December 14, 2004
From 1984 to 2000 I was responsible for compliance and oversight of equity trading on the Pacific Exchange aka Pacific Stock Exchange. During that period I saw the market system complete its development from its traditional mechanisms to a computer driven system. But, I also directly observed how the SRO aspect of the national exchanges began to suffer and whither under the influence of the exchanges need to compete for market share.
The initial creation of the SRO concept was based upon the inability of a central authority in the 1930s to properly govern and observe the day-to-day trading of the exchange markets. This continued up until recent times when exchanges began to have access to computer systems that allowed not only intermarket trading but a means to monitor trading in a real time manner.
But the market system was also built upon a inherent cost structure that the exchanges maintained until the 1970s. Once the exchanges were no longer able to agree on charges to their members they had to compete for order flow and as the markets drew closer together the competition grew more intense.
During my time at the exchange I was constantly pressured by senior management to lighten up on the members in a disciplinary way because of the constant threat that the members would take their business elsewhere. As time ran on it became more and more apparent that the business interests of the exchange could not compete with the disciplinary requirements and responsibilities of the exchange under the 34 Act.
As the times that forced the creation of the SRO status of the exchanges has passed so to must the Commission realize that the durge of scandals that have beset the exchanges is not a fluke but merely the realistic conditions of todays market environment that no longer make relying upon the honor and sense of responsiblity enough to leave regulation to the very individuals who run the exchanges and believe that in order to keep business they cannot afford to rock the boat.
Whereas from the 1930s to the 1980s the SEC had no means to monitor trading on a constant basis, now that exists. The farmer would no sooner allow the fox to oversee the chickens, so why do we continue to allow the business interests to monitor their own obligation to adhere to disciplinary requirements? It is time for this system to be totally overhauled.