FOR IMMEDIATE RELEASE 97-43 SEC SOLICITS COMMENT ON REGULATION OF MARKETS Washington, D.C., May 23, 1997 -- The U.S. Securities and Exchange Commission is embarking on a reevaluation of its oversight of securities markets in light of the dramatic effects of technology on securities trading. As part of this undertaking, the Commission will vote today to publish a concept release soliciting public comment on a broad range of questions. Over the past two decades, technology has revolutionized the way in which our securities markets operate. Today, with the click of a button, orders can be entered, executed, and confirmed within seconds. Advances in communications and other technologies have dramatically expanded the methods by which securities can be traded. In light of these changes, the Commission is issuing a concept release soliciting comment on both its overall approach to regulation of markets as well as specific options under the current regulatory framework for addressing these changes in our markets. Among other things, the concept release discusses options for addressing two key developments: (1) the rapid growth of trading systems that present alternatives to traditional exchange trading; and (2) the development of technology that allows U.S. investors to trade on foreign markets from the United States. The Commission is also soliciting comment on ways to reduce the regulatory requirements for regulated markets. SUMMARY OF CONCEPT RELEASE REGARDING SEC OVERSIGHT OF MARKETS The Commission votes today on whether to publish a concept release soliciting public comment on various approaches to regulating automated trading systems, national securities exchanges, and foreign market activities in the United States. Reason for Concept Release The purpose of the concept release is to elicit the views of the public regarding ways to update the Commission's regulatory framework to address recent, dramatic changes in the U.S. securities markets resulting from technological developments. Issues raised by the growth of alternative trading systems and the development of automated mechanisms that allow U.S. investors to trade on foreign markets from the U.S. have highlighted the need for a more forward-looking regulatory approach. þ First, in recent years, trading systems that provide comparable alternatives to traditional exchange trading have grown to account for a significant percentage of the trading volume of the U.S. securities markets. In 1994, the Commission's Division of Market Regulation reported that alternative trading systems accounted for 13% of the volume in Nasdaq securities and 1.4% of the trading volume in NYSE-listed securities. By the end of 1996, 20% of transactions in Nasdaq securities and 4% of transactions in listed securities took place on these alternative trading systems. In fact, one and a half times as many shares traded on alternative trading systems on a daily basis than on the American Stock Exchange and all of the regional stock exchanges combined. þ Because the operators of alternative trading systems are regulated in the same away as traditional broker-dealers, these significant trading markets are not fully integrated into the quote display, surveillance, and enforcement mechanisms run by the New York Stock Exchange, Nasdaq, and the other national securities exchanges. þ Second, the Commission to date has not addressed the regulatory status of entities that limit their activities to providing U.S. investors access to foreign markets. As a result, many foreign markets have been reluctant to provide U.S. investors with direct access to their trading facilities or have attempted to provide these services without disclosing the risks of trading on foreign markets to U.S. investors. These arrangements could also affect the Commission's ability to enforce the antifraud provisions of the U.S. securities laws. The concept release discusses ways the Commission might address these issues so that public investors share in the reduced costs and other benefits of technological changes in the securities markets. After receiving comments on the concept release, the Commission will determine whether rulemaking is appropriate. Scope of the Concept Release The concept release discusses the activities of two types of entities: (1) trading systems that present alternatives to traditional exchange trading; and (2) foreign markets, broker- dealers, and other entities that provide investors in the U.S. with direct electronic links to foreign markets. Alternative trading systems are electronic systems that typically allow broker-dealers and institutions to trade directly with each other on an anonymous basis, without trading on an exchange. Primary Issues Covered in Concept Release The Commission is soliciting comment on the various options that the Commission has for addressing these issues under the current regulatory framework. The Commission is also soliciting comment on ways to reduce the regulatory requirements for all markets. Domestic Markets þ Among other things, the release solicits comment on various approaches to integrating alternative trading systems into the national market system. First the release solicits comment on regulating alternative trading systems under a three-tiered approach to exchange regulation. þ The first tier would be a new category of "exempt exchanges." The release solicits comment on whether regulating most alternative trading systems (which do not handle significant trading volume or do not set their own trading price) under this new category would be workable. The release asks commenters for their views on the types of limited regulation, such as requirements to maintain an audit trail, and adequate computer capacities. þ The second tier of exchanges would be the most significant alternative trading systems. The release solicits comments regarding whether those trading systems with high volume and active price discovery should be required to register as national securities exchanges and be regulated in a manner similar to the way the NYSE and Nasdaq are currently regulated, or whether the Commission could use its exemptive authority to reduce or eliminate those requirements that are incompatible with the operation of for profit, non-membership exchanges. þ The third tier of exchanges would be those currently registered exchanges with traditional structures, such as the NYSE. This release solicits comment on ways the Commission could reduce the regulatory requirement for these exchanges, and provide them with enhanced opportunities to innovate and compete. For example, the release solicits comment on ways to further reduce rule filing requirements and lessen the costs of fulfilling their surveillance and enforcement obligations. þ Second, the release discusses whether the Commission might address the market activities of alternative trading systems through enhanced broker-dealer regulation. Under this approach, alternative trading systems would continue to be regulated as broker-dealers as they are today. However, existing SROs would need to assume greater responsibility for actively surveilling these trading systems. Comment is solicited on ways that additional rules could require alternative trading systems to provide greater information about their systems and trading activities to the national securities exchanges and Nasdaq, to grant greater access to their systems to public investors, and to meet standards for ensuring that the capacity of their systems is adequate. Foreign Market Activity in the United States The release generally solicits comment on how best to address issues raised by cross-border trading. In particular, the Commission solicits comment on whether investors would benefit from a clearer regulatory framework for entities that offer U.S. investors opportunities to trade on foreign markets electronically. The release also asks commenters for their views on ways to ensure that the Commission has the means to protect U.S. investors trading on foreign markets. þ For example, the release solicits comment on an approach that could regulate those entities that provide U.S. investors with direct access to foreign markets. þ The release also asks for comment on other options available to the Commission, for example, requiring foreign markets to register as exchanges in the United States or relying solely on foreign regulation to protect U.S. investors. Comment Period If the Commission votes to publish the concept release, the public comment period will end 90 days from the date of publication in the Federal Register.