Senator WILLIAMS. We appreciate your being with us again. Thank you very much.

Mr. Alan Kay from AutEx, Inc., president of same.

STATEMENT OF ALAN F. KAY, AUTEX, INC.

Mr. KAY. My name is Alan F. Kay. I am the president of AutEx, Inc. Seated with me on my right is William A. Truslow of the law firm of Hill & Barlow, which acts as counsel for the company; and on my left Leonard Grimaldi, head of our securities division.

I appreciate the opportunity to appear before you and to make the following statement on behalf of AutEx, Inc., with regard to the proposed National Securities Market System Act of 1973.

Before proceeding, I would like to briefly describe what AutEx is and what it does.

In most discussions of the central market, it is assumed that a transaction begins with a broker having an order in hand. In fact, most transactions originate at an earlier point in time when the broker first becomes aware of his customer's trading interest. This is particularly true of institutional customers with whom 70 percent of the trading volume now takes place. To turn this interest into an order and the order into a transaction, the broker, first of all, normally seeks the other side of the trade. This is where AutEx comes in. AutEx is a facility for introducing buyer and seller; it is a pretrading system that has been considered outside of the central market system in the thinking of the SEC prior to this bill. Brokers enter data through AutEx stating their trading interests, which are then accessed by the institutions to whom the broker made the trading interest available, through terminals located in their tradingrooms. There are no anonymous messages on AutEx. Trades come about when an institution sees a broker's trading interest that interests him, and he contacts the broker by phone to negotiate the trade in conventional fashion. The execution then takes place on an exchange or in the over-the-counter or third markets. AutEx is basically an availability system, not a pricing system. Prices, however, are sometimes shown in the broker's message. In addition to the foregoing basic function of the system, there are various other incidental features designed to accommodate the specific needs of block traders.

AutEx is directly concerned with the proposed act because AutEx would presumably be a "securities information processor," as that term is defined in the act. AutEx, which unlike the user-owned NASDAQ or SIAC, is a publicly traded, investor-owned business, would no longer be a simple business corporation upon passage of the act, but rather would become a federally regulated activity.

We recognize that our activity is a proper matter for the SEC to supervise, as an extension of its traditional role under the Securities Exchange Act of 1934, of overseeing the maintenance of fair and orderly markets and the protection of investors, but we are concerned at the idea that our company might become subject to the full-scale, ongoing economic regulation of the kind usually associated with railroads, telephone companies, and other utilities.

Not only would this sort of total regulation be unnecessary given the nature of our business, but it would be unwise. Our activity can be regulated without going to the extent of vesting the SEC with the

responsibility for our business destiny; the purposes of achieving a national securities market system can be achieved without having the SEC substitute its judgment for ours in the matter of technical and business decisions. History supports the wisdom of limiting Federal economic regulation of businesses except to the extent it may be absolutely essential.

AutEx feels that its achievements, which have been almost revolutionary for a securities industry which was 50 years behind the times, came about in large part because it has operated as an ordinary business corporation subject to both the hazards and the incentives of free enterprise.

To illustrate this point, we have described in our written statement how, following the announcement and creation of the AutEx system in 1968, the New York Stock Exchange determined to develop a duplicate system to do the same thing as the AutEx system but which would be under the control of the exchange. For the next 4 years, the industry had a choice as to which system better served its needs. Despite all the resources and powerful backing of the New York Stock Exchange, the greater effectiveness of the AntEx system was demonstrated. Last month the exchange announced that it is discontinuing its system, having lost about $9 million on the venture since its inception 4 years ago, including $3 million in the current year alone. The important point is that a climate of free enterprise permitted this competition to take place and the result was a better system for the securities industry. If the industry structure had been one of total economic regulation, it is doubtful that this better system would exist today.

I would now like to turn to the specific provisions of S. 2519. We have submitted to this subcommittee a written statement which sets out in detail our comments on the bill, covering four basic points. I would like to summarize the first three of these four points. I will then devote the balance of my remarks to the fourth point.

The first point made in our written statement is that the definition and use of the word "quotation" in the act to include mere indications of interest without any reference to price, would have the effect of requiring that indications of interest between block traders be made available to all brokers and dealers on a nondiscriminatory basis. Because of the magnitude of the blocks in which a block trader deals, however, block trading is done by showing indications of interest on a careful and selective basis. It is a negotiated market, not an auction. market. If "quotation" is defined to include mere indications of interest-even where there is no price or number of shares mentioned and these indications of interest had to be directed to all brokers and dealers, then block traders would not be able to make indications of interest on a selective basis. The result would be to seriously undermine the functioning of the negotiated market for large blocks, which we do not believe is one of the purposes of the proposed legislation.

The second point made in our written statement is that section 11A (c) (1), which sets forth the conditions for granting registration to processors, is worded in a way which seems to impose an unnecessary burden on processors applying for registration to demonstrate exactly how they will contribute to a national market system-when that sys

tem is as yet undefined. The effect of this wording might be to discourage new entrants into the processor field.

The third point in our written statement is that the category of security information processors should be added to the other categoriessuch as brokers, dealers, customers, and issuers-which in various places in the act are provided certain protections against discrimination by self-regulatory bodies and are provided assurances of fair and orderly procedures, right of notice and appeal, and similar protections. We list these places in our written comments.

I shall now turn to the fourth and final point-the question of the economic regulation of processors. The section in question is section 11A (h).

At the root of our reservations about section 11A (h) is the fear that AutEx, a small, investor-owned computer business, will find itself having its destiny determined by administrative fiat without recognition of how completely different its nature is from that of a national securities exchange, or securities association, or indeed from that of a securities information processor which is user owned, such as NAS DAQ or SIAC. AutEx, which has been in the business of simply providing a service to the industry, finds itself about to be constituted a basic element of the industry itself.

Upon becoming a securities information processor, AutEx will be cast onto a board with two other industry categories exchanges and associations. The SEC then will have a free hand to move all these pieces around, allocating among the exchanges, the associations, and the processors all the costs, functions, and responsibilities associated with the development, operation, and regulation of a national market system. It is the allocation of costs that troubles us in particular.

An exchange or a securities association, or an exchange- or association-sponsored processor, has a greater freedom to simply announce the things it is going to do that will have economic consequences to their members. For one thing, the economic consequences to such institutions will be spread widely among its members. AutEx, however, does not have members; it simply has customers. It must tread far more lightly, for having no franchise like an exchange or an association, it always faces the prospect of a flood of termination notices from subscribers. AutEx must provide each of its subscribers with an economically viable service because none of them has to subscribe to Aut Ex in order to continue in its business.

Section 11A (h) (3), in effect, gives open authority to the SEC to structure a national securities market system using the national exchanges, securities associations, and securities information processors as building blocks, which the SEC may stack and move around into whatever structure they determine is best. The fact is, however, that some of these blocks are economically more fragile than others. We don't feel that section 11A (h) (3) takes this fact into adequate

account.

The potential fragility of AutEx or any other privately based processor in this process of stacking and arranging the units of a national market system, is not a reflection of the quality or the utility of what the processor offers to a national market system. It is simply a question of its resources and its relationship to those upon whose support it must depend. These matters, we feel, should be taken into account, but

there is nothing in section 11A (h) (3) which requires the SEC to do so.

It would be a case of processor beware-you enter this field without protection. Such an atmosphere, we feel, would only stimulate the coagulation of the already entrenched elements of the securities industry and the disappearance of nonexchange or association-affiliated suppliers of services. The sources of control of the various elements of the securities industry would thereby become still further concentrated, and the industry would be deprived of the beneficial input of new participants in the processor activity.

It is completely appropriate that the Commission should regulate processors with regard to their activities insofar as these activities affect the maintenance of fair and orderly securities markets, the protection of investors, and indeed, the development, operation, and regulation of a national market system. But in order to assure that private enterprises can continue to enter, operate, and make contributions in the field of securities information processing, and in order to eliminate the implication that the SEC is to assume the kind of role toward private processors which the ICC or the FCC carries out in supervising private railroads or telephone companies-full-scale economic regulation of their affairs-we have proposed in our written statement that section 11A (h) be modified to eliminate the word "costs" and to add a provision requiring the Commission, in prescribing rules under subsection (h), to give consideration to not imposing undue economic burdens on processor businesses.

I wish to thank the subcommittee for the opportunity to appear here today. I would be pleased to answer any questions that there might be time for.

[Prepared statement of Mr. Kay follows:]

STATEMENT OF AUTEX, INC.

AutEx, Inc.'s written statement on S. 2519 will consist of a brief introductory description of the AutEx computer system followed by four specific comments on the provisions of the bill.

1. BRIEF DESCRIPTION OF AUTEX

AutEx, Inc. is a Massachusetts corporation, whose stock is publicly held and traded in the over-the-counter market. Since August, 1969 AutEx has operated its Securities Trading Information System (the "System"), a nation-wide computer system for the processing of data relating to the trading of blocks of securities and its transmission among subscribing broker-dealers and subscribing financial institutions.

The AutEx System accumulates, retrieves and transmits among subscribers current and recent data on the availability for purchase or sale of blocks of securities, thereby facilitating the bringing together of purchasers and sellers. Broker-dealer subscribers include members of the New York, American and regional exchanges, as well as dealers in the over-the-counter and third markets. Subscribing financial institutions include insurance companies, pension funds, banks and mutual funds.

Subscribers for the most part participate through terminals, consisting of keyboards and TV screens, located in their offices and connected directly to AutEx's computers in Wellesley, Massachusetts via leased telephone lines. Programs developed and maintained by AutEx control entry, processing and retrieval of information.

The basic units of input for the System are described as "interest-messages" which are supplied by subscribing broker-dealers and which provide the System with data on buying or selling interests in specified securities in defined lot sizes of at least 1,000 shares. These units are accumulated, merged, and sorted by

the computer so that they will be immediately or subsequently available to subscribers, as determined both by the initiating broker-dealer and by the subscribers themselves.

Distribution of the data accumulated within the computer takes two forms. The first is a continuous flow of accumulated current input data, principally interestmessages from subscribing broker-dealers but also related data from them and from institutional subscribers, as sorted by the computer. The second form of distribution is made when a subscriber retrieves data previously fed to the computer and stored in its memory bank. The data may be retrieved under various indices, such as security, name of broker-dealer, or time of entry, and any subscriber may retrieve any information that was made available to it when originally entered. The primary use of the System is made through its retrieval facilities. A retrieval typically includes several stored interest-messages as well as other data previously entered by subscribers into the computer memory bank.

A broker-dealer can make data available to all subscribers in the System, to a single subscriber, or to any combination of subscribers as determined by the broker-dealer. An institutional subscriber may elect to have displayed to it as they are entered either all interest-messages made available to it or only those for securities selected by it in which it has a particular interest at the moment. When an institutional subscriber becomes interested in a particular security, it will ordinarily obtain on its terminal a recapitulation of both open and cancelled interest-messages relating to that security (except that no subscriber can retrieve any data not made available to it when entered). If an institution is interested in a particular block, the institution or its broker may contact the initiating broker-dealer, normally by telephone, to negotiate a transaction. No transactions are executed on the System; the System simply provides a way for buyers to become aware of potential sellers, and vice versa.

The System covers all types of stocks and bonds, both listed and unlisted. Information relating to over 2500 securities is available for recall for several months. Subscribers can also obtain the benefit of various other incidental features of the System. Perhaps the most noteworthy of these is the service which AutEx is presently instituting which will allow its subscribers to obtain through the System last sale prices on the New York and American Exchanges.

2. AUTEX AS AN EXAMPLE OF THE VALUE OF PRIVATE ENTERPRISE

The story of AutEx when compared to that of a similar activity which the New York Stock Exchange unsuccessfully undertook, is a demonstration of the innovative benefits which a framework of free enterprise fosters.

At the time of its start-up in 1968-69, AutEx kept the New York Stock Exchange fully informed of its intentions. But the Exchange, aware that block trading, while a substantial percentage of its trading volume, was only loosely tied to the Exchange floor, determined to develop a duplicate system at great cost in order to prevent the development of any organization which might encroach on its hegemony. It announced a competing system, known as BAS (Block Automation System). For the next four years, the industry had a choice as to which system better served its needs. The greater effectiveness of the AutEx system was demonstrated. Last month the Exchange announced that it is discontinuing BAS, having lost about $9 million on the venture since its inception four years ago including $3 million in the current year alone. AutEx, on the other hand, has been profitable for the last couple of years.

3. COMMENTS ON NATIONAL SECURITIES MARKET SYSTEM ACT OF 1973 (S. 2519) (a) Use of Term “Quotations". Proposed Section 11A (h) (1) would require the Commission to prescribe rules to assure that "quotations" were available on a non-discriminatory basis to all registered brokers and dealers. If quotations are defined as broadly as proposed in Section 3(a) (22)—i.e., to include not only bids and offers but also mere indications of interest-we see a serious problem created for the block trading subscribers to the AutEx System.

One of the basic principles of block trading is that the institution which has a block, let us say, of 100,000 shares of a security which it wishes to buy or sell must be circumspect and skillful in how it negotiates the purchase or sale. To simply announce to the world that it wants to sell 100,000 shares could have a catastrophic effect on the price of the shares, to the injury of that institution's beneficiaries, policyholders, or stockholders to whom it has a duty to obtain the best possible execution. Accordingly, block traders develop sophisticated skills