[17409]
April 22, 2004
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 19-04
SEC RULES MEMBERS No. 59-04
RE: INSTITUTE TESTIFIES AT SEC REGULATION NMS HEARING
On April 21, John Wheeler, Vice President and Director of U.S. Equity Trading at
American Century Investments, testified on behalf of the Institute at a hearing held by the
Securities and Exchange Commission on proposed Regulation NMS. A copy of Mr. Wheeler’s
oral statement is attached and the most significant aspects of the statement are summarized
below.
Mr. Wheeler began by commending the SEC for issuing proposed Regulation NMS and
noting that the Institute has strongly supported past regulatory efforts to improve the quality of
the U.S. securities markets. He stated that the structure of the securities markets has a
significant impact on the Institute’s mutual fund members as increased efficiencies will clearly
benefit mutual fund shareholders. Mr. Wheeler testified that despite all the recent changes to
the securities markets, they still do not facilitate efficient trading by mutual funds.
In order to create the optimal market structure for investors, Mr. Wheeler stated, the
SEC should focus its efforts on promoting the key principles of a national market system,
specifically, efficiency, competition, price transparency, and the direct interaction of investor
orders. He added that in order to provide investors with the incentive to publicly display their
orders and to create a market structure in which these orders can effectively interact, the market
structure should contain several key components, i.e., price and time priority for displayed limit
orders across all markets, strong linkages between markets that permit easy access to limit
orders and standards relating to the execution of orders.
Regarding Regulation NMS’ trade-through proposal, Mr. Wheeler stated that the
Institute supports the establishment of a uniform trade-through rule for all market centers as
well as the proposed exception to the trade-through rule that would permit an “automated”
market to trade through a better priced displayed bid or offer on a “non-automated” market. In
addition, while the Institute supports the distinction between an “automated” and “non-
automated” market, it believes that the SEC should provide a stronger definition of what
constitutes an “automated” market.
2
Mr. Wheeler indicated that, if the SEC strengthens its definition of an “automated”
market in the manner recommended by the Institute and creates strong linkages and access
between automated markets, the proposal’s other exception, allowing an “informed investor” to
“opt-out” of the trade-through rule, may be unnecessary. He explained that this is because an
ideal market structure should not provide the ability for any market participant to ignore better
priced orders in the market. Mr. Wheeler added that the exception also is inconsistent with the
principle of price protection for limit orders and that the Institute is concerned that the
exception could discourage the placement of limit orders if investors know that those orders can
be ignored.
Finally, Mr. Wheeler stated that if the SEC does not adopt a stronger definition of an
“automated” market and permits disparities to remain in the ability to execute orders between
“automated” markets under proposed Regulation NMS, the inefficiencies investors are
experiencing in the markets today could remain. Therefore, under those circumstances, in
order to allow investors to avoid having their orders routed to an inefficient market, the “opt-
out” exception may be necessary.
Ari Burstein
Associate Counsel
Attachment (in .pdf format)
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attachment for memo 17409.