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March 1, 2001

Levitt Couldn't Stop Himself

By Jeffry Davis

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  • Levitt Couldn't Stop Himself

The outgoing chairman of the Securities and Exchange

Commission, Arthur Levitt, recently gave a speech titled, "The National Market System: A Vision that Endures." In that speech, which appears to be his market structure swan song, Levitt proclaimed:

"More than twenty-five years ago, Congress established the framework for a National Market System to connect the growing number of different markets. This framework, set forth in the 1975 Amendments, has served our markets well. But today, as our markets undergo unprecedented technological and competitive changes, some question its viability. In a time when the ground beneath our markets is shifting, it's a fair question to consider."

It is heartening that Levitt acknowledges that the National Market System (NMS) might be subject to question as a national policy objective. His speech, however, makes it clear that he has no doubts. Among other things, he praises the law that made the NMS a public goal for its "flexibility in approach and implementation [that] allows a constant reevaluation of the course to achieving a true National Market System."

It should not be surprising that the official most recently responsible for exercising this "flexibility" would praise it. But is this flexibility really such a good thing? Consider why Congress enacted a law that gave so much discretion to the SEC. Levitt and others have argued that Congress wisely provided flexibility because it envisioned the NMS as an evolving ideal that would necessarily be shaped by the interaction of market forces with a touch of government nudging. To be blunt, this is tripe.

Congress had no idea what a NMS was when it called for its creation, and it had no idea how to give the SEC any guidance, other than in vague directives. The SEC came up with the idea of creating a NMS as a clever way to conclude its massive study of the securities markets (the Institutional Investor Study). That study was prompted by the breakdown of the fixed commission rate system under the watchful eye of the SEC. In short, the NMS was the offspring of the SEC's embarrassment over having sanctioned fixed commission rates for so long. Congress went along because the natural inclination of Congress is to expand its power over commerce.

Levitt professes to be among "those inclined to write odes to the power of market forces." But he is concerned that, when it comes to market structure "individual competitive interests cannot always be relied upon to produce a basic framework for competition that serves the public." The SEC is already well on the way to turning the production and dissemination of price information into a public utility. Levitt's speech baldly asserted:

"[T]he ability of one market to veto decisions that bear directly on the public interest - such as how much to charge for data, and whether to upgrade the technology for disseminating it - should certainly be a thing of the past."