1 See Memorandum to Board of Governors No. 61-99, Equity Markets Advisory Committee No. 30-99, and SEC Rules
Committee No. 72-99, dated September 30, 1999.
1
[11319]
October 19, 1999
TO: BOARD OF GOVERNORS No. 62-99
EQUITY MARKETS ADVISORY COMMITTEE No. 33-99
SEC RULES COMMITTEE No. 78-99
RE: INSTITUTE LETTER TO CHAIRMAN LEVITT ON SECURITIES MARKETS
______________________________________________________________________________
As we previously informed you, SEC Chairman Arthur Levitt recently delivered a major speech
focusing on the significant changes occurring in today’s securities markets.1 The Institute has sent a letter
to Chairman Levitt (a copy of which is attached) commending him on his speech. In particular, the letter
states that it is important for regulators and market participants to begin discussing ways to address the
issues that will arise as the markets continue to rapidly change. The letter offers the Institute’s assistance
to the SEC as they consider those issues. The letter also offers the Institute’s preliminary views on several
issues discussed in Chairman Levitt’s speech, in particular, demutualization, ECN fees, and centrality.
Demutualization
With regard to Nasdaq’s and the NYSE’s plans to become for-profit enterprises, the letter states
that while the Institute does not have any definitive view at this time as to the best approach to changes
to the current system of self-regulation, we agree that there should be a strict separation of the self-
regulatory role from the marketplace it oversees and that the self-regulatory standards in place today
should not be weakened.
The letter also states that the Institute was particularly pleased that Chairman Levitt stressed the
need for continued stringent listing standards. The Institute believes that any dilution of those standards
as a result of the demutualization of Nasdaq and the NYSE would be detrimental to investors. The
letter therefore urges the SEC to give this issue serious consideration, including whether it might be
appropriate for a single SRO or even for the SEC itself to establish those standards. The letter also
urges the SEC to monitor vigilantly the fee levels charged by Nasdaq and the NYSE and approve only
justified fee increases.
ECN Fees
2The letter supports the SEC’s two-fold approach to ECNs that was outlined in Chairman
Levitt’s speech, specifically, providing regulatory space for competition while seeking to ensure market
integrity and a level playing field for all markets, and urges that any regulation of ECN fees be consistent
with that approach. The letter also states that to ensure a level playing field and to avoid stifling
competition, it is important that any regulatory proposals relating to ECN fees do not unfairly
discriminate against certain classes of market participants by restricting only certain types of
compensation.
Centrality
The Institute agreed with Chairman Levitt’s assessment that fragmented markets are detrimental
to liquidity, tighter spreads, and overall efficiency. In this regard, the letter states that the Institute
supports efforts, such as Nasdaq’s proposed limit order book and enhancements to the Intermarket
Trading System, to facilitate the ability of customer orders to interact with one another as broadly as
possible.
The letter also notes that the Institute is sensitive to the potential conflict between efforts to
reduce market fragmentation through greater centrality of orders and the need to promote competition
and innovation. The letter, however, states that the SEC should not allow legitimate concerns over
fragmentation to serve as a facade for efforts to monopolize all or part of our markets.
Ari Burstein
Assistant Counsel
Attachment