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September 30, 1998

Bloomberg Warns That SEC Could Create Central Market

By Staff Reports

Bloomberg has warned that a Securities and Exchange Commission proposal for regulating alternative trading systems (ATSs) could create a centralized Nasdaq-run market that sends execution messages instead of orders to ATSs.

In a bluntly-worded comment letter on one of the two SEC proposals for regulating ATSs, including electronic communications networks, Bloomberg stated: "Taken to its logical and practical conclusion, such centralization of the market could severely truncate, if not eliminate, the role of ATSs, and stifle competition."

The centralization of the market would be the direct result of enhanced regulation of ATSs as broker dealers as envisaged in the SEC proposals, the market-data giant maintained. (The current crop of ATSs includes Bloomberg's electronic communications network Bloomberg Tradebook.)

"By mandating delivery of executions from a central market, the central market itself would become a monopoly and would set the market standard at the lowest common denominator for efficiency, technology and service," the Bloomberg letter stated.

"In the process," Bloomberg added, "Nasdaq could extract monopoly rents from the market participants that were subservient to it, and would not be disciplined by the threat of effective competition."

Bloomberg also takes issue with the second proposal for the regulation of ATSs as de facto exchanges, warning that the proposal could

subject the ATSs to "a variety of entrenched market forces that might well be more problematic and impractical for ATSs than operating as a broker dealer under the status quo."

The best approach to regulating ATSs, Bloomberg believes, is to leave the current arrangements basically unchanged, an approach favored by the Securities Industry Association.

In a public comment letter, the SIA said the current framework has "worked successfully to allow the development of innovative trading systems." The public comment period on ATSs recently ended.