ond, I don't see how that really differs from the New York Stock Exchange's position. They say total disclosure, but as long as you are playing in our ballpark, you know, that disclosure will only go to our members. Are you saying anything different than that?

Mr. PUSTILNIK. Yes, I think

Senator BIDEN. Maybe you could run through it once more for me. I would appreciate it.

Mr. PUSTILNIK. Maybe I haven't been phrasing it clearly. I am not going to try to make any comparisons between the stock exchange and ourselves.

Senator BIDEN. That is probably wise.

Mr. PUSTILNIK. Correct. I am just going to try to clarify our position. We believe in having full access to information in our system, And that anybody who has met financial criteria that we will establish uniformly and reasonably and in accordance with Commission standards, can transact on the system.

An individual investor for example who wants to deal on our system might not be able to meet our criteria directly. But what he could do is he could go to the Wells Fargo National Bank if he lived in the west coast or a member firm, if rule 394 didn't prohibit him, and have access to the information that way.

Senator BIDEN. Either access to the information

Mr. PUSTILNIK. Access to the information and access to the ability to transact.

Senator BIDEN. By going through the third party.
Mr. PUSTILNIK. That is right.

Senator BIDEN. Well, let me see if I can get off that for a moment.
I believe you have given me some idea of the present size of your
system. The average trade was about $200,000, is that correct?
Mr. PUSTILNIK. I-

Senator BIDEN. The average size of trade.

Mr. PUSTILNIK. The average size of the trade is approximately 4,600 shares.

Senator BIDEN. Which worked out to about $200,000?

Mr. PUSTILNIK. Right.

Senator BIDEN. Now assuming this legislation were to pass basically intact, what kind of growth do you anticipate for your system or how do you feel the effect would be if it were passed as it is now?

Mr. PUSTILNIK. We think it will be affirmatively affected by the legislation. That, of course, is part of the reason that we are as enthusiastic about it as we are, aside from the basic correctness or rightness. if I can use such an old fashioned moralizing word these days, of the thrust of the legislation.

We think that by having a composite transaction tape for example, and being able to report and advertise our transactions, that will be helpful in attracting customers and activity to our system. We think that in advertising

Senator BIDEN. All out activity is now restricted by rule 394?

Mr. PUSTILNIK. Only firms of the stock exchange have access presently to the tape so that they may report their transactions. When the composite tape is in operation, everybody, everybody who transacts orders, whether they are members of the exchange or not, will be able to have access to that reporting, and if you will, advertising system.

We think that will help us. We think that furthermore, being able to advertise quotations of either bids or offers in size and at the prices that may be favorable, perhaps more favorable than in any other marketplace, that that will also attract business to our system and

more customers as well.

Senator BIDEN. Again, let's be very fundamental. Why would that attract business to your system?

Mr. PUSTILNIK. As the marketplace has become increasingly institutionalized, there has been less liquidity on the book. You know that is a very broad generalization but I think that it is true. And I think that to the extent that you are able to show bids and offers in size of several thousand shares, that it will attract those people who have an interest on the other side.

We honestly believe that. That is the basis on which our system works. If I can give you an example, Senator Biden.

Senator BIDEN. Please do.

Mr. PUSTILNIK. If one of our subscribers, for example, wants to buy 3,000 shares of Polaroid, what he can do is he can enter it into the system and hit the broadcast key which means that simultaneously and instantaneously every one of our 50-odd subscribers will get a bulletin on his terminal showing, "Buy 3,000 Polaroid." If he specified a price, there would be a price attached to it. If he specified time limit as well that would be attached to it. And so what he is doing in effect. is he is advertising to the network. And anybody who has an interest on the other side can respond to it.

Senator BIDEN. And access to that information, you believe, will attract additional clients?

Mr. PUSTILNIK. That is right. And furthermore, when-you asked me the question, you talked about it as being a national system. And I would like to mention that we have sold license to a company organized by the leading merchant banks in the United Kingdom. And they are setting up an Instinet-like system which will begin operation in February of next year. And once that is in operation we look forward to an inter-connection between the systems so that it will be more of an international marketplace and communications center.

Senator BIDEN. Is it your understanding that in a national market system that information of wanting to buy the 3,000 shares of Polaroid, will be available to everyone, or is that just to be available to your customers?

Mr. PUSTILNIK. That would be available to everyone.

Senator BIDEN. I just wanted to make sure I understood that.

Now what ideas, if any, do you have for development of the composite tape?

Mr. PUSTILNIK. Well, we have no idea of development of a composite tape. But I think it might be interesting to the subcommittee for us to point out that we have a system in place right now operating every day that in effect is a composite quotation system that could easily be broadened and expanded.

Senator BIDEN. That was my next question. So you believe the technology is there to develop a composite quotation system?

Mr. PUSTILNIK. That is right, and although we are a very small company

Senator BIDEN. You would be willing to consider that possibility. Mr. PUSTILNIK. Yes, we are.

Senator BIDEN. We don't want to force anything on you. [Laughter.]

A couple more short questions. A very basic question, that I would like to clarify for the record.

How do you react to the proposal for equal regulation for all the markets?

Mr. PUSTILNIK. I think we react favorably to it.

Senator BIDEN. For the record, I have asked people before, and I would like to ask you: What do you see as the goals of the national market system? How do you envision them; what do you think the goals are or should be?

Mr. PUSTILNIK. I think it will make more information available to all investors, particularly if they have a conscientious agent.

Senator BIDEN. That will produce what kind of results as you see it! Mr. PUSTILNIK. I think more confidence in the marketplaces and when the time is appropriate, more interest.

Senator BIDEN. Now I am beginning to wonder how important it is any more, but again let's get back to the question I asked the last witness about the small investor. Do you think that in a national market system the small investor is going to be more likely to get back into the market or those who are small and still in it will stay. In general what effect do you see it having on the small investor?

Mr. PUSTILNIK. I think we have to define what we mean by the small investor. I think that most people tend to talk in terms of the widow buying or selling 10 shares of American Telephone whereas I think that the industry usually thinks in terms of the dentist in Silver Spring who is buying 500 shares of Tektronics.

I think that the individual investor is going to be attracted back to trading in equities when his interest and confidence in the economy and the economic factors of the specific industry come together in such a way to encourage him.

Senator BIDEN. I don't want to beat this to death but I assume those things come together under the present system as we now have it. But I am trying to visualize the effect of the added component, the national market system. Could you isolate the reaction of the small investor in a national market system?

Mr. PUSTILNIK. I think more will come back. More will have an interest under the national central market system. I think that if I can digress for just a second, we talked a bit before, not I, but one of the other witnesses, about the big fluctuations in prices of stock as compared to what they were some years ago. I think that part of the reason those fluctuations is because the SEC has done such a good job in restricting the flow of inside information. The information now becomes available to everybody at the same time, much more so than was the case in the past.

I think that as this thought is more generally accepted, that that is going to encourage more interest, more confidence in the marketplace by the individual investor. I think when the individual investor feels that he also is getting the same kind of access that all of the information about buying and selling interest, which these days is in many ways almost as important as interest about the affairs of a company itself, that that will also encourage him in our market systems.

And from that point of view I think that the national market system, which is the subject of S. 2519, is a very favorable factor and is going to help attract the individual investor.

Senator BIDEN. Thank you very much. That responded directly to what I was trying to get at.

One last question, Mr. Chairman, if I may. Is it important that the individual investor be in the market? What difference does it make whether he is or isn't?

Mr. PUSTILNIK. Well, I think that is a very good question. I am a little appalled, speaking quite candidly, when I hear Wall Street figures quoted as saying that we have got to bring the little investor back so that we don't have these big drops or these big rises in individual security prices because it seems to me that what that means is you know let's take advantage of the little investor in the way that we have in the past, slowly selling the stock to him or slowly buying the stock from him.

I think that that doesn't serve the Street's best interests and I don't think that the really thoughtful people in the industry really believe that.

Senator BIDEN. It certainly does serve the Street's best interest, doesn't it, I mean in the immediate sense? If we are going to be candid let's really be candid. Obviously they think it serves their interest or they wouldn't do it regardless of the reason. Or do you think they just don't know—

it

Mr. PUSTILNIK. No, I would disagree with that, Senator. I think that may serve the interest of an individual from time to time. But in the sense of the industry's interests, they lie in only one direction, I honestly believe, and that is to get the best, most informative, most honest market system because that it what is going to bring investors back and have confidence in the system. It is, you know, Lincoln's old comment, you can't fool all of the people all of the time.

Senator BIDEN. You have been flexible in responding to my very broad questions. I appreciate it.

Senator WILLIAMS. Thank you, Senator Biden.

Thank you, gentlemen. Very helpful.

[Whereupon, at 4:28 p.m., the hearing was adjourned, to reconvene at 2 p.m., Tuesday, November 13, 1973.]

[Mr. Pustilnik's prepared statement and letters received for the record follow:]

STATEMENT OF JEROME M. PUSTILNIK, PRESIDENT, INSTITUTIONAL NETWORKS

I am Jerome Pustilnik, President of Institutional Networks Corporation. With me are David Collin and R. Bartlett Renfrew of our Company and Richard H. Paul and Wade H. Nichols of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Company. We are grateful for having been invited to take part in the hearings of this Committee on Senate Bill S. 2519, the National Securities Market System Act of 1973.

Let me say at the outset that we were enormously impressed by the insight and understanding of the securities industry demonstrated by the drafters of this Bill. Senate Bill S. 2519 is by far the most significant legislative step to date toward development of the sort of securities market system that can attract and justify participation by the public investor.

25-406 O 74 - 11

We at Instinet believe that we are in the forefront of the technological wave which is so dramatically changing the face of the securities markets. We have therefore followed legislative and administrative developments in this area with great interest. We participated in the securities industry hearings of the House Committee on Interstate and Foreign Commerce held in February 1972, and earlier in the Securities and Exchange Commission's hearings on Securities Market Structure and Regulation. The purposes of Senate Bill S. 2519, as expressed by Senator Williams in introducing the Bill, are purposes we have consistently endorsed. We urge the speediest possible implementation of the type of market system contemplated by the Bill.

I believe a number of members of the Subcommittee and its Staff may be familar with Instinet's operations. I note that Instinet-together with AutEx and SIAC was specifically named in the Summary of S. 2519 as one of the "securities information processors" intended to be regulated under the Bill. We wholeheartedly endorse such regulation. However, as you will see, Instinet is considerably more than a processor of information, and indeed is quite distinct in its operations from such systems as AutEx and SIAC. A number of our technical comments will relate directly to these unique characteristics of Instinet. In the Instinet System, institutional investors-banks, insurance companies, mutual funds and pension funds—deal directly with each other in trading securities through the channel of the communications system which we provide. Since we help find the other side in institutional transactions, we are registered as a broker, and are technically viewed by the SEC as part of the so-called "Third Market." In fact, we function in a manner which is quite different from that of most third market operators. Generally third market firms participate in their security transactions as dealers. Instinet operates only as a broker, putting the two sides of a transaction in touch with each other, letting them negotiate directly through the System, and ultimately accomplishing execution of the transaction on a fully documented, "locked-in" basis. Instinet is the only automated communications system that incorporates this execution feature. We understand that Instinet is the only "securities information processor" registered with the Securities and Exchange Commission as a broker. And Instinet is the only such system designed for and used primarily by institutional investors.

II. BACKGROUND OF REGULATION

Instinet fully supports the principle that securities related communications systems should be subject to the direct regulatory authority of the Securities and Exchange Commission. Instinet was registered as a broker in August 1969, and thereby became subject to the full regulatory powers of the Commission pursuant to Section 15 of the Securities Exchange Act of 1934. When the Commission proposed Rule 15c2-10 under that Act to regulate the operations of "automated trading information systems," including Instinet, we urged the Commission to put the proposed rule into effect as soon as possible. As you know, that rule was never adopted. When in March 1972 the Commission issued for comment proposed Rules 17a-14 and 17a-15, relating respectively to the composite quotation and transaction tapes, Instinet supported the proposed Rules, and advocated stringent requirements for full, current, sequential disclosure of quotations and transactions. After Rule 17a-15 became effective, the delays of the exchanges and the NASD in settling on their joint plan prevented Instinet from filing its own plan of operation.

The central market system envisioned by the Commission when it proposed Rules 17a-14 and 17a-15, and the central market system contemplated in Senate Bill S. 2519, require accurate, timely information assembly and dissemination. The "securities information processors" are the key to that information. To the extent that the Commission's power to regulate "securities information processors" is unclear, we welcome amendment of the Securities Exchange Act to remove all such ambiguity.

While urging early passage of this legislation and prompt implementation by the Commission of the regulatory system that it contemplates, we would like to make a few fairly technical comments on the provisions of the Bill, and a few observations on the nature of the rules which will follow.

(a) Exemptions.-Section 4 of the Bill would amend Section 3(a) of the Exchange Act to add a new subsection (22) defining "securities information proc