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March 1, 1998

Birth and Death of the CLOB

By Junius W. Peake

The creation of a file for the consolidatation of investor orders, or a CLOB, was proposed as far back as 1976 by the Securities and Exchange Commission. But Professor Junius W. Peake believes the CLOB was overwhelmed by dealer objections, causing the SEC to "wimp out." The CLOB finally reemerged as an NASD proposal last December. Peake provided the following chronology of SEC plans as outlined in commission releases.


The commission believes that there is a need for further modernization and improvement of our securities markets...Further, existing limit-order mechanisms are unable to provide nationwide limit-order protection, and thus cannot always provide the degree of protection for limit orders which hopefully could be furnished by a composite book.

Finally, a composite book appears to be well-suited to assuring an opportunity for public orders to meet without the participation of a dealer.

(Securities and Exchange Commission, Release No. 34-12159, March 2, 1976)


The commission continues to believe that one of the basic principles upon which a national market system must be based is the assurance that all agency orders in qualified securities, regardless of location, receive the benefits of auction-type trading protections.

To this end, the commission believes the several self-regulatory organizations should take joint action promptly to develop and implement a central limit-order file for public agency orders to buy and sell qualified securities in specified amounts at specified prices...

The objectives of a central file are relatively simple: to make available a mechanism in which public limit orders can be entered and queued for execution in accordance with the auction-trading principles of price and time priority.

(Securities and Exchange Commission, Release No. 34-14416, Jan. 26, 1978)

1979: The End of the CLOB

The commission received several proposals describing alternative means of achieving the goal of nationwide limit-order protection. The National Association of Securities Dealers submitted a "Technical Plan for the Development of a national market system," describing an electronic facility (based upon the technology and hardware of the existing Nasdaq system) functionally similar to the central file proposed by the commission.

The technical plan contemplates that any qualified broker could enter limit orders into the facility for execution by qualified market makers based upon price and time priority within the system. The NASD's board of governors, however, expressly reserved judgment on the policy and regulatory issues associated with implementation of the facility described in the technical plan.

Specifically, the NASD noted that further study was necessary to determine whether exclusion of non-public limit orders from the central file and whether protection of orders entered in the file against executions at the same price as well as executions at an inferior price would be appropriate.

Most other self-regulatory organizations opposed creation of a central file...These commentators argued that the absolute time priority proposed to be afforded public limit orders entered in the central file would have significant deleterious effects on the exchange-trading process.

(Securities and Exchange Commission, Release No. 34-15671, March 22, 1979)