February 1, 2000
Mr. Jonathan G. Katz
U. S. Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: File No. SR-PCX-00-25, Amendment No. 1, Archipelago Exchange
Dear Mr. Katz:
I am Steve Wunsch, president of the Arizona Stock Exchange (AZX), an electronic single price auction market operating pursuant to a low volume exemption from exchange registration under Section 5 of the Securities Exchange Act of 1934 (Act). I am writing to comment on the proposed rule change of the Pacific Exchange (PCX) that would allow PCX to bring up the Archipelago Exchange (ArcaEx) as a facility. Since PCX is a registered stock exchange, approval of the proposed rule change would have the effect of allowing the ArcaEx facility to operate as a registered stock exchange under Section 6 of the Act.
We recommend approval of the rule change for two reasons, both related to the value of innovation in today's stock market. First, as a for profit business operating an essentially non-membership electronic market, ArcaEx is pioneering a new regulatory structure. With "demutualization" in the air around the world, it is critical that a new form of "self regulatory organization" emerge that is as or more effective than the traditional membership SRO at protecting investors. We believe that ArcaEx, with its state-of-the-art electronic surveillance capabilities, will usefully explore this new territory under appropriate Commission guidance.
Secondly, ArcaEx proposes to operate two innovative forms of single price auction every morning, one at 8:00 a.m. and one at 9:30 a.m., Eastern Time. While not the way we run our auctions at AZX, both ArcaEx offerings are credible innovations that deserve a chance to compete. If they are not used and, therefore, do not succeed in the marketplace, they will not do any harm. If they do succeed, the consolidating effect on morning order flow, which is particularly chaotic on Nasdaq, would be very beneficial.
The current era of regulatory reform has ushered in considerable confusion regarding what form the regulation of markets and exchanges will take in the future. In addition, the volatility in the market, which we believe may be related to these reforms, continues to increase (see my letter to you dated March 28, 2000). We would urge you, therefore, to expedite the PCX proposed rule change, as we believe that doing so may help resolve both of these pressing problems.
Please do not hesitate to call if you desire clarification of our views.