Whitehead, John C. November 20, 1973 12. John C. Whitehead Chairma Securities Industry Association 20 Broad Street New York, New York 10005 Dear Mr. Whitehoad: In connection with your testimony on S. 2519, the National Securities Market System Act, it would be of assistance to the Subcommittee on Securities if we could have your answers to the following questions: 1. On the one hand SIA supports the bill's requirement that 2. of those approtellas dens the BPA Tano in mi Is a requirement that 116tod exchanges tha only effective inventivo to cudhevga ship in a natkolun? quzitet sydb. 0 Thooq quastione had your anurono will be the on > de a part of che il ing record. Accordingly, a pro. pt reply would be appreciated. pas. AMI:bt Sincerely, Has.foon A. Williams, J. Your letter of November 20, 1973 to John C. Whitehead requested SIA's views on two additional questions in connection with our testimony on S. 2519, the proposed National Securities Market System Act. 1. Equal Regulation. You ask whether SIA would prefer to see "equal regulation" of exchange specialists and non-exchange market makers achieved either "(1) by classifying firms in accordance with the functions they perform and regulating the firms in each category in the same way, or (2) by requiring all firms to perform the same function and thus to come under the same regulation". In terms of the principle to be applied, there is no question but that SIA supports the first alternative. We do not believe that any firm should be required to perform any particular function. What we attempted to point out in our statement is that an exchange agency auction market is different from an over-the-counter dealer market; and the operative components of one are not simply interchangeable with the other. To say that an exchange specialist and a non-exchange dealer are both "market makers" is a misleading half truth. To stop there can confuse the issue. Each has a different role and different responsibilities. For example, if a firm acts as a "market maker" in listed stocks, it should be held to the same standards of professional conduct and performance as every other firm engaging in that function. Of course, any one firm may and often does, act in different market making capacities at the same time, i.e., as an exchange specialist with respect to certain listed stocks, as a block positioner in other listed stocks and as an over-the-counter market maker with respect to certain unlisted stocks. However, that firm must abide by the rules developed to enhance the public interest functioning of each particular market. Many of these rules will be the same for both markets, e.g., the prohibition against fictitious trades to create the appearance of activity. Others must be tailor-made in recognition of a market's special characteristics, such as primary exchanges' rules prohibiting specialists from dealing directly with institutions or insiders in their speciality stocks, or the NASD's Mark-Up Policy with respect to dealer spreads on transactions effected with customers as principal. In short, we believe that firms electing to perform a specific market making function in a given market should adhere to the highest possible public interest standards in that market. It is neither necessary, nor desirable for competition among markets to take the form of lower requirements in one or the other. To gloss over or becloude functional distinctions in order to achieve theoretical equality, we believe, will confuse rather than clarify the issue. I am surprised and puzzled by your conclusion that SIA believes that "non-exchange market makers should be put out of business". Certainly we do not. What we did say was that in the interest of protecting customers and fostering deep liquid agency auction markets goals espoused in the introduction of S. 2519 all trades in listed securities should take place within the central exchange market system. So long as all qualified broker dealer market makers can belong to and compete in that system on the same fair and non-discriminatory terms, then it is difficult to see how any present non-member will be driven out of business except by his shortcomings as a competitor. Indeed, several of the most prominent third market firms already act as specialists on regional exchanges, and I presume that they would be eager to serve clients by making good continuous markets in a more fully integrated central exchange market system. 2. Incentives to Exchange Membership. Your second question asks for our judgment on whether the requirement that listed securities be traded exclusively on exchanges is the only effective incentive to exchange membership in a national market system. We believe that as of today the primary incentive encouraging membership on exchanges and the consequent flow of orders that produced the world's premier central auction market system was and is the system of minimum commissions. The other incentives in combination, such as listing requirements, clearing arrangements, self regulatory standards, public confidence and prestige of membership turn out to be much weaker secondary incentives. However, given the determination of the SEC and the impact of S. 470 and H.R. 5050 on commission rates, the requirement that listed securities be traded exclusively on exchanges attains new importance. The recent public statement by three large NYSE members, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Paine, Webber, Jackson & Curtis Incorporated, and Goldman, Sachs & Co., support this conclusion. The mounting costs of exchange regulation, estimated by some to be 7-9% of total costs, make the relatively unregulated and less expensive arena of the over-the-counter market more appealing. In addition, individual managers maintain that dealer markets in the short run would be better for firms. In the long run, however, they feel that dealer markets would not be in the best interests of the individual investor. We know that the agency auction market has functioned effectively and efficiently in the public interest through wars, periods of prosperity, depressions, and any of a number of national crises. We do not know precisely what combination of ingredients membership, incentives, rules, economic compensation has encouraged and sustained this unique mechanism. Thus, we wonder if anyone can be certain that auction markets will survive the sweeping away of some of its most visible supports and whether men dedicated to the securities business can still furnish American corporations the capital markets they need to provide jobs for American workers, taxes for governments, and fair and orderly markets for savers and investors. Singerely yours, Leon T. Kendall Leon T. Kendall CC: Edward C. Dicks Alton B. Harris GTE INFORMATION SYSTEMS INCORPORATED ONE STAMFORD FORUM, STAMFORD, CONNECTICUT 06904 203 357-2000 JAY M. ROSEN Vice President and General Counsel November 29, 1973 Alton B. Harris, Esquire United States Senate Committee on Banking, Housing and Urban Affairs GTE Information Systems Incorporated, on behalf of itself and its wholly-owned subsidiary, Ultronic Systems Corp. ("GTE/IS"), offers the following comments on Senate Bill S. 2519, The National Securitics Market System Act of 1973 ("Bill"). GTE/IS feels qualified to comment as an interested party, since the present definition of a securities information processor contained in the Bill could include the activities of GTE/IS. GTE/IS installs, in the United States and abroad, transaction and quotation devices (recall systems), and views its mission in the financial community as that of a disseminator of data received from authoritative sources. In constructing the various displays which we offer to our customers we accumulate additional information from the data received, such as cumulative volume and the day's high and low; however, we neither manipulate nor interpret received information. Our position is to make all pertinent official information available in a dynamic and convenient manner to our subscribers, who then draw their own conclusions. Our comments are specifically directed to Section 7 of the Bill entitled "Securities Information Processors; National Market System." In reviewing the provisions of new Section 11 A of the Securities Exchange Act of 1934 ("ACT"), we initially refer to the Securities Industry Study Report of the Subcommittee on Securities, Committee on Banking, Housing and Urban Affairs United States Senate dated February, 1973 ("Report"). Viewing said Report in the context of the language of the Bill, it appears that while the Report distinguished between "ver.dors of market information" and "processor |