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December 1, 1998

SEC's ATS Proposal Coming Very Soon

By Staff Reports

The Securities and Exchange Commission's rule proposal for the regulation of alternative trading systems (ATSs) is expected to be issued before year end.

Barring some last-minute revisions that would postpone the release until next year, sources say the SEC is currently wrapping up the rule proposal with an eye on integrating ATSs into the Intermarket Trading System (ITS). The ITS is the backbone of the National Market System linking U.S. stock exchanges.

As currently envisaged, one of the most interesting consequences of more closely integrating ATSs such as Reuters Holdings' Instinet into the ITS is enhanced transparency of listed stock trading, one expert said.

Since ATSs (otherwise commonly referred to as electronic communications networks) are subject to the SEC's order handling rules, the listed business that would flow through ATSs as a result of the SEC concept rule would be similarly subject to the display-order-rule provision.

The pending SEC rule proposal on ATSs follows an earlier concept release the SEC issued to drum up comments on how best to regulate these flourishing marketplaces. The SEC concern is that the existing regulatory structure is inadequate.

The concept release outlined two distinct regulatory structures for ATSs, namely broker dealers and fully-fledged stock exchanges. At the moment, ATSs are regulated as broker dealers, though in effect many have the practical wherewithal of stock exchanges.