem exchanges. 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? See the answer to question 105. Question 107: Should the Commission require foreign markets with only limited activities in the United States to register as national securities exchanges or obtain an exemption from such registration? How would this affect U.S. persons trading directly on foreign markets? Not require, but allow. Registration with the Commission would foster more confidence in the foreign exchange. Question 108: How can the Commission best achieve its goal of regulating the U.S. activities of foreign markets? Commenters should take into consideration that foreign markets are regulated abroad, that there is a potential for international conflicts of law, and that the Commission has jurisdictional limits. Given the difficulties of surveilling public networks such as the Internet, would an access provider approach be workable? No. Requiring the access provider to be subjected to the rules for broker-dealers is too onerous and stifle the growth of the market. Use one central regulatory institution to collect the trading data and surveil the market, not private enterprise. Education is the key to warning investors about potentially fraudulent foreign markets. Question 109: What would be the best way for the Commission to regulate the limited U.S. activities of foreign markets that provide remote access to U.S. members? See the answer to question 105. Question 110: When should an entity be required to register with the Commission as a non-exclusive SIP under Section 11A of the Exchange Act? For example, should the activities described above require registration as a SIP? See the answer to question 108. Question 111: If the SIP approach were adopted, is it likely that U.S. members of foreign markets would wish to transmit their orders to such markets through more than one SIP registered with the Commission? If so, should all but one of those SIPs be exempt from registration? See the answer to question 108. Question 112: Under the SIP approach, should foreign markets that allow their U.S. members to transmit their orders solely through a registered SIP have a safe harbor from registration as national securities exchanges? See the answer to question 108. Question 113: What type of activities should a registered SIP be permitted to conduct on behalf of a foreign market without the SIP or the foreign market registering as an exchange? See the answer to question 108. Question 114: What types of automated broker-dealer systems, both operational and contemplated, would be encompassed within the above description of access providers to foreign markets? How widespread are these activities? DK. Question 115: Would the above description of broker-dealer access providers adequately and clearly exclude traditional brokerage activities, particularly handling the execution of customer orders on foreign markets? If not, how should such activities be distinguished from traditional brokerage activities, particularly traditional cross-border activities? Should U.S. broker-dealers that provide investors with access to foreign markets be subject to any additional requirements? U.S. broker-dealers that provide investors with access to foreign markets should not be subject to any additional requirements. Question 116: Should foreign broker-dealers that provide U.S. investors with automated access to foreign markets be required to register as broker- dealers on the basis of that activity? No. Requiring this is too onerous and stifle the growth of the market. Use one central regulatory institution to collect the trading data and surveil the market, even foreign markets. Alert foreign regulatory agencies. Use education to warning investors about potentially fraudulent foreign markets. Question 117: What types of conditions, if any, should the Commission place on access providers if it were to pursue that approach? DK. Question 118: If the Commission decides to regulate access providers to foreign markets, what criteria should the Commission use in determining whether an exchange is a bona fide foreign market? Should a market be required to have at least a majority of foreign members in order to be a bona fide foreign market? Should the Commission exclude exchanges that provide terminals in the United States? DK. Question 119: Should the Commission regulate as a U.S. exchange any market that, although organized and having its principal place of business outside of the United States, is under common control with or controlled by U.S. persons, or whose decisions regarding trading rules, practices, or procedures are made by U.S. persons? No. First, the Commission should not regulate foreign exchanges. Secondly, the U.S. person test is too easy for operators to circumvent. Question 120: What factors should the Commission use in determining whether an exchange is operating a trading facility in the United States and is not a bona fide foreign market? If exchange-owned terminals are located in the United States, should this constitute operating a trading facility in the United States? If exchange-owned terminals located in the United States were the criteria then operators would find ways not to own the terminals, thus circumventing the criteria. It is interesting to note that, with respect to internet transactions, European regulators have decided that the laws where the server sits shall apply. Question 121: What effect would a reinterpretation of the term "exchange" under Section 3(a)(1) of the Exchange Act have on any Commission proposal to regulate SIP and broker-dealer access providers? DK. Question 122: If the Commission decides to regulate access providers to foreign markets, should the Commission require access providers to transmit orders only to foreign markets that are willing to share, and capable of sharing, information with the Commission in connection with investigations involving violations of U.S. securities laws? If so, what standard should the Commission use in determining whether a foreign market would provide meaningful assistance to the Commission? If commenters believe that SIP and/or broker-dealer access providers should be permitted to transmit orders to any foreign market, indicate how the Commission could ensure that it has the ability to enforce the applicable provisions of the federal securities laws. No. The Commission should only require that the access provider send trade data to a central market surveillance function. If fraud becomes apparent the Commission should halt trading in the U.S. and then deal with the foreign regulatory coordination issues. Question 123: Should the Commission require access providers to transmit orders only to foreign markets that are located in countries that have entered into arrangements with the Commission to provide enforcement and information sharing assistance? No. Question 124: If the Commission regulated access providers through the approach described above, should SIP access providers be limited to providing their services to sophisticated institutions or should they be allowed to provide any U.S. investor with the capability of directly trading on foreign markets as members? If so, should broker-dealer access providers be subject to similar requirements? All investors should have access. All access providers, including broker-dealer access providers should be subject to the same requirements. Question 125: If the Commission permits SIP access providers to offer their services only to broker-dealers and certain sophisticated institutions, how should this category of sophisticated institutions be defined? DK. 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. issuers? Permit full access for securities of U.S. and non-U.S. issuers. Question 127: Should the Commission limit the ability of SIP and broker- dealer access providers to transmit orders to foreign markets for the securities of non-U.S. issuers if the "principal market" for those securities is located in the United States? If so, how should the Commission determine when the "principal market" of a non-U.S. security is located in the United States? No. Question 128: If the Commission permits SIP and broker-dealer access providers to transmit orders to foreign markets only for securities of non- U.S. issuers, how should the Commission distinguish between U.S. and non- U.S. issuers? DK. Question 129: If the Commission decides to regulate access providers to foreign markets, should they be required to make and keep records? What records should registered SIP and broker-dealer access providers be required to maintain? No, but they should provide trade data to a central market surveillance function. Question 130: Should access providers be required to file periodic reports? If so, what information should those contain? No. Question 131: Should broker-dealer access providers be required to keep records of denials of access to their services? Should they be required to notify the Commission of such denials of access? Yes to both questions. Question 132: What types of risks should be disclosed to users of SIP and broker-dealer access providers? For example, should SIP and broker-dealer access providers be required to disclose the listing and maintenance standards of foreign markets to which they transmit orders on behalf of U.S. persons? What would be the costs associated with such a requirement? The rules of trading and standards of the exchange should be disclosed. Question 133: Should access providers be required to make disclosures to sophisticated institutions? Yes. Question 134: What market information should SIP and broker-dealer access providers be required to provide to the users of their services? All trade data except the names of the counter-parties. Question 135: Should direct trading in foreign listed companies be limited to those that satisfy U.S. disclosure standards in order to better protect U.S. investors? DK. 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 information? An investor education program should make broad distinctions based on what laws and accounting principals under which the issuer operates. Question 137: Are there circumstances under which unregistered foreign securities should be permitted to trade on foreign markets through an access provider? For example, should the Commission establish some de minimis threshold for a foreign security based on the dollar value of the U.S. float or trading volume in that security, or on the relative percentage of U.S. float or trading volume compared to that of the home or worldwide markets? No. If you have a regulatory system, the exceptions will be the ones which cause the most trouble for investors. Question 138: Should the exemption from registration under Exchange Act Rule 12g3-2(b) be available if a significant portion of an issuer's float is traded in the United States? No. Question 139: Given that broker-dealers currently trade unregistered securities for customers, should the Commission reconsider its approach to securities registration requirements in this context? Are there other viable alternatives that would ensure adequate disclosure to U.S. investors trading on foreign markets? Investor education and a voluntary registration system. Question 140: Is trading in unregistered foreign securities through an access provider to a foreign market appropriate if access is limited to sophisticated investors? For example, should access providers be permitted to transmit orders for unregistered foreign securities to a foreign market on behalf of qualified institutional buyers as defined in Rule 144A of the Securities Act? No, trading should be open to all. But, of course, it also depends on the definition of a "sophisticated investor." Question 141: Are there uniform procedures that the Commission should impose on foreign markets or on access providers to assure that securities are not sold to U.S. investors in circumstances that result in a public distribution of securities in the United States that are not registered under the Securities Act? DK. Question 142: What are the consequences to SEC reporting companies if unregistered foreign securities listed on foreign markets are available to be purchased or sold through access providers? Commission reporting companies have better disclosure and the investing public should be educated to this process. More confidence to invest usually follows better disclosure. Question 143: Would any of the approaches described above provide an effective means of addressing the issues raised by foreign market activities in the United States, including providing key protections for U.S. investors? What would be the benefits of each approach? What would be the drawbacks of each approach? As stated previously, use an approach which fosters competition in the marketplace for trading forums which offer fair rules, the best information, best trade reporting and dissemination, best execution and best access. In trading activity data is where 90% of market fraud is found. Make that the focus of enforcement. Follow the money. Use a centralized market surveillance function which monitors all trade date (including counter-parties) on a real time basis, subjects the data to algorithms which identify suspicious trading activity, investigate that activity and bring appropriate enforcement actions. Use technology and the internet to disseminate information about the market (exchanges and alternative trading systems), the issuers, trade activity, investor education and fraudulent activity. Don't create a plethora of rules which stifle competition. Set minimum standards which create uniformity in trade reporting, clearing and settlement, and market integrity. Keep the alternative trading systems barriers to entry low. Then let free enterprise do the rest. Although not addressed in the release, as the trading arena becomes more international in scope state rules and regulations need to be superseded by uniform laws and regulations on a national basis. Anything less will hinder the continued supremacy of the U.S. securities markets. For support in pursuing this metamorphosis I would suggest that the Commission look to the actions of two other federal regulatory agencies that have instituted programs opening their respective industries once known for high barriers to entry and lack of competition: the Federal Communications Commission in the telecommunications industry, and the Federal Energy Regulatory Commission in the electric utilities industry. New regulatory rules in these industries are allowing the effects of technology and competition to benefit their customers in terms of price and service options. A similar initiative in the securities markets would benefit the entire economy by increasing the integrity and efficiency of the process by which those who invest capital transact with other investors and with businesses that need access to capital. By exercising strong leadership now the Commission can create for the first time a truly "national market system", speeding the flow of issuer information, price discovery and dissemination, and investor education. This would be a model for evolving foreign trading mechanisms and the forerunner of a ubiquitous universal securities market. With the European Union' embrace of the accelerating electronic commerce and internet technology developments, the window of opportunity will not be open long. Thank you for soliciting comments on such an important facet of our national and international economy. This market is changing, with or without the current participants and regulators. It is comforting to know that the Commission has the foresight to consider the implications and hopefully act to guide the process in a way which fosters market honesty and integrity. Sincerely, /s/ Robert C. Weaver, Jr. Robert C. Weaver, Jr. REFERENCES Barney, Lee. 1997. 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