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June 30, 2001

The SEC Big Brother

By Jeffry Davis

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  • The SEC Big Brother

At a recent American Bar Association panel discussion in Washington, D.C., on antitrust enforcement and competition policy, I was ready to clash with Kevin O'Hara, general counsel of Archipelago. At issue was access to the NYSE's liquidity. I had made the following remarks:

"The battle over linkage and the so-called CLOB [consolidated limit order book] is a battle over access to the NYSE. The NYSE is characterized as a stodgy old club of dinosaurs standing in the way of progress. The new entrants into the battle, the ECNs, are characterized as purveyors of cutting-edge technology that can modernize the antiquated securities business and reduce costs to consumers. The new entrants, just like the regional exchanges, want access to the NYSE's liquidity, and they justify their demand as necessary to achieve the goal of the National Market System (NMS)."

To my surprise, however, Kevin said that Archipelago just wanted to compete head-to-head for order flow and did not seek free access to the NYSE's liquidity; nor did it favor free access to its own liquidity. I hope I did not misunderstand Kevin. This is such a refreshing development in the saga of the NMS. Instead of a so-called competitor petitioning the Securities and Exchange Commission for regulatory benevolence, we have a real competitor asking the SEC to get out of the way and let it compete.

After the panel discussion I read Archipelago's submission to the SEC's Market Data Advisory Committee. In the submission, Archipelago criticizes current NMS structures for stifling competition and discouraging innovation. I found this encouraging. The submission also states that, "the NMS concept remains as fundamentally sound as it [was] in 1975." Now, I happen to agree with this statement, only because I think the NMS concept has never been fundamentally sound. It was unsound from the start.

This makes me wonder whether Archipelago believes the NMS concept needs some tweaking to keep it "modern" or believes, like me, that the NMS needs to be cast aside. I understand that Archipelago and all the others who conduct similar businesses must get along with the SEC. That often means not saying what you really mean. The SEC, after all, has a great deal of power over its petitioners. And Archipelago has asked the SEC to let it become a registered exchange.

So, it may be that Archipelago believes it has no choice but to preface its remarks with a verbal genuflection to the NMS concept.

If the exchanges, the ECNs and others competing for business and order flow continue their servile obedience to this bankrupt concept, the only competition the SEC will ever tolerate is competition for its regulatory favors. Instead of battling in the marketplace, the combatants will continue to scuffle in the political arena of rule filings, hearings, and committees.

Consider the Market Data Advisory Committee created by the SEC. That's the committee in which Archipelago addressed its comments on market structure. It is heartening that a key concern of this committee is figuring out how to break out of the monopolistic model that was created by the SEC to consolidate trade and quotation reporting and dissemination.