View from the Sec-Promoting Fair and Efficient Markets as a Regulatory End

  • Laura Simone Unger
Part of the Zicklin School of Business Financial Markets Series book series (CUNY)

Abstract

Since this conference focuses on regulation, I thought I would indulge in a brief philosophical discussion about what considerations factor into the Securities and Exchange Commission’s (“Commission”) rulemaking process. Although the Commission has one overarching mission — investor protection — it must also promote fair and efficient markets.45

Keywords

Dust Assure Sine Stake Cobble 

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Notes

  1. 45.
    Section 106 of the National Securities Market Improvement Act of 1996 requires the Commission to consider efficiency, competition, and capital formation in its “public interest” standard analysis. PL 104-290, 110 Stat. 3416, 3424-25 (1996) (codified in 15 U.S.C. 78s(b)(6)).Google Scholar
  2. 46.
    Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (ATS Adopting Release).Google Scholar
  3. 48.
    This only underscored the Commission’s longstanding support for the application of technology to the markets, which went back at least as far as our 1963 Special Study of Securities Markets. See Report of Special Study of Securities Markets, 88th Cong., 1st Sess., H.R. Doc. No. 95, pt 2 Ch.VI.J. & Ch.VII.E.Google Scholar
  4. 49.
    Exchange Act Rel. No. 19456 (Jan. 27, 1983), 48 FR 4938 (order authorizing operation of ITS on an indefinite basis); Exchange Act Rel. No. 18713 (May 6, 1982), 47 FR 20413 (order amending ITS Plan to include the NASD as a participant). The Nasdaq Stock Market (“Nasdaq”) serves as the de facto intermarket linkage for Nasdaq National Market and SmallCap securities.Google Scholar
  5. 50.
    Exchange Act Rel. No. 14416 (January 26, 1978), 43 FR 4354; Exchange Act Rel. No. 15671 (March 22, 1979), 44 FR 20360.Google Scholar
  6. 51.
    See, e.g., NYSE, Fact Book 1990 (1990) at 22–23 (comparing NYSE, regional exchange, and NASD third market maker Consolidated Tape share and trade volume in NYSE-listed stocks, 1980–1990). But see Division of Market Regulation, SEC, Market 2000: An Examination of Current Equity Market Developments (January 1994) (Market 2000 Study) at 11-10 (asserting that “although the regional exchanges may not provide vigorous quote competition to the NYSE, they have provided meaningful and needed service competition…. [and] vigorous cost competition through lower transaction fees and have developed new products.”).Google Scholar
  7. 52.
    See, e.g., NYSE, Fact Book 1995 (1995) at 25–26 (comparing NYSE and Instinet reported Consolidated Tape volume in NYSE-listed stocks, 1985–1990).Google Scholar
  8. 53.
    National Best Bid or Offer (NBBO) refers to the single highest bid price from among all bids quoted by the various participants (stock exchange specialists and third market dealers) in the Consolidated Quotation Service and the single lowest offer price from among all offers quoted by those participants.Google Scholar
  9. 54.
    See Exchange Act Rel. No. 37619A (September 6, 1996), 61 FR 48290 (Order Handling Rules Adopting Release).Google Scholar
  10. 55.
    By way of contrast, any significant new service offered by the exchanges or the NASD is treated as a proposed rule change, and is subject to the notice and comment requirements of the Exchange Act, and approval by Commission order. 15 U.S.C. 78s(b). But see infra note 67 and accompanying text (describing Rule 19b-5 pilot trading program exemption).Google Scholar
  11. 56.
    Exchange Act Rel. No. 26708 (April 18, 1989), 54 FR 15429 (Rule 15c2-10 Reproposing Release).Google Scholar
  12. 57.
    Exchange Act Rel. No. 8661 (August 4, 1969), 34 FR 12952 (Rule 15c2-10 Proposing Release). The Commission withdrew the original 15c2-10 proposal in 1975 as no longer necessary in light of the regulatory scheme provided for in the 1975 Amendments. See Exchange Act Rel. No. 11673 (September 23, 1975), 40 FR 45422.Google Scholar
  13. 59.
    In 1991, the total share volume on ATSs was 2.9 billion shares. In 1992, it had grown to 4.9 billion shares. For the first half of 1993, it was 4.7 billion shares (of which 87% was in Nasdaq stocks and 13% was in listed stocks). During this same period, ATSs captured 13% of the volume in Nasdaq NM Securities volume and 1.4% of NYSE-listed volume. Exchange Act Rel. No. 35124 (December 28, 1994), 59 FR 66702 at n.18 (citing Market 2000 Study at II-12 and 13.)Google Scholar
  14. 60.
    Exchange Act Rel. No. 35124 (December 28, 1994), 59 FR 66702.Google Scholar
  15. 61.
    Exchange Act. Rel. No. 38672 (May 23, 1997), 62 FR 30485 (Exchange Concept Release).Google Scholar
  16. 62.
    See Order Handling Rules Adopting Release, supra note 54 (discussion on amendments to the Quote Rule, 17 C.F.R. 240.11Aa3-l).Google Scholar
  17. 63.
    In the ATS Adopting Release, the Commission noted that approximately 94 percent of non-market maker broker-dealer and institutional orders in ATS s that could have improved the NBBO were not in the public quote stream. See ATS Adopting Release, supra note 46, at 192.Google Scholar
  18. 64.
    15 U.S.C. 78mm.Google Scholar
  19. 65.
    Indeed, Nasdaq has continued to search for a market structure that is acceptable to its various constituencies in this new environment. See, e.g., Exchange Act Rel. Nos. 36548 (December 1, 1995), 60 FR 63092 (Naqcess proposal); 39718 (March 4, 1998), 63 FR 12124 (integrated order delivery and execution system proposal); 41296 (April 22, 1999), 64 FR 19844 (proposal to modify SOES and SelectNet; reopening of comment period on central limit order file); and 41343 (May 6, 1999), 64 FR 24430 (Agency Quote proposal).Google Scholar
  20. 66.
    Exchange Act Rel. No. 41297 (April 16, 1999), 64 FR 19450. High-volume ATSs must comply with the display requirement for 50 selected Nasdaq securities on August 23, 1999; 50% of all Nasdaq securities on September 28, 1999; 75% of all Nasdaq securities on April 25, 1999; and 100% of all Nasdaq securities on June 20, 2000. Moreover, ATSs will not have to comply with the requirement with respect to exchange-listed securities until a mechanism is developed for the display of such securities.Google Scholar
  21. 67.
    17 C.F.R. 240.19b-5.Google Scholar
  22. 68.
    See 17 CFR 242.301(b).Google Scholar
  23. 69.
    See 17 CFR 242.301(b)(3), (b)(5) and (b)(6).Google Scholar
  24. 70.
    An example of this conflict is the concern that several ATSs have expressed with respect to the NASD’s Super Montage proposal. See Exchange Act Release No. 42166 (November 22, 1999), 64 FR 69125 (December 6, 1999).Google Scholar
  25. 71.
    See ATS Adopting Release, supra note 46, at 21–24.Google Scholar
  26. 72.
    In July 1998, the Commission proposed rulemaking to amend the ITS Plan to expand the link between ITS and the NASD’s Computer Assisted Execution System (“CAES”) link to include all exchange-listed securities (it currently is limited to securities continuously listed on an exchange after April 1980). CQS market makers (i.e., NASD-registered third market makers) would thereafter have ITS access equivalent to that of exchange specialists. The Commission solicited comment on whether NASD rules needed to be amended to allow ATSs to participate in CAES and the ITS/CAES linkage. Exchange Act Rel. No. 40260 (July 24, 1998), 63 FR 40748.Google Scholar
  27. 73.
    In July 1998, the Commission proposed rulemaking to amend the ITS Plan to expand the link between ITS and the NASD’s Computer Assisted Execution System (“CAES”) link to include all exchange-listed securities (it currently is limited to securities continuously listed on an exchange after April 1980). CQS market makers (i.e., NASD-registered third market makers) would thereafter have ITS access equivalent to that of exchange specialists. The Commission solicited comment on whether NASD rules needed to be amended to allow ATSs to participate in CAES and the ITS/CAES linkage. Exchange Act Rel. No. 40260 (July 24, 1998), 63 FR 40748.Google Scholar
  28. 74.
    Exchange Act Rel. No. 16888 (June 11, 1980), 45 FR 41125.Google Scholar
  29. 75.
    The NYSE voted to rescind Rule 390 in December 1999. The Commission approved the NYSE’s proposed rule change to rescind Rule 390 on May 5, 2000. See Exchange Act Release No. 42758, 65 FR 30175 (May 10,2000). There are two other provisions restricting trading among markets that come to mind. The first is the OTC-UTP Plan, which limits the number of OTC stocks that a national securities exchange can trade on an UTP basis. See Exchange Act Rel. No. 40896 (January 12, 1999) 64 FR 1834 (describing the Joint Transaction Reporting Plan for the National Market Securities Traded on an Exchange on an Unlisted or Listed Basis). The Chicago Stock Exchange recently received permission to increase the number of OTC stocks it could trade from 500 to 1000. Exchange Act Rel. No. 41392 (May 12, 1999), 64 FR 27839. However, the OTC-UTP Plan does not cover Nasdaq SmallCap securities. Accordingly, an exchange presently could not trade a SmallCap security UTP. The second is Rule 12f-2 under the Exchange Act, which limits exchange, but not OTC, trading on the first day of an IPO to the exchange that listed the IPO. 17 C.F.R. 240.12f-2. In 1998, the regional exchanges recently filed a rulemaking petition with the Commission seeking to remove this restriction. On December 9, 1999, the Commission proposed a change to Rule 12f-2, permitting a national securities exchange to begin trading in an IPO issue pursuant to UTP immediately after the first trade in the security is reported by the listing exchange to the Consolidated Tape. See Exchange Act Release No. 42209, 64 FR 69975 (December 15, 1999). The Commission adopted this rule change on August 29, 2000. See Exchange Act Release No. 43217, 65 FR 53560 (September 5, 2000).Google Scholar
  30. 76.
    Market 2000 Study, supra note 51, at III-9 to III-10. On October 13, 1999, the Commission approved certain SRO rule filings allowing for the implementation of an extended hours trading session on a pilot basis. See Exchange Act Release Nos. 42003 (October 13, 1999), 64 FR 56554 (October 20, 1999) (NASD-99-57); 42004 (October 13, 1999), 64 FR 56548 (October 20, 1999) (CHX-99-16).Google Scholar
  31. 77.
    15 U.S.C. 78k-1(c)(1)(C) and (1)(D).Google Scholar
  32. 78.
    15 U.S.C. 78k-l(a)(2).Google Scholar
  33. 79.
    Instinet, leading a consortium of companies including Morgan Stanley Dean Witter, J.P. Morgan, American Century, Archipelago, and Warburg Dillon Read, acquired a 54.4% stake in Tradepoint on July 8, 1999.Google Scholar
  34. 80.
    SETS, the Stock Exchange Electronic Trading Service, is the electronic order book trading system of the London Stock Exchange.Google Scholar
  35. 81.
    Tradepoint received SEC approval on March 23, 1999.Google Scholar

Copyright information

© Springer Science+Business Media New York 2001

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  • Laura Simone Unger

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