[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
                  THE SEC'S MARKET STRUCTURE PROPOSAL:

                      WILL IT ENHANCE COMPETITION?

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                     CAPITAL MARKETS, INSURANCE AND
                   GOVERNMENT SPONSORED ENTEREPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 15, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 109-2



                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2005
22-158 PDF

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          HAROLD E. FORD, Jr., Tennessee
    Carolina                         RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
VITO FOSSELLA, New York              STEVE ISRAEL, New York
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio              JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
TOM FEENEY, Florida                  STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   AL GREEN, Texas
KATHERINE HARRIS, Florida            EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas               
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina

                 Robert U. Foster, III, Staff Director
  Subcommittee on Capital Markets, Insurance and Government Sponsored 
                              Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair         PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
PETER T. KING, New York              DENNIS MOORE, Kansas
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois         HAROLD E. FORD, Jr., Tennessee
EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
SUE W. KELLY, New York               JOSEPH CROWLEY, New York
ROBERT W. NEY, Ohio                  STEVE ISRAEL, New York
VITO FOSSELLA, New York,             WM. LACY CLAY, Missouri
JUDY BIGGERT, Illinois               CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
J. GRESHAM BARRETT, South Carolina   BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
TOM FEENEY, Florida                  NYDIA M. VELAZQUEZ, New York
JIM GERLACH, Pennsylvania            MELVIN L. WATT, North Carolina
KATHERINE HARRIS, Florida            ARTUR DAVIS, Alabama
JEB HENSARLING, Texas                MELISSA L. BEAN, Illinois
RICK RENZI, Arizona                  DEBBIE WASSERMAN SCHULTZ, Florida
GEOFF DAVIS, Kentucky                BARNEY FRANK, Massachusetts
MICHAEL G. FITZPATRICK, 
    Pennsylvania
MICHAEL G. OXLEY, Ohio



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 15, 2005............................................     1
Appendix:
    February 15, 2005............................................    53

                               WITNESSES

                       Tuesday, February 15, 2005

Andresen, Matt, President, Citadel Execution Services............    16
Bang, Kim, President and Chief Executive Officer, Bloomberg 
  Tradebook LLC..................................................    22
Britz, Robert G., President and Co-Chief Operating Officer, New 
  York Stock Exchange, Inc.......................................    12
Dwyer, Carrie E., General Counsel, The Charles Schwab Corporation    14
Greifeld, Robert, President and Chief Executive Officer, The 
  Nasdaq Stock Market, Inc.......................................    25
Joyce, Thomas M., President and Chief Executive Officer, Knight 
  Trading Group, Inc.............................................    20
McCooey, Robert H. Jr., President and Chief Executive Officer, 
  The Griswold Company, Inc......................................    18
Nicoll, Edward J., Chief Executive Officer, Instinet Group 
  Incorporated...................................................     9

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    54
    Kanjorski, Hon. Paul E.......................................    56
    King, Hon. Peter T...........................................    58
    Gillmor, Hon. Paul E.........................................    60
    Andresen, Matt...............................................    62
    Bang, Kim....................................................    89
    Britz, Robert G..............................................   114
    Dwyer, Carrie E..............................................   129
    Greifeld, Robert.............................................   135
    Joyce, Thomas M..............................................   166
    McCooey, Robert H. Jr........................................   176
    Nicoll, Edward J. (with attachments).........................   184

              Additional Material Submitted for the Record

Fidelity Investments, prepared statement.........................   214


                  THE SEC'S MARKET STRUCTURE PROPOSAL:

                      WILL IT ENHANCE COMPETITION?

                              ----------                              


                       Tuesday, February 15, 2005

             U.S. House of Representatives,
         Subcommittee on Capital Markets, Insurance
              and Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 3:00 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Richard H. Baker 
[chairman of the subcommittee] Presiding.
    Present: Representatives Baker, Shays, Bachus, Fossella, 
Biggert, Kennedy, Barrett, Brown-Waite, Feeney, Harris, 
Hensarling, Davis, Fitzpatrick, Oxley (ex officio), Kanjorski, 
Ackerman, Sherman, Hinojosa, Israel, Clay, McCarthy, Baca, 
Miller of North Carolina, Scott, Watt, Bean, and Wasserman 
Schultz.
    Chairman Baker. I would like to call the meeting of Capital 
Markets Subcommittee to order and welcome all of our witnesses 
at our rather cramped quarters today. The subcommittee meets 
today for the purpose of reviewing the market structure 
proposal under consideration currently by the SEC.
    The proposed regulation NMS is aimed at the subject of 
modernization of United States securities markets. Supplemented 
in May of this year or, excuse me, of 2004 with the filing 
extending the comment period till June, the regulation has 
provoked a great deal of discussion and controversy.
    Comments on the proposed rule were due January 26 of this 
year. It centers around three principal aspects of the current 
securities market. The 212-year-old New York Stock Exchange, 
which is clearly the leading stock option market not only in 
the United States but in the world, lists over 2,800 countries. 
New York Stock Exchange members representing individual and 
institutional investors bring their orders to buy and sell New 
York list stocks to specialists on the floor, electronically, 
or through a floor broker.
    On a similar but slightly different path, the NASDAQ is the 
largest U.S. electronic market, listing over 3,300 companies 
and unlike the New York exchange, NASDAQ is a dealer market 
where buyers and seller purchase a share from the dealer or 
market maker through telecommunications capabilities.
    The most recent development in market centers is the growth 
of the electronic communications network. Until the 1990s, 
NASDAQ was the dominant trading in NASDAQ listed securities. 
ECNs have initiated a different methodology of operation from 
the New York exchange or from the NASDAQ. There are no third 
party middlemen, specialist market makers. Buyers and sellers 
actually meet directly and electronically. And today, two of 
the leading ECNs, Instinet and Bloomberg, account for about 25 
percent of the trading volume in NASDAQ listed securities.
    These developments have obviously caused market observers 
and participants to question the current regulatory structure 
and whether any efficiencies might accrue by a change of rule. 
The rule does focus on the question of the trade-through rule, 
its appropriateness, market access, market data and sub-penny 
quotations.
    Via the trade-through rule, market participants are 
prohibited from ignoring or trading through to the best price 
available and executing a trade at an inferior price, even if 
the investor so chooses. Some broker dealers and investment 
advisors contend this rule has a resulting anti-competitive 
effect.
    There is also a discussion as to whether disclosure of top 
of book, Market Best Bid and Offer should be the required 
disclosure or whether depth of book which would allow 
participants to voluntarily display several levels of bids and 
offers away from the Best Bid and Offer.
    I can go on with what really is ultimately a complex 
subject and the decisions of which will have broad and long 
standing effect on market function in this country. I do wish 
to make a comment at the outset, however, that without regard 
to one's view of the trade-through's applicability in the New 
York exchange, I am hoping today to get a good understanding of 
the proposal's intent to apply the trade-through to the NASDAQ 
and the logic of making that the order of the day.
    I do believe that our hearing will be productive. We have 
diverse opinions represented, and more importantly, we have 
very educated and insightful individuals as market participants 
who have been willing to come here today.
    And let me extend a brief word of apology to all. I was 
ready this morning. Delta said they were ready; you know, they 
are ready when you are. I got there at 5:50 this morning, and 
they were not ready. So for that reason, I had to make the 
untimely announcement of the delay. And I know that caused each 
of you some personal inconvenience, for which I regret.
    But to put a fine point on it, I really wanted to be here 
for this hearing and felt it appropriate to make that request. 
So thank you for your courtesies extended.
    With that, I would recognize Mr. Kanjorski for his opening 
statement.
    Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, as 
the old joke goes, that is one. So you have two more shots, and 
then we shoot you. Mr. Chairman----
    Chairman Baker. I will save you the trouble. Just do it 
now.
    Mr. Kanjorski. Mr. Chairman, today, we meet for the fifth 
time in the last 16 months to evaluate the need for further 
reforms in the organization of our capital markets. The ongoing 
deliberations over the National Market System have engendered 
strong emotions and considerable debate.
    As I have regularly observed in our previous hearings, a 
variety of agents in our equities markets have questioned one 
or more aspect of the regulatory system during the last several 
years. Technological advances and competitive developments have 
also led us to a crossroads in the securities industry, forcing 
us to confront a number of decisions that could fundamentally 
alter its organization for many years to come.
    One year ago, the Securities and Exchange Commission put 
forth four interrelated proposals to reshape the structure and 
operations of our equities markets. After reviewing the 
comments that it received regarding these matters, the 
commission made a number of striking changes in its original 
plan and republished them for comment this past December.
    Mr. Chairman, as you already know, I have made investor 
protection one of my highest priorities for work on this 
committee. It is therefore my very strong expectation that the 
commission first and foremost will ensure that it protects the 
interests of average American investors in any decision it 
finally reaches regarding the future of the National Market 
System.
    Given my interest in protecting retail investors, I was 
very pleased that the commission decided to retain the trade-
through rule when issuing its latest regulatory proposal. As 
one of the foundations of our National Market System this 
regulation has insured that all investors get the best price 
that our securities markets have to offer regardless of the 
location of the transaction.
    The approval of an opt-out provision for the trade-through 
rule will have likely splintered our securities markets, 
decreased liquidity, limited price discovery and damaged our 
economy. Today, I also suspect that many of our witnesses will 
focus on the commission's newest proposal to alter the trade-
through rule.
    In addition to applying the trade-through rule to all 
securities marketplaces, the commission's latest plan for 
updating the National Market System includes two alternatives 
for implementation, the Market Best Bid or Offer Alternative 
and the Volunteer Depth Alternative.
    Although some of our witnesses may disagree, the former 
approach, in my view, is the one that the commission should 
choose as it better protects investors, fosters competition 
between and within markets, and incentivizes markets to attract 
the most aggressive orders.
    Also, the Voluntary Depth Alternative seems inconsistent 
with the goals of the National Market System in that it would 
undercut efforts to promote robust competition between markets. 
Moreover, the Voluntary Depth Alternative will almost certainly 
result in only one way for the markets to differentiate 
themselves, namely, how much they are willing to pay other 
market participants for their order flow.
    In my view, promoting competition based on payment for 
order flow will improve--will prove detrimental in the long-
term to average retail investors because the conflicts of 
interest it creates. This issue is one that the commission 
should carefully study and one that I hope our panelists will 
address in their comments and answers today.
    Ultimately, the commission can best ensure that investors 
obtain the best price by balancing competition between markets 
with protection of the best prices in each marketplace. From my 
perspective, the incremental approach contained in the Market 
Best Bid or Offer Alternative is preferable. The adoption of 
this alternative will also help to ensure that the United 
States maintains its global leadership in our financial 
markets.
    In closing, Mr. Chairman, it is appropriate for our panel 
to conduct continued oversight on these complex issues. The 
observation of today's witnesses about these matters will 
further help me to discern how we can maintain the efficiency, 
effectiveness and competitiveness of our Nation's capital 
markets for many years to come.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 56 in the appendix.]
    Chairman Baker. I thank the gentleman.
    Mr. Shays, do you have a statement?
    Mr. Shays. Just for the purposes of introduction, I want to 
extend a warm welcome to Bob Greifeld of the NASDAQ market 
whose nerve center is located in the Fourth Congressional 
District. As I do this, I am thinking probably some of you also 
live in the Fourth Congressional District.
    Bob has done a tremendous job improving NASDAQ strategy 
direction since he joined the company in 2003, and I am told 
his graduate thesis at Stern School, where I also went, was on 
operation of the NASDAQ marketplace. So it seems to me he was 
the perfect match for the company and probably why he actually 
did his thesis.
    Bob is an active speaker on market structure and regulatory 
issues, and I am pleased he could join our other distinguished 
guests here today to provide his thoughts on the SEC proposal.
    Could I ask, is there anyone else in the Fourth 
Congressional District?
    Bob lives in New Jersey.
    Welcome. Thank you.
    I tell people, being on the Finance Committee from the 
Fourth Congressional District of Connecticut is like being--
living in Iowa and being on the Agriculture Committee.
    Chairman Baker. Thank you Mr. Shays.
    Mr. Ackerman.
    Mr. Ackerman. I just want to thank the Chairman and the 
Ranking Member for calling this hearing, and I am anxious to 
hear from the witnesses.
    Chairman Baker. I thank the gentleman.
    Mr. Bachus.
    Mr. Bachus. I thank the chairman.
    I am not going to ask how many of you are from Alabama. 
First of all, I thank Chairman Baker for his leadership on the 
issue. As you know, a significant part of the proposed reg NMS 
purports to reform the so-called trade-through rule and extend 
its application marketwide or intermarket. While the repeal of 
the trade-through rule makes more sense, the SEC appears to be 
past that point.
    According to the SEC's own studies, the trade-through 
problems in the New York Stock Exchange and NASDAQ markets are 
roughly the same and not very large. About 2.5 percent of the 
trades are traded through in both markets.
    So why extend the rule into the market that does not have 
one, the NASDAQ?
    A trade-through rule is unnecessary for the NASDAQ market 
and, if anything, would reduce execution quality by slowing 
down the execution times. A more appropriate approach, I would 
suggest would be to reform the trade-through rule and the 
listed market, the NYSE, where there is already such a rule but 
where clearly the rule is flawed.
    Once the SEC is confident that they have reformed, that 
they have a reform rule or they have the reform rule right, 
then consideration could be given to extending the rule's 
application to the NASDAQ market.
    Just a short suggestion, short statement.
    Thank you Chairman Baker.
    Look forward to hearing from our witnesses.
    Chairman Baker. I thank the gentleman.
    Mr. Israel.
    Mr. Israel. Thank you Mr. Chairman. Thank you for convening 
this hearing.
    In the interest of the committee's time, I will insert my 
statement for the record. I want to give them more time to 
speak than me.
    Chairman Baker. I thank the gentleman for his leadership.
    Mr. Fossella.
    Mr. Hensarling, did you have a statement?
    Mr. Hensarling. Thank you Mr. Chairman.
    First, hailing from the Dallas Fort Worth metroplex, home 
of American Airlines, I might point out, Mr. Chairman, they got 
me here on time this morning. And as we explore increased 
competition within the securities market, we may want to 
explore it in the airline arena as well.
    I appreciate the chairman for holding this hearing. As a 
believer in the free market system, I believe that Congress 
must constantly search for ways to foster more competition 
within our financial markets and allow them to become more 
efficient.
    Along these lines, I have paid particularly close attention 
to the SEC's reg NMS proposal. It is my opinion that the nearly 
30-year-old trade-through rule is too limited in scope to take 
into account the many factors that investors consider when 
executing trades in today's modern high-speed markets. And I 
have great concerns about any expansion of this arguably 
antiquated rule. And I certainly do not need to be convinced 
that more government mandates typically lead to less private 
sector innovation.
    I hope that this debate will continue to focus on what 
enhances competition and thus what is best for the American 
consumer, because only each individual investor knows what his 
short-term and long-term goals are. And certainly, 
institutional investors have different priorities. I question 
whether this rule truly protects investors in today's, much 
less tomorrow's, high-speed markets.
    I am additionally unconvinced that reg NMS should favor one 
particular market or market structure. Instead, shouldn't we be 
trying to foster and encourage competition between markets?
    So as the SEC continues to determine how best to revise the 
regulation, it is my hope that they will keep in mind the 
importance of free and open competition in the American economy 
and the role that we have as a world leader in financial 
services.
    Thank you Mr. Chairman. I yield back.
    Chairman Baker. I thank the gentleman.
    Mrs. McCarthy.
    Mrs. McCarthy. Thank you, Mr. Chairman, I also will submit 
my questions, and I am actually looking forward to hearing from 
the committee.
    Chairman Baker. I thank the gentlelady.
    Mr. Fitzpatrick.
    Mr. Fitzpatrick. Thank you Mr. Chairman.
    And to the distinguished panel of experts who are prepared 
to give testimony today, I appreciate your taking the time to 
be here. Even though I am new to this committee and to these 
rather complicated market structure issues, it seems that 
market forces and technological advances have made trading 
stocks today much more efficient and transparent than ever 
before.
    With decimalization and the rise of electronic trading, 
investors today are receiving better prices and faster trades 
than they were say just 5 years ago. Despite the wide-ranging 
viewpoints of our exceptional panel of witnesses, we can all 
agree that the work must still be done to fully modernize the 
structure of our equity markets. I commend the Securities and 
Exchange Commission for its timely proposal, regulation NMS, 
which aims to complete this modernization.
    However, one part of the proposal, extending the trade-
through rule, does not appear to much offer efforts to 
modernize our equity markets. I am apprehensive about 
government regulations that can strain competition. Competition 
in the marketplace generates innovation, which leads to greater 
productivity. Automatic market structures and mechanisms have 
lower trading costs, bypassing obsolete market mechanisms that 
cost public investors unnecessary trading costs.
    It seems this rule may be an unnecessary second layer of 
regulation.
    Aren't investors protected by their brokers best execution 
obligations?
    Nonetheless, we must be certain that we are protecting the 
investor, in particular small investors. These investors happen 
to be my constituents, the residents of Pennsylvania's Eighth 
Congressional District who have pensions, 401(k) plans, mutual 
funds and investments in stocks and bonds. I need to know in 
what way the SEC's proposal affects the everyday lives of my 
constituents. But before I make that final judgment, I would 
like to hear from our distinguished panelists. I yield back my 
time.
    Chairman Baker. I thank the gentleman.
    Mr. Scott.
    Mr. Scott. Thank you very much, Mr. Chairman.
    I certainly want to thank you, Mr. Baker and Ranking Member 
Kanjorski, for holding this hearing today regarding the 
Securities and Exchange Commission's proposal to modernize the 
National Market System. I understand that the proliferation of 
electronic computer networks have changed the way that 
investors trade in the markets, which is the reason the 
Securities Exchange Commission needs to update the current 
National Market System.
    It is clear from the written testimony of the witnesses 
that there are a wide range of opinions on the best approach 
for assuring intermarket price protection. Indeed, some of our 
witnesses today believe that, in light of current best 
execution obligations and other existing practices, no such 
assured protection is necessary.
    However, one question that I would like to focus on today 
is, if the ultimate policy decision is to try to strengthen and 
expand existing trade-through protection, would it make sense 
to do so in an incremental fashion?
    And also I would like to weigh the potential costs to 
participants in relation to the benefits that new rules would 
provide to markets. And then, of course, there is the 
fundamental question, is there a need for a trade-through rule, 
or does a broker's responsibility to obtain best execution of 
customer orders provide the sufficient protection for 
customers?
    As this subcommittee reviews these proposed regulations, we 
must keep in mind the need to have an efficient national system 
that provides the best prices for a wide variety of investors. 
With that in mind, Mr. Chairman, I look forward to hearing from 
the distinguished panel of witnesses, and I yield back the 
balance of my time.
    Chairman Baker. Thank the gentleman.
    Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman and Ranking Member 
Kanjorski.
    I do want to mention, Delta was ready when I was this 
morning at 5:55, so we are here.
    It is a great opportunity to have this dialogue today. The 
dramatic improvement of communication technology, just 
literally a generational leap in the last 5 years, demands that 
we evaluate the applicability of all regulations, policies and 
procedures from the Federal Government that could assist or 
impair the function of our markets and ultimately the 
functioning of our economy.
    I am looking forward to this dialogue to address 
regulations, the process and procedures to ultimately assure 
that we can protect investors, especially working Americans who 
are building a nest egg for the future and whose future 
economic growth rests largely on our work in this room on both 
sides of the table.
    I am excited about this discussion. And I hope the outcome 
will be ensuring free and fair markets that encourage 
investments and create jobs.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman Baker. I thank the gentleman.
    Ms. Wasserman Schultz.
    Ms. Wasserman Schultz. Thank you, Mr. Chairman.
    It is a pleasure to be here with you today and with Ranking 
Member Kanjorski and members of the panel. Appreciate you 
taking this time to articulate your concerns with regard to the 
SEC's revised National Market System proposal. I am looking 
forward to hearing from the panelists, and I am sure that the 
differences among them with regard to the efficacy of trade-
through reform will only reinforce the contentious nature of 
this issue and the absence of a clear regulatory solution. As 
this process moves forward, I encourage the commission to be as 
fair as possible and to proceed with restraint when considering 
reforms that will affect our nation's financial markets.
    I personally have reservations about imposing regulations 
that may damage our internationally competitive investor-driven 
markets. I believe we must always be wary of the unintended 
consequences that reforms may impose upon the very markets that 
sustain our national economy. Thank you, and I yield back the 
balance of my time.
    Chairman Baker. Thank the gentlelady.
    Mr. Fossella, did you have a statement, sir?
    Mr. Barrett?
    Mrs. Biggert?
    Mr. Feeney?
    Mr. Watt?
    Mr. Watt. I pass.
    Chairman Baker. Mr. Miller.
    Mr. Miller of North Carolina. I will pass.
    Chairman Baker. We are on a role. Mr. Clay.
    Mr. Clay. None.
    Chairman Baker. Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Baker and Ranking Member Kanjorski, I want to 
express my sincere appreciation for you holding this very 
important and very timely hearing. Unfortunately, I will not be 
able to stay for the entire hearing due to a scheduling 
conflict with another committee, but I look forward to reading 
the testimony of today's witnesses and the transcript of 
today's hearing.
    This subcommittee has held a number of hearings on the 
Securities and Exchange Commission's proposed National Market 
System regulation, and we have heard from a number of witnesses 
on the proposal. Today, we will hear from some witnesses, 
including exchanges, ECNs and others, on yet another aspect of 
the Securities and Exchange Commission's National Market System 
proposal originally designed to update and strengthen our 
national securities markets.
    As most everyone in this room and those listening or 
watching knows, the Securities and Exchange Commission proposed 
regulation NMS last year in the attempt to modernize U.S. 
market structure. In May 2004, the SEC decided to extend the 
comment period to June 30, 2004, in part likely due to the 
amazing amount of interest in the importance of and the 
controversy surrounding this proposed regulation.
    Once all the comments were in, the SEC decided to propose 
two alternatives to the original NMS proposal. The commission 
republished the two alternatives to the proposed regulation for 
comment. And now that all those comments are in, the SEC is 
reviewing all of them and will issue its final regulation 
reportedly at the end of this quarter.
    While working on proposed changes to the Real Estate 
Settlement Procedures Act last year, I was amazed and surprised 
by the number of steps that can be taken by certain groups to 
interfere with the regulatory process in an attempt to either 
slow down the process or to use certain ways and means to 
arrive at the end they desire.
    The fundamentally flawed proposed changes to the Real 
Estate Settlement Procedures Act were ultimately and thankfully 
withdrawn as the result of efforts by myself, Mrs. Biggert, 
Senator Wayne Allard and our letter in opposition cosigned by 
well over 250 Members of Congress. All this to say that it is 
amazing what a few of us here in Congress can defeat when we 
put our hearts into it.
    I realize that the SEC is now considering two alternatives 
to the NMS regulation. And Mr. Chairman, I have serious 
reservations about the Voluntary Depth Alternative. It could 
radically change the structure of the U.S. capital markets and 
damage our internationally competitive investor-driven markets.
    I urge the SEC to reject the Voluntary Depth Alternative. 
In this instance, I hope that the SEC will complete the task 
that we set out to do last year and will issue a final 
regulation soon.
    Mr. Chairman, Ranking Member Kanjorski, again, I wish to 
express my sincere appreciation for you holding this important 
hearing today. I yield back the remainder of my time.
    Chairman Baker. I thank the gentleman.
    Ms. Bean, did you have a statement?
    Is there any member wishing to make a further statement?
    If not, at this time, I would like to proceed to call on 
our panel, and I am, again, appreciative for so many of our 
distinguished participants willing to give us their time this 
afternoon.
    Our first is Mr. Edward J. Nicoll, chief executive officer, 
Instinet group incorporated. As is the usual custom, we ask 
that you try to limit your statement to 5 minutes. Your full 
statement will be made part of the official record. And 
otherwise, proceed as you like.

    STATEMENT OF EDWARD J. NICOLL, CHIEF EXECUTIVE OFFICER, 
                  INSTINET GROUP INCORPORATED

    Mr. Nicoll. Mr. Chairman, I am wondering whether I should 
draw any inferences from the fact that I am seated at this--
apparently at the children's table here today.
    But thank you Chairman Baker, Ranking Member Kanjorski and 
members of the subcommittee. Thank you for inviting me to 
appear today to discuss the SEC's latest version of reg NMS.
    This subcommittee has held hearings throughout the 
formation of the rule, and I greatly appreciate the time and 
effort you have taken to understand the complexity of this 
issue.
    Chairman Baker. Mr. Nicoll, if you could pull that mike a 
little closer. They are not real sensitive. You almost have 
to----
    Mr. Nicoll. How about that?
    Chairman Baker. That is much better. Thank you.
    Mr. Nicoll. As I said, I greatly appreciate the time and 
the effort that the committee has taken to understand the 
complexity of this issue. In particular, I want to thank 
Chairman Baker for your leadership.
    This afternoon, I would like to spend a few minutes on the 
trade-through rule. When the SEC re-proposed regulation NMS 
last December, Commissioner Cynthia Glassman encouraged those 
submitting comments not just to consider what type of trade-
through they preferred, but if any trade-through rule was even 
necessary.
    We have taken Commissioner Glassman's words to heart and 
continue to advocate for the elimination of the trade-through 
rule. Its repeal would foster competition without favoring one 
market model over another.
    I must say that I was surprised by the re-proposed rule, 
since, even at this late date, the case for the trade-through 
rule has not been made. Sound economic principle, solid data 
and real-world experience must be our guides when implementing 
rules that will impact our nation's capital markets.
    Let's look at the facts surrounding the trade-through rule. 
First, it is said that the rule is necessary to protect 
investors from unscrupulous brokers that may execute customer 
orders at inferior prices. But once it became apparent that the 
inclusion of an opt-out provision could have addressed such 
concerns, advocates of regulation had to shift their rationale 
for preserving the rule.
    The new defense of the trade-through rule is that it 
encourages limit orders. The example given by supporters is of 
the retail investor who posts a limit order only to watch in 
dismay as other markets ignore his order. All of this causes 
the investor to lose confidence in the market and stop posting 
limit orders. With fewer limit orders, spreads widen and market 
quality is compromised.
    It is a good story, but with a significant flaw. There is 
no evidence to support it. Moreover, the absence of a trade-
through rule in other markets shows no evidence of such a loss 
in confidence. In fact, retail investors have shown a 
preference for placing limit orders in NASDAQ where there is no 
trade-through rule.
    I am concerned that the SEC has adopted the position that 
the trade-through rule promotes limit orders based on research 
that seems to prove just the opposite. In its own study, the 
SEC examined 4 days of trading in 2003. And what did it find? 
The trade-through rate for NASDAQ listed securities was just 
2.5 percent of the trades. This finding can only mean that 
supporters of the trade-through rule believe that even though 
more than 97.5 percent of the time a limit order is not traded 
through, the mere 2.5 percent risk of being traded through is 
enough to discourage limit orders.
    This just does not seem to be the case. In fact, some of 
the largest brokerage firms that represent individual 
investors, including Schwab, Ameritrade, Morgan Stanley, 
Scottrade, and even Goldman Sachs, report that they receive 
more limit orders for NASDAQ stocks where there is no trade-
through rule than for New York Stock Exchange stocks where 
there is.
    Further, the SEC's own study also noted that there were 
more limit orders placed in NASDAQ stocks than New York Stock 
Exchange stocks. So based on these numbers, shouldn't the SEC 
be eliminating the rule entirely, as commissioner Glassman 
suggests?
    Unfortunately, the SEC instead has indicated that it will 
impose the regulation on both the NASDAQ and the New York Stock 
Exchange and has only asked for a public comment on its two 
ways to apply this expanded trade-through rule, top of book and 
voluntary depth of book. This is a false choice. Neither is a 
step forward.
    Moreover, public comment letters to the SEC make it clear 
that there are sharp divisions on this issue. The New York 
Stock Exchange and some others are strong defenders of the 
regulation. Yet 37 members of the House and Senate signed 
comment letters last year calling for a repeal of the trade-
through rule or, at a minimum, the inclusion of an opt-out 
provision. They were joined by statewide officials from coast 
to coast, ranging from California Controller Steve Westly to 
Florida Attorney General Charlie Crist.
    Also calling for a repeal or opt-out were more than a dozen 
State pension funds and labor unions, including some of the 
largest like CalPERS, OPERS, the Teachers' Retirement Systems 
of Louisiana, Indiana, and California; and TIAA-CREF. Major 
financial institutions, such as UBS, Morgan Stanley, JP Morgan, 
Merrill Lynch, and Citigroup joined retail firms like 
Ameritrade, Fidelity and Schwab as they all called for the 
rule's repeal or an opt-out exception.
    Such sharp divisions should be taken very seriously. We are 
considering fundamental changes in how our markets operate and 
compete. While we should not expect full consensus across our 
industry, I would think the SEC would be wary of sweeping 
changes with their related costs to investors in the face of 
such a deep split and with so many questions still unanswered.
    Let me conclude with Instinet Group's position on the key 
issues. First, the trade-through rule is an unnecessary burden 
that hinders competition, ultimately harming rather than 
protecting investors.
    Second, on no account should the trade-through rule be 
extended to the NASDAQ marketplace. The NASDAQ market is an 
example of a highly liquid and highly competitive market where 
the competition has reduced investor costs, narrowed spreads 
and improved performance for all investors.
    As Chairman Donaldson himself said when re-proposing reg 
NMS, quote, We need to identify real problems, consider the 
practical consequences of possible solutions, and then move 
pragmatically and incrementally towards the goals Congress 
staked out, unquote.
    Applying the trade-through rule to the NASDAQ marketplace 
is not a pragmatic and incremental move. It should be taken 
only when it is clear that the market is failing and less 
drastic remedies are inadequate.
    And third, if the SEC still feels the overwhelming need to 
protect limit orders by strengthening the trade-through rule 
and imposing it on the NASDAQ marketplace, it should implement 
a consistent rule that protects all limit orders to its 
voluntary depth of book proposal and not one that protects the 
lucky few at the top of the book.
    I have commented in greater technical detail on our 
positions in the documents accompanying my remarks today and 
ask that they be included in the record. I thank you for your 
time and effort and would happily answer any questions you 
might have.
    [The prepared statement of Edward J. Nicoll can be found on 
page 184 in the appendix.]
    Chairman Baker. Thank you very much, sir. Our next witness 
is Mr. Robert G. Britz, president and the co-chief operating 
officer of the New York Stock Exchange.
    Welcome, sir.

STATEMENT OF ROBERT G. BRITZ, PRESIDENT AND CO-CHIEF OPERATING 
             OFFICER, NEW YORK STOCK EXCHANGE, INC.

    Mr. Britz. Thank you Chairman Baker, Ranking Member 
Kanjorski and members of the subcommittee. Appreciate the 
opportunity to be with you this afternoon to articulate the 
NYSE views on this important issue.
    Mr. Chairman, while we have filed written testimony 
addressing a variety of the aspects of reg NMS, I thought I 
would address my verbal remarks to the question that is posed 
in the title of this hearing: Will reg NMS actually enhance the 
competitive position of our markets?
    In my view, the answer to that question is categorically 
yes. In that regard, I would offer the following general 
observations. Reg NMS approach to the trade-through utilizing 
the Market Best Bid effort will incent markets to compete for 
investor orders by offering them speedy executions and, 
importantly, at the best price. It will incent someone seeking 
counter-party interest to improve upon the existing market, 
thereby reducing bid offer spreads. It will require markets to 
adhere to a minimum standard of speed in order to compete. It 
will reward those who create the most marketable bids and 
offers, thereby encouraging quote competition. And then, very 
importantly, it strikes a balance between the pure order 
competition of a consolidated limit order book and market 
competition that arises from linking competing markets. 
Specifically by continuing to encourage intermarket 
competition, reg NMS will help to boost the U.S. capital 
markets' competitive position globally and particularly when 
compared with the government monolith that would inevitably 
spring from a consolidated limit order book.
    More specifically, I would offer as Exhibit A of the pro-
competitive benefits of reg NMS the NYSE's proposal for a 
hybrid market. While the hybrid is driven by our evolving 
customer needs and by our own productivity initiatives, wanting 
to be aligned with the provisions of reg NMS was clearly a part 
of our thinking. Without getting into the specifics, through a 
series of hardware and software initiatives between now and 
this time next year, the hybrid market will enable our 
customers to execute in our market electronically, anonymously, 
in subseconds and with no size restrictions. They will see the 
complete limit order book in real time. They will have the 
opportunity to reach into that book at multiple prices or sweep 
to a particular price if they care to do that. They will be 
able to place undisclosed interest to a broker in the quote or 
on the book at various price points as they see fit. Their 
orders will be auto routed to other markets to the extent that 
better prices exist in other markets. Incoming orders from 
other markets will be automatically executed in the NYSE 
market, and in general, both brokers and specialists and by 
extension the NYSE market will be significantly more 
productive.
    I think reg NMS is particularly pro-competitive in the way 
that it adeptly deals with the trade-through issue. Amid calls, 
albeit from a small minority, to allow markets to ignore 
investors' better-priced orders in other markets, the reg NMS 
proposes to strengthen and extend the current trade-through 
rule. The commission correctly recognizes that trade-throughs 
inherently involve treating investors unfairly, never a good 
idea, and especially so in an environment already tainted by 
questionable practices on the part of some corporate officials, 
some auditors, some research analysts, some mutual fund 
executives, and some securities dealers.
    Trade-throughs are symptomatic of inefficient markets. 
Indeed, only an inefficient market could give rise to a trade-
through. They are a violation of the trust investors place in 
the market and inconceivable with any notion of fair dealing. 
Trade-throughs devalue price as an order execution element and 
weaken the equity pricing mechanism. They create a disincentive 
for investors and traders to post better prices because there 
can be no assurance that doing so will be rewarded.
    When competing to establish the best price is no longer the 
key to attracting orders, markets will regress to the lowest 
common denominator relative to price. When one considers that 
the fundamental mission of the stock market is to efficiently 
price securities, how can the price at which investors trade 
not be paramount? Remember, in a trade-through scenario, 
several things occur, none of which is desirable. In the first 
case, one investor pays more or sells for less than is 
possible. Another investor gets completely ignored, 
notwithstanding being willing to pay the best price. And 
importantly, the company shares are mispriced, and trading is 
more volatile than would otherwise be the case. And so the SEC 
has proposed reg NMS to create an environment where investor 
orders will be rapidly executed and at the best prevailing 
price.
    This proposed trade-through rule has the practical and 
desirable effect of directing investor orders to markets that 
deliver the best prices. And in so doing, it incents 
competition among those markets to establish efficient prices. 
Through reg NMS, the SEC is wisely not dictating market 
structure. It is creating a framework that allows markets to 
choose the combination of services they wish to offer and lets 
investors decide which services best meet their needs. Reg NMS 
encourages well functioning capital markets and highlights the 
importance of investor confidence in ensuring that result.
    Were trade-throughs to be sanctioned by the SEC and, 
therefore, commonplace, how long will it take investors whose 
orders are ignored to lose confidence in the systems' ability 
to meet their needs? How long before corporations experience a 
higher cost of capital due to the increased volatility in their 
shares? And how long before U.S. capital markets lose ground to 
foreign competition due to a decline in the efficacy of the 
securities pricing mechanism?
    At the end of the day, Mr. Chairman, the investor willing 
to pay the highest price and his counterpart willing to sell 
for the lowest price ought to trade. Anything else is not only 
counter-intuitive, it is downright inefficient. Worst than 
that, it is anti-investor.
    In closing, I would like to commend the committee for 
conducting this hearing and particularly for correctly framing 
this in terms of the competitiveness of our markets. Speaking 
for my own organization, the NYSE is by far the largest and 
most important equity market in the world. Its growth parallels 
the growth of the U.S. economy. It has helped to both fuel the 
growth of U.S. enterprise and maintain the global preeminence 
of the U.S. as a capital market.
    At the risk of stating the obvious, there is a lot riding 
on the markets, the SEC and policymakers. Making sure that the 
question posed in the title to this hearing, the answer to that 
question is a resounding yes. Thank you, Mr. Chairman.
    [The prepared statement of Robert G. Britz can be found on 
page 114 in the appendix.]
    Chairman Baker. I thank you very much sir.
    Our next witness is Ms. Carrie E. Dwyer, general counsel of 
the Charles Schwab Corporation.
    Welcome.

  STATEMENT OF CARRIE E. DWYER, GENERAL COUNSEL, THE CHARLES 
                       SCHWAB CORPORATION

    Ms. Dwyer. Chairman Baker, Ranking Member Kanjorski and 
members of the subcommittee, my name is Carrie Dwyer. I am 
general counsel of the Charles Schwab Corporation. I also have 
the distinction, along with some colleagues at the New York 
Stock Exchange, of being one of the drafters of the original 
trade-through rule.
    I am pleased to be here today to present our perspective on 
an issue that has direct consequences for the individual 
investors that we serve. For more than three decades, Charles 
Schwab has been providing individual investors with efficient 
access to the markets and the tools they need to make informed 
investment decisions. Today, we serve more than 7.3 million 
clients with nearly $1.1 trillion in client assets. On an 
average day, our customers trade about 3.6 million shares on 
the New York Stock Exchange and NASDAQ combined.
    Whether investing in equities, mutual funds or through an 
investment advisor, our customers' investment returns depend on 
efficient execution. Our customers demand ever greater 
efficiency, better service and lower cost from us. We believe a 
regulatory structure that promotes vigorous competition between 
markets will generate the innovation that will deliver those 
benefits now and in years to come.
    As you know, Mr. Chairman, Congress has historically 
rejected the idea of a government-designed central market. 
Instead, over the years, this committee has wisely decided to 
allow market structure to evolve through the interplay of 
competitive forces while limiting the SEC's role to market 
oversight.
    Members have generally agreed that legislators and 
government regulators cannot foresee how technology and 
investing will resolve, nor should they choose which competitor 
should succeed and which should fail. This policy has served us 
well over the years, fostering the highly efficient and 
technologically advanced market that we enjoy today, which 
makes it difficult to justify the SEC's plan to abandon this 
approach.
    Regulation NMS and the proposals for expanding the trade-
through rule represent a fundamental redesign of the equity 
markets. In this proposal, the commission seeks to substitute 
its own algorithm for the interaction of competitive market 
forces, creating in effect a central market system. Brokers 
will be forced to route to markets that may not necessarily get 
the customer the best overall price and which they would 
otherwise seek to avoid because of a variety of factors, old-
fashioned order handling procedures, cumbersome technology or 
capacity or reliability concerns.
    Should this design be adopted, there will be no incentive 
for markets to compete on how orders are executed or how they 
discover prices or depth because exchanges are guaranteed to 
receive orders no matter how moribund their technology. Without 
an incentive to innovate, technological and operational 
efficiency will suffer.
    As numerous experts have pointed out, with every broker 
forced to route to the same market to take out the same quote 
where they trade, there is a serious risk of market gridlock. 
With the advent of Internet trading, our customers are used to 
getting the price they see on the screen within seconds of 
entering the order. What will we say to them when their orders 
start taking longer to execute and at worse prices? What is the 
SEC's justification for this radical change? It is hard to find 
a solid empirical basis in the commission's release. Is the 
rationale for a trade-through rule the quality of effective and 
quoted spreads?
    Our experience with our own order flow has shown us market 
quality improvements in the transfer just last fall of the 
QQQQs from the listed markets which have a trade-through rule 
to NASDAQ which does not.
    Is the rationale high rates of trade-throughs? The 
commission found reported rates of the trade-throughs, as Ed 
has said, of about 2 percent. Seems too small to justify 
changing how the other 98 percent of orders are handled. In any 
case, the commission reports that the trade-through rate is 
about the same for the New York Stock Exchange which has a 
trade-through rule and NASDAQ, despite the differences in 
market structure.
    Is the rationale to encourage greater use of limit orders? 
Our own customers choose to enter twice as many limit orders on 
NASDAQ, which has no trade-through rule, than the New York 
Stock Exchange.
    Do not be misled by those who will argue that a trade-
through rule is merely about requiring that customers get the 
best price. From the customer's perspective, the issue is not 
whether the first part, the first hundred shares of their order 
is executed at the best quote. The issue is whether they are 
getting the best price overall for their whole order. There are 
many factors that go into that analysis, such as speed and the 
ability to discover additional liquidity for an order.
    Contrary to the claims of others, the SEC's top of book 
proposal will result in situations in which individual 
investors do not receive the best prices for their trades. The 
SEC's experimentation with the new market design stands in 
striking contrast to its slow response to a well documented 
problem that has continued to disadvantage investors. Under the 
current SEC rules, the exchanges operate as a cartel to fix the 
price of market data and restrict access to data to the 
detriment of all investors, but especially individual investors 
who cannot afford the hundreds of dollars a year the exchanges 
charge for access to quote services that display market depth 
information.
    Needless to say, access to quality market data is vital to 
the functioning and fairness of our markets. We are talking 
about a depth of book proposal, but no one can see, other than 
institutional customers, can see depth of book today. Despite 5 
years of study, comment, and debate, the commission proposal is 
only a first step that merely reapportions the pool of money 
and fails to address the root cause of the problem and the 
inequities it creates.
    Mr. Chairman, facilitating competition means eliminating 
barriers to competition, such as the trade-through rule, that 
guarantee a market will receive business even if it refuses to 
evolve. And it means facing up to cartels that place individual 
investors at a disadvantage. Regulation NMS represents a step 
that requires reconsideration by the commission with the 
thoughtful input of this committee.
    While Congress has traditionally respected the SEC's 
historic role in terms of market oversight, it has consistently 
reaffirmed that competitive market forces should shape market 
structure, and it should do so again. Thank you for allowing me 
to share my views, and I look forward to answering any 
questions.
    [The prepared statement of Carrie E. Dwyer can be found on 
page 129 in the appendix.]
    Chairman Baker. I thank the gentlelady.
    Our next witness is Mr. Matt Andresen, President Citadel 
Execution Services.
    Welcome, sir.

   STATEMENT OF MATT ANDRESEN, PRESIDENT, CITADEL EXECUTION 
                            SERVICES

    Mr. Andresen. Thank you. Chairman Baker, Ranking Member 
Kanjorski and members of the subcommittee, I am Matt Andresen, 
president of Citadel Execution Services, an affiliate of 
Citadel Investment Group. Prior to joining Citadel, I was CEO 
of Island, at the time the largest electronic communications 
network. On behalf of Citadel, I welcome this opportunity to 
present our views on the proposed National Market System 
regulations issued by the SEC.
    Citadel manages approximately $11 billion in investment 
capital from its headquarters in Chicago and offices in New 
York, San Francisco, London, and Tokyo. On average, Citadel 
accounts for between 1 and 2 percent of the daily dollar volume 
traded on both the New York Stock Exchange and NASDAQ and for 
more than 10 percent of daily U.S. options volume. With nearly 
a thousand employees and as an active and substantial investor 
in the U.S. and throughout the world, Citadel has a vital 
interest in the development of fair, efficient, transparent, 
and liquid markets.
    Because the trade-through rule implicates fundamental 
questions regarding the transparency and efficiency of the 
markets, the issues to be addressed at this hearing are of 
great importance to all investors. American investors, whether 
retail or institutional, have a vested interest in insuring 
that U.S. markets remain the strongest and most efficient 
markets in the world.
    I would like to refer the committee to our written 
testimony, which I have submitted and briefly summarizes our 
position. The status quo is not acceptable. Citadel is not an 
exchange but rather a customer of exchanges. And as such, 
Citadel is well acquainted with the limitations of the current 
regulatory regime. Citadel believes that the existing trade-
through rule is unnecessary and should be eliminated.
    However, the top of book proposal, if adopted, would be 
substantial improvement over the current regulatory framework. 
Specific benefits would include, one, the ability to bypass 
manual markets where appropriate; two, the ability to use an 
intermarket sweep exemption to execute large institutional 
orders cleanly and efficiently; and three, the creation of a 
clear incentive for manual markets to automate. Citadel has 
asked the commission to act quickly to either eliminate the 
existing trade-through or to adopt a revised rule.
    In addition, given that the US options markets are plagued 
with the same market structure problems as the NYSE and AMEX 
listed equity markets, Citadel has requested the SEC extend any 
proposed trade-through changes to the options markets.
    We would now like to respond specifically to the questions 
raised by the committee. First, Citadel does not believe that a 
compelling empirical case has been made for the extension of 
the trade-through rule to all NMS stocks. Specifically, Citadel 
does not believe there is any discernable policy justification 
for any application of the trade-through rule to electronic 
markets. In the marketplace for NASDAQ stocks, where there is 
not a trade-through rule and quotes are generally immediately 
and electronically accessible, market quality is superior and 
trade-throughs are not an issue.
    With regard to questions on top of book versus depth of 
book, Citadel would support a top of book provided there is an 
ability to bypass manual markets, an intermarket suite 
exemption, and a clear definition of an automated market.
    You have also asked what the consequences are if this 
proposal is adopted. Citadel believes the markets and, 
therefore, all investors would be better served by an abolition 
of the trade-through rule rather than by incremental reforms.
    Nevertheless, Citadel believes that the SEC's proposal, if 
adopted, will be a meaningful improvement over the model we 
have now. Tangible benefits that would accrue on the listed 
equity markets from the proposed rule include an increase in 
market transparency and liquidity; a decrease in effective 
spreads and execution costs; and a dramatic improvement of 
execution speed and certainty.
    Finally, with regard to your question on the SEC's 
empirical justifications for the proposal, the SEC has 
correctly recognized the serious weakness in the current trade-
through rule, its failure to reflect the disparate speed of 
response between manual and automated quotations. A proposed or 
revised trade-through rule by excluding manual quotations would 
reduce impact of this fundamental flaw in the current National 
Market System and thereby improve the system.
    A number of commentators have pointed out flaws in the 
SEC's analysis in regard to the question of whether to extend 
the trade-through rule to the NASDAQ marketplace. Based on our 
own experience trading large volumes of both NASDAQ and NYSE 
listed equities, we believe strongly that the execution quality 
of the NASDAQ marketplace is significantly superior to that of 
the listed marketplace.
    In conclusion, let me be very clear about Citadel's 
position here. We do not believe there should be a trade-
through rule. However, the current status quo is unacceptable. 
If an immediate and complete abolition of the trade-through 
rule across all markets, over-the-counter, listed and option, 
is not on the table, then Citadel strongly recommends taking a 
positive incremental step that, in our opinion, will 
substantially improve the execution quality of NYSE listed 
stocks. Thank you.
    [The prepared statement of Matt Andresen can be found on 
page 62 in the appendix.]
    Chairman Baker. Thank you, sir.
    Our next witness is Mr. Robert H. McCooey, Jr., president 
and chief executive officer of the Griswold Company, 
Incorporated.
    Welcome.

   STATEMENT OF ROBERT H. MCCOOEY, JR., PRESIDENT AND CHIEF 
         EXECUTIVE OFFICER, THE GRISWOLD COMPANY, INC.

    Mr. McCooey. Thank you Chairman Baker, Ranking Member 
Kanjorski and members of the subcommittee. Good afternoon. 
Thank you for inviting me here to testify in connection with 
your review of the SEC's re-proposed regulation NMS.
    I am privileged to be here to share my thoughts, again, 
before the committee. For those of you who do not know me, my 
name is Robert McCooey. I am a member of the New York Stock 
Exchange and one of the agent representatives from the floor to 
the New York Stock Exchange Board of Executives. In my primary 
job, I am the president and chief executive officer of the 
Griswold Company, an agency broker executing institutional 
orders on the floor of the New York Stock Exchange. I am a 
practitioner.
    Chairman Baker, I am pleased to be part of this group you 
have assembled here today. I hope that I am going to be able to 
bring some perspective on the impact of the re-proposed reg NMS 
as well as insight into why, of the two proposals, 
alternatives, proposed by the SEC, I favor the market BBO 
alternative over the Volunteer Depth Alternative.
    Over the past few years we have witnessed a great 
transformation taking place throughout the National Market 
System. At the New York Stock Exchange alone, change has been a 
prevalent theme in our business. We have welcomed new 
management who have brought with them new ideas and a new 
perspective. Our Chairman John Reed and our CEO John Thain has 
been singularly focused on listening to our multiple 
constituent groups and responding with an aggressive approach 
to meeting customer needs.
    A product of this response has been the NYSE's proposed 
hybrid market initiative. This was created as a direct response 
to the feedback from our customers. With this initiative, we 
aim to create a market that enhances choice and best serves the 
demands of all of our customers.
    Some of our customers have asked for speed others require 
certainty and still others desire the opportunity for price 
improvement. The Hybrid Market offers all of these options. If 
they want speed, certainty, and anonymity of execution, they 
can choose the NYSE's automated execution service, an 
enhancement to a service that already exists today. If they 
want the opportunity for price improvement offered through the 
auction process, they can still employ the services of a 
professional agent to meet that goal.
    The SEC, too, has been actively listening to constituents. 
I praise the Commission for its thoughtful proposals and for 
all the hard work put forth in creating the best marketplace 
for all investors. I share this goal, and therefore I support a 
Reg NMS where customers receive the best price for their 
transactions while also giving them the benefit of competition 
between marketplaces. I support a trade-through rule that 
extends to all NMS stocks, as I believe that creates a level 
playing field for investors and promotes healthy competition 
among markets.
    In the SEC's most recent trade-through proposal, two 
options were presented. I support the first of the two 
alternatives, the market BBO alternative, in which the best bid 
and offer in each market would be protected. This top of book 
alternative will promote competition to provide the best bid or 
offer within a market with the assurance that their quotes will 
not be traded through. It will also encourage market 
participants to quote aggressively, to be that best bid in 
offer in order to be afforded that protection. This will narrow 
spreads and foster more display liquidity. Market participants 
have consistently ranked these two benefits of the proposal as 
two of their top priorities.
    I strongly disagree with the second proposal, the voluntary 
depth alternative, that mandates depth of book order routing 
which will essentially create a consolidated limit order book, 
or CLOB, in the marketplace. This alternative, periodically 
debated and always rejected, harms competition among markets by 
taxing technology and regulation. One of the great features of 
the New York Stock Exchange is the interaction between large 
and small orders. The creation of a government mandated order 
file would significantly limit customers' ability to achieve 
the best price as the interaction of orders from institutional 
clients and individual investors would be dramatically 
hindered. This bifurcated market where the largest institutions 
would trade in a different arena than small investors would 
have a significant negative impact on price discovery.
    Furthermore, in a CLOB environment, customers' orders would 
have to be exposed in the market, making them difficult to 
trade and more costly to execute. All institutional customers 
worry about the market impact that their orders will have, 
especially those in small and midcap stocks. The forced display 
of these orders in a CLOB in order to receive protection is not 
in the customers' best interest since it undermines the goal of 
minimizing market impact. I cannot support a model that does 
not promote the customer's best interest. Additionally, the 
cost of this model to investors is unjustifiable. The 
implementation operating costs would eventually fall on 
investors, and these costs would greatly outweigh any potential 
benefits.
    I cannot imagine a reason to unnecessarily alter today's 
highly competitive system that accrues tremendous benefits to 
my customers and your constituents.
    I hope my comments today presented before the committee 
have underscored the importance of a trade-through rule for all 
NMS stocks and the overwhelming value of the market MBB 
alternative versus the negative impact of the voluntary depth 
alternative in the reproposed Reg NMS.
    If best serving investors is a goal that we all share, then 
we must agree on a comprehensive Reg NMS that guarantees the 
best price for all investors as well as fosters competition. We 
must continue to put the interest of investors first and 
provide healthy, competitive, and robust domestic markets.
    I am pleased that the SEC has recognized the value in 
maintaining the trade-through rule. It is reassuring that we 
can collectively recognize the value of updating this important 
customer protection rule as we make significant changes to the 
structure of the NYC in response to suggestions from our 
competitors and, more importantly, constructive dialogue with 
our customers.
    I am privileged to be part of this process in creating a 
better marketplace for all investors and again applaud the SEC 
for all their efforts.
    Finally, I want to commend the work that you, Mr. Chairman, 
your staff, and the committee has done on this issue. Thank you 
for the opportunity to speak before you today, and I will be 
happy to answer any questions.
    Chairman Baker. Thank you, sir.
    [The prepared statement of Robert H. McCooey can be found 
on page 176 in the appendix.]
    Chairman Baker. Our next witness is Mr. Thomas M. Joyce, 
president and chief executive officer, Knight Trading Group, 
Incorporated. Welcome.

  STATEMENT OF THOMAS M. JOYCE, PRESIDENT AND CHIEF EXECUTIVE 
              OFFICER, KNIGHT TRADING GROUP, INC.

    Mr. Joyce. Mr. Chairman, thank you. I apologize in advance; 
I am wrestling with a cold.
    Chairman Baker, Ranking Member Kanjorski, and members of 
the subcommittee, thank you for the opportunity to participate 
in this important hearing regarding regulation NMS. I am the 
chairman and CEO of Knight Trading Group. We manage investor 
assets of over $3-1/2 billion as well as being the largest 
market maker in the industry, trading well over 1 billion 
shares on a typical day.
    I commend this subcommittee for its interest in ensuring 
that the capital markets remain competitive and innovative. 
Although the SEC's regulation NMS addresses some inefficiencies 
in the equity markets such as ECN access fees to nonsubscribers 
and subpenny quotations, we have very serious concerns about 
its proposal to extend the trade-through rule to all markets. 
Due to competitive forces and the lack of data supporting such 
a rule, we respectfully submit that the SEC has not 
demonstrated a meaningful justification of the proposed rule. 
As such, we firmly believe that neither of the two alternative 
trade-through rules, market BBO alternative and voluntary 
depth, are warranted.
    The solution is simple: Require linkages that efficiently 
connect all markets and ensure that all display quotations can 
be accessible and executable. If there are efficient linkages, 
then the need for a trade-through rule on any market is 
effectively eliminated.
    There is no evidence to support the extension of a trade-
through rule. In fact, the SEC's data on trade-through rates is 
nearly the same on the NYSE, which has a trade-through rule, 
and the NASDAQ market, which does not have a trade-through 
rule. So it is unclear what is to be gained by instituting such 
a rule across all markets. Government-mandated paths of trading 
could have serious unintended consequences and negatively 
impact the technological innovations that have served to 
greatly benefit the U.S. investor.
    The driver of this innovation can be summed up in a single 
word: competition. Competition in securities markets has 
allowed the typical U.S. investor to now experience trades at 
blinding speed and at the best price. By forcing all trades to 
take a similar route and be handled in a similar manner, we 
will undermine the very foundation of competition. That is the 
distinctions in execution offerings that motivate the investor.
    It is those very distinctions which drive the markets to 
improve. Rather than a centralized way of trading, the U.S. 
investors want fast trades, complete fills, minimal impact, 
superior pricing, and minimal costs. These investor demands 
force the markets to create and innovate in a highly efficient 
manner. Too many unnecessary rules create roadblocks and reduce 
competition.
    The reproposal significantly underestimates the cost of 
instituting the trade-through rule for all markets. No trade-
through rule has existed in the NASDAQ market, so firms like 
Knight will face a significant technology cost burden. The 
costs of these system and compliance technologies and personnel 
changes will be significant; yet the benefits of a trade-
through rule are minimal. The ultimate costs of investors will 
also be great as they will inevitably suffer from reduced 
efficiencies brought about by a centralized mandated trading 
protocol.
    Competition rather than mandatory--rather than regulatory 
mandates should drive market participants. Unlike a trade-
through rule mandate, the SEC's rule 11Ac1-5 is an example of 
regulation that increases competition. The rule requires market 
participants to post execution stats, and as a result, rule 5 
transparency and comparability of execution, which order 
routing firms can and do use to make informed routing 
decisions, has increased competition and pressured markets to 
become more efficient, greatly reducing execution times and the 
cost to investors. This is due to competitive forces, not 
regulatory fiat.
    Innovations and increased efficiencies may never occur if 
we do not encourage and foster a competitive market environment 
rather than pursuing and expanding antiquated command-and-
control methods of trading. An approach such as rule 5 provides 
a far less invasive and less costly way to achieve the goals of 
a trade-through rule.
    There is no evidence to suggest that a trade-through rule 
will increase limit orders. Charles Schwab data supports the 
view that small investors would not benefit from an extension 
of the trade-through rules of the NASDAQ market as their 
customers, quote, tend to use limit orders approximately twice 
as often for NASDAQ stocks as for listed stocks, end quote. A 
trade-through rule simply will not encourage more limit orders 
since retail investors appear to use limit orders on NASDAQ 
stocks, which are not governed by a trade-through rule, more 
than twice as often than on Exchange-listed stocks. This 
explains why many large retail-based brokers argue there is no 
need to extend the rule. And let us face facts. Even though the 
New York Stock Exchange already has a trade-through rule, large 
institutional investors do not populate the specialist book 
with limit orders. They simply don't do it.
    In short, these real market behaviors tell us that a trade-
through rule will not encourage limit orders. Rather than 
imposing a trade-through rule at this time, a phased approach 
to addressing market structure issues should be implemented.
    Requiring connectivity would go a long way towards ensuring 
that investors receive best execution of their orders. Once 
connectivity and access are established, the SEC would then be 
better able to determine whether there is a need for further 
investor protections. If necessary, then a pilot program could 
be implemented to examine the impact of proposing a trade-
through rule.
    Knight supports the Commission's proposals relating to 
limiting access fees, banning subpenny quotations, and locked 
and crossed markets. Each of these by the SEC will help 
maintain an orderly marketplace, so we urge adoption of those 
proposals.
    In conclusion, competition fosters innovation and 
efficiencies, ultimately benefiting the markets and investors. 
Connected markets and efficient and fair access will do more to 
benefit investors than a costly unproven command-and-control 
trade-through rule. Knight recommends the SEC minimize 
unintended consequences by taking a market-oriented approach 
that requires connectivity, efficient and fair access, and then 
later considers whether a trade-through rule is necessary.
    Thank you. I look forward to any questions.
    Chairman Baker. Thank you, sir.
    [The prepared statement of Thomas M. Joyce can be found on 
page 166 in the appendix.]
    Chairman Baker. Our next witness is Mr. Kim Bang, president 
and chief executive officer, Bloomberg Tradebook, LLC. Welcome.

 STATEMENT OF KIM BANG, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
                 THE NASDAQ STOCK MARKET, INC.

    Mr. Bang. Thank you, Mr. Chairman, and members on the 
committee. My name is Kim Bang. I am pleased to testify on 
behalf of Bloomberg Tradebook. Bloomberg Tradebook is owned by 
Bloomberg L.P. and is located in New York City. Bloomberg L.P. 
Provides multimedia, analytical, and news services to more than 
250,000 financial professionals in over 100 countries 
worldwide. Bloomberg News is syndicated in over 350 newspapers 
and on 550 radio and television stations worldwide. Bloomberg 
Tradebook is a global electronic agency broker serving 
institutions and other broker dealers. We count among our 
clients many of the Nation's largest institutional investors 
representing, through pension funds and mutual funds, the 
savings of millions of ordinary Americans.
    Bloomberg Tradebook specializes in consolidating what has 
otherwise been a fragmented marketplace by increasing 
transparency and by providing direct market access to those 
points of liquidity. We are not competitors of the exchanges; 
we are liquidity agnostic, if you like. Our challenge is to 
provide the best possible tools to our clients to empower them 
to find the best price, whether it is at the New York Stock 
Exchange, NASDAQ, or any of the other 40 exchanges we route to 
globally.
    Currently the trade-through rule protects manual markets by 
mandating that investors pursue the advertised theoretical best 
price rather than the available firm price. The rules should be 
abolished. If manual markets are to continue on the New York 
Stock Exchange when they exist at no other significant exchange 
in the world, they must earn that position as a result of 
competition, not because of regulatory protection.
    We would respectfully submit that the goals of the National 
Market System can be most fully and efficiently realized with 
greater transparency and unintermediated access to firm 
quotations. Greater mandatory display of liquidity beyond the 
national best bid and offer, the NBBO, and immediate electronic 
access would make for a more competitive National Market 
System.
    Decimalization has been a boon to investors and an enormous 
spur to market efficiency. This committee has played a critical 
role in producing this market evolution. However, the rules 
governing the display of market data, rules crafted in an era 
of eighths and sixteenths, have never been updated to reflect 
this change in decimalization.
    Since decimalization introduced 100 price points to the 
dollar in place of the previous 8 or 16, the amount of 
liquidity now available at the NBBO is much smaller than it was 
before. As a result, there has been a dramatic decrease in 
transparency and liquidity found at the inside quotation. The 
Securities Industry Association in commenting on Reg NMS 
accurately observed, beginning quote, ``The value of the NBBO, 
the cornerstone of the market data system, is less than it was 
prior to decimalization. We believe that the SEC has the 
responsibility to address this issue in light of the operation 
of its quote and display rules,'' et cetera, end of quote.
    We agree. Bloomberg publishes data on en route orders to 
equity securities markets throughout the world. Every 
significant market other than the New York Stock Exchange and 
Mexico currently publishes realtime quotations at a minimum of 
five levels deep for all investors to see and immediately 
access electronically. As the largest equity market in the 
world, the New York Stock Exchange should not continue to deny 
investors and fiduciaries that same transparency and access.
    Rather than introduce a new trade-through rule, we believe 
the Commission should consider amending the limit order display 
rule to require exchanges, market makers, and other market 
senders, including ECNs, to publish any customer limit orders 
within 5 cents of their best published quotations; to require 
all market centers to have their published quotations, not just 
the top of file, be firm and immediately touchable 
electronically.
    Three, amend the vendor display rule to require vendors 
such as Bloomberg to carry the depth-of-book quotations on the 
same terms as top-of-file quotations.
    Four, review and implement with appropriate modifications 
the New York Stock Exchange open book and hybrid market 
proposal before making decisions on Reg NMS.
    And, fifth, enforce meaningful compliance with fiduciary 
standards by brokers and investment managers so they use their 
reasonable means to seek best execution for clients.
    This is a modest proposal. As a policy matter, it is hard 
to argue that decimalization should leave investors with less 
transparency and liquidity. The impact of simply updating the 
display rules could be profound, positive, encouraging the 
display of limit orders in a fashion that relies on market 
forces instead of governmental regulation. It is far less 
intrusive than a trade-through rule which would be expensive to 
implement and difficult to monitor and enforce.
    With better transparency and access to market quotations, 
brokers and investment managers would have powerful incentives 
particularly given their best execution duties to reach out for 
the best prices available in any market, which would improve 
execution quality, promote intermarket competition, and lower 
transaction cost.
    We think the New York Stock Exchange, in fact, has made 
some very encouraging progress under the constant and effective 
prodding on the investors and the SEC. Its open book proposal 
has some shortcomings, we believe, but if implemented properly, 
it would enhance transparency. The hybrid market proposal and 
its direct plus element offers enhanced electronic access to 
the published quotations. Both of those developments represents 
a welcomed modernization of the market, and we think the 
Commission should pause to let them be properly implemented 
before given further consideration as to whether a trade-
through rule is necessary or indeed desirable.
    As to market data itself, the chairman of this committee 
has observed that market data is the oxygen of the markets. 
Ensuring that the market data is available in a fashion where 
it is both affordable to investors and where market 
participants have the widest possible latitude to add value to 
that data are high priorities. According to the SEC, the SRO 
networks spend about 40 million on collecting and disseminating 
market data, and in return receive over 10 times that much in 
revenues, 424 million. And those revenue come from investors.
    We believe the SEC was closer to the mark in 1999 when it 
proposed market data revenues should be cost-based--excuse me, 
and that--and its current Reg NMS proposal, which sets forth a 
new formula for dispensing market data revenue without 
addressing the underlying question of how to effectively 
regulate this monopoly function.
    Regulation NMS is a bold step to bring our markets into the 
21st century. This committee and the SEC are to be commended 
for prompting what has already been a productive debate. 
Elimination of the trade-through rule, restoring the 
transparency lost to decimalization, coupled with greater 
efforts to ensure access to liquidity, and finally control the 
cost of market data would help promote a National Market System 
that best serves investors. Thank you.
    Chairman Baker. Thank you, sir.
    [The prepared statement of Kim Bang can be found on page 89 
in the appendix.]
    Chairman Baker. And our next witness is Mr. Robert 
Greifeld, president and chief executive officer of the NASDAQ 
Stock Market, Incorporated. Welcome.

  STATEMENT OF ROBERT GREIFELD, PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, THE NASDAQ STOCK MARKET, INC.

    Mr. Greifeld. Thank you. Chairman Baker, Ranking Member 
Kanjorski, and members of the subcommittee, thank you for the 
opportunity to discuss NASDAQ's views on the reproposed 
Regulation NMS. NASDAQ supports much of the proposed Regulation 
NMS, including the restrictions on subpenny trading, the 
proposed access standards, and restrictions on access fees.
    With regard to the SEC's proposal on market data, we 
support the SEC's liberalization of proprietary market data; 
however, we believe the quote credit element is seriously 
flawed and will be gamed by market participants. Examples of 
this gaming would be flickering quotes, security targeting, 
market targeting, shredding quotes, and shifting quotes. This 
will serve to distort market data and increase investor costs.
    With regard to the trade-through rule, NASDAQ opposes it 
because it is not needed. It is costly, and it will not serve 
the best interest of investors.
    We are proud of the market quality experienced by investors 
every day on the NASDAQ Stock Market. We achieve that high 
quality without the anticompetitive effects of a trade-through 
rule. We do not believe that extending the trade-through rule 
to NASDAQ is supported by the facts and may indeed be harmful 
to investors.
    Reg NMS will allow investors to make distinctions between 
fast and slow markets. This will help modernize our overall 
market structure. While repealing the trade-through rule would 
be a simpler way to achieve a competitive proinvestor National 
Market System, the advances proposed by the Commission with 
regard to floor-based markets are a step forward. This proposal 
is already driving floor-based markets to develop plans to 
automate. It will enable electronic markets to compete and will 
offer investors a better opportunity for best execution.
    With regard to NASDAQ, the extension of the trade-through 
rule to our market would be harmful to investors. We are not 
convinced that the rule would even achieve the SEC's desired 
goal of increasing the use of limit orders. In contrast, we 
know that the rule will, in fact, impose financial and 
technical costs and deprive millions of investors of the 
ability to determine what is best for them.
    The Commission relied on two economic studies to support 
the application of the trade-through rule to NASDAQ securities. 
We respectfully disagree with the Commission's staff studies. 
Our full analysis is attached to my written testimony, and in 
these studies it shows that the trade-through rate on NASDAQ is 
not, in fact, 2 percent, but today is 1 percent.
    In general, I will tell you the SEC's study significantly 
overstates the extent, and it also concludes that differential 
fill rates for large market orders in NASDAQ and New York Stock 
Exchange stocks are evidence of a defect in NASDAQ's market 
structure. This study, in fact, demonstrates a lack of 
understanding of how the market works, and yet it is used to 
justify a major change in our market.
    Many in Congress have asked NASDAQ what we think of the two 
alternatives in the latest NMS proposal. Just to be clear, 
neither a top of book proposal nor a depth-of-book version of 
the trade-through rule is better than the NASDAQ open 
competitive market. The real question should be, has the trade-
through rule outlived its usefulness, and should it be 
repealed?
    For those who support a trade-through rule, we found it 
interesting that the arguments they relied upon conveniently 
evaporated from their advocacy when the depth of book 
alternative was proposed by the Commission. In fact, some seem 
to be taking intellectually inconsistent positions. When the 
New York Stock Exchange testified before you last February at 
the New York field hearing, the NYSE stated ``Why should 
investors ever receive anything other than best price?"
    There is talk of the importance of speed, anonymity, and 
other factors, but in a commoditized market like that which 
exists for equities, if displayed prices across all markets are 
available immediately, there is absolutely no reason to allow 
agents to buy and sell on behalf of their clients for anything 
other than the best price. However, the New York Stock Exchange 
seems to have had a change of heart. Last month, in a letter to 
the SEC, the New York Stock Exchange praised the virtue of 
promoting investors' ability to choose among alternative 
trading venues and decried the mandatory depth-of-book routing. 
And it said it will eliminate intermarket competition by giving 
any limit order regardless of where it was placed the same 
protection; that is, any limit order would be protected based 
on price.
    If you really worship at the altar of best price, the depth 
of book alternative fulfills that objective perfectly. If 
someone supports trade-through protection for one price, how 
can one logically argue against protection of an order as 
little as one penny away from that price? That is saying that 
the first investor in line deserves to have his or her spot 
protected, but the second person in line and any subsequent 
investors in line do not.
    We have been given a choice between two competing visions. 
The first vision is the government continues to function as an 
involved regulator, presiding over the positive forces of 
competition as is now the case on the NASDAQ market where there 
is no trade-through rule. Or the second choice is we rely on 
the government to define quality stock market services and 
provide attendant rate protection and price setting. This is 
the world where a national trade-through rule is administered 
by the SEC.
    Some would say there is a level of safety in removing the 
rigorous jostling forces of competition and applying a 
government-defined pathway for each and every trade. Others 
would say competitive vigor is our best hope of providing the 
most efficient, effective market for investors. I come down 
squarely on the side of competition, and this is not a 
theoretical conclusion. The NASDAQ Stock Market operates this 
way every day and has performed exceptionally well for 
investors.
    In the end, NASDAQ is hopeful that Reg NMS is completed in 
a timely manner. It is important to move competition forward in 
the trading of New York Stock Exchange issues.
    Again, we hope the Commission will reject the imposition of 
any trade-through rule on NASDAQ. The Commission's market 
structure rules are critical to maintaining our lead in the 
global equity markets and will impact the way Americans and all 
investors view the quality and the fairness of our markets.
    I thank you for holding this hearing and for considering 
NASDAQ's views.
    Chairman Baker. Thank you, Mr. Greifeld.
    [The prepared statement of Robert Greifeld can be found on 
page 135 in the appendix.]
    Chairman Baker. And I want to start my questions with you. 
Based on your obvious concerns about trade-through being 
extended, setting aside for the moment the consumer interest to 
respond to this question--and let me quickly add, this should 
not be considered for litigation purposes a forward-looking 
statement. I am asking a policy question. If we were to extend 
the trade-through, or the SEC were to extend the trade-through, 
with the top of book feature, tell me where the NASDAQ would be 
3 years from now. What is it going to look like? What is the 
bad consequence of that? And take into consideration Mr. 
Joyce's and others' comments about cost of compliance.
    Mr. Greifeld. Right. I think the consequence is that the 
trading in NASDAQ stocks remain essentially unchanged, but we 
have a drag to participants and investors on their return in 
that the imposition of trade-through on NASDAQ forces all 
participants to essentially go through a very rigorous and 
time-consuming and expensive system reengineering to allow each 
and every participant to follow the government-mandated rules. 
At the end of that day, you will have some trade-through on 
NASDAQ even if there is a trade-through rule. So that is a key 
point. With the imposition of a trade-through rule, there still 
will be some level of trade-through, and that is specified in 
Reg NMS.
    Chairman Baker. Well, let me jump in. There is one other 
issue that the SEC, as I understand it, was hoping to achieve 
with the imposition, and that was to facilitate enhanced 
utilization of limit orders. Given where you are vis-a-vis the 
New York Exchange, what is the prognosis if the trade-through 
is applied with regard to the current utilization?
    Mr. Greifeld. Well, we see today that there is a greater 
use of limit orders on the NASDAQ market as compared to the New 
York Stock Exchange, and we see from a broad range of 
commenters that they feel their limit orders today are better 
protected on the NASDAQ Stock Market when compared to the New 
York Stock Exchange. So we do not have an issue today with 
investors being wary or unwilling to put limit orders into the 
market. So, at the end of the day, you are putting a cost 
structure on to the market, and you are solving a problem that 
does not exist.
    Chairman Baker. Let me flip over to Mr. Britz and give you 
the worst situation. Let us say, for example, that the trade-
through is eliminated. Now, other than the consequence to the 
individual investor, who I am sure you will say may not be best 
served by that change, what is the consequence to the market 
structure? Assume for the moment the committee's interest in 
looking forward is to come up with a philosophical approach to 
the issue to have the most vibrant and competitive market 
possible in 3 to 5 years. What is wrong with that as far as the 
New York Exchange, and why won't your predominant position in 
the market prevail?
    Mr. Britz. Well, Mr. Chairman, if I may, I would almost 
like to answer the question for just briefly that you asked Mr. 
Greifeld. I think NASDAQ will be, under your scenario, a much 
better competitor of the New York Stock Exchange in 3 years 
with the benefit of the trade-through rule than they are today. 
And as you can imagine, I have some mixed views on that, but 
they would be in a position where they would strive to deliver 
the best prices to investors rather than striving--having a 
business model that strives to deliver cash inducements to 
brokers and substandard prices to investors.
    Relative to the New York Stock Exchange, we will continue 
under all circumstances to have a business model that delivers 
the best prices to investors with or without a trade-through 
rule, Mr. Chairman.
    Chairman Baker. So your response really is if we extend the 
trade-through to NASDAQ, you are actually facilitating their 
competitive position; and you are going to argue here that in 
competition for your financial interest is the way we ought to 
go?
    Mr. Britz. Yes, sir.
    Chairman Baker. That is an interesting approach.
    Let me ask this: Since the numbers are similar as 
percentages, I go to the question asked by----
    Mr. Britz. Mr. Chairman, if I may.
    Chairman Baker. Sure.
    Mr. Britz. The numbers are not similar. There is a fair 
amount of smoke and mirrors taking place here.
    Chairman Baker. Please explain.
    Mr. Britz. There is a difference between the gross number 
and the net number. There isn't anything in the listed market 
and in the trade-through rule today that precludes a trade-
through from taking place; it simply requires a resolution for 
the aggrieved party. The trade-through rule at the end of the 
day was not about the taker of liquidity, it is about the 
person that gets traded through. Ultimately they raise their 
hand and complain against the trade-through, and that matter 
gets resolved. So the net number in NYSE-listed trading within 
the National Marketing System is dramatically different than 
the gross number that you are hearing about.
    Chairman Baker. And what would that number be? If it is 
dramatically different, what would be the number?
    Mr. Britz. Virtually zero.
    Chairman Baker. So are you telling me that there aren't 
occasions on each trading day where thousands of executions 
occur which are not at the best price in the market.
    Mr. Britz. There are always order facts, Mr. Chairman. What 
I am telling you is that the trade-through rule addresses a 
procedure whereby those bona fide trade-throughs and aggrieved 
parties get resolved after the fact.
    Chairman Baker. I understand your point as to process and 
the right of the aggrieved party to seek redress. My point 
merely was in today's market function there are on thousands of 
occasions on a daily basis within the conduct of the New York 
Exchange transactions, individuals who do not get execution at 
the best price.
    Mr. Britz. That is correct. And what I am suggesting to 
you, Mr. Chairman----
    Chairman Baker. Is there is a way for them to fix it.
    Mr. Britz. That is exactly right.
    Chairman Baker. I understand.
    Mr. Britz. That is what the trade-through rule prescribes 
today.
    Chairman Baker. And all I am suggesting is that the defense 
of the current structure is that we are protecting individual 
interest. And I think Mr. McCooey made the point in his written 
testimony that when we went to decimalization, and there were 
minor fractions that were gleaned for the investor, we should 
not lose those fractions of a penny or a penny on the aggregate 
of trades because of the enormity of value that represents in 
the market.
    I am simply saying--making the same observation with regard 
to current trade-through practice: There are thousands of 
occasions when the trade does not occur at the best price, 
maybe a penny, maybe a little over a penny, and that also 
represents significant value. And what I am trying to get out 
of this--and, you know, a Congressman trying to unravel Wall 
Street conversation is perhaps a more lengthy task than 
somebody who has only been here 20 years really has to really 
understand you guys.
    But I am kind of getting the picture that, whatever the 
current system, there are advantages that could further accrue 
to the average investor--it might be very small amounts--if we 
let technology work. I think the principal reason--and, again, 
correct me if I am wrong, one of the principal reasons why the 
execution might not occur at the best price is the 
technological barriers between the exchanges that don't allow 
that transfer of information in a timely manner to meet your 
own self-imposed trading timelines. Is that a factor in this?
    Mr. Britz. Proposed Reg NMS, Mr. Chairman, neutralizes the 
landscape relative to speed. So whatever inefficiencies exist 
as between so-called manual markets and automated markets today 
will be a thing of the past under Reg NMS.
    Chairman Baker. But what I am saying, as to current market 
practice, that is the principal reason I believe that execution 
may not occur at the best prices, because of technological lack 
of translators.
    Mr. Britz. I am not so sure I would call it technological 
so much as I would call it different market models, different 
market structures. Technology, the piece of that, to be sure, 
but a much more fundamental----
    Chairman Baker. We are not getting to the specialist 
question, are we, with that answer?
    Mr. Britz. Say it again.
    Chairman Baker. We are not getting into the specialist 
question with that answer.
    Mr. Britz. No, we are not.
    Chairman Baker. Okay.
    Mr. Britz. No, we are not.
    Chairman Baker. I have exhausted my time and probably you 
as well. I am sorry.
    Mr. Kanjorski.
    Mr. Kanjorski. Ms. Dwyer, you helped draft the original 
trade-through rule, and I assume, because of technological 
change in advancement, your position now is contrary to what 
you drafted when you were originally with the SEC?
    Ms. Dwyer. Well, actually the rule was drafted by the 
American and New York Stock Exchanges. At that time I 
represented the American Stock Exchange, and with my companions 
at the New York Stock Exchange we were being pressured by an 
SEC that was looking to establish a CLOB because it wasn't 
happy with the inefficiencies of ITS, which in those days 
linked regional stock exchanges and some third market makers. 
And under pressure to avoid the imposition of a CLOB, we did, 
as Bob has correctly pointed out, create a rule that had 
nothing to do with best execution, and that rule hasn't had--
for at least 28 of its 30 years, it was merely a means of 
redressing monetary grievances between specialists that traded 
through each other. It was a means of avoiding arbitration over 
every single one of those things.
    Mr. Kanjorski. I find that interesting, but I suspect, like 
Abraham Lincoln, it depends on who you represent as to who you 
stand for. But your company participates, I believe--and I want 
to ask this as a question--getting payment for order flow; is 
that correct?
    Ms. Dwyer. Well, in some respect I think you could 
characterize the sale of our market-making business lock, 
stock, and barrel to UBS with an ongoing order routing 
arrangement as payment for order flow, but it would then be in 
the realm of many other things throughout the industry that 
arguably could be called that, but represent not cash payment 
for order.
    Mr. Kanjorski. Do you see any conflict of interest involved 
there?
    Ms. Dwyer. I actually don't see a conflict of interest 
there. I see it as the elimination of a potential conflict of 
interest which we have been managing for many years operating 
our own market-making business within the Schwab family, and 
now we have an arm's-length arrangement with the New York Stock 
Exchange's largest order routing firm and service levels 
agreements that are, if anything, better than the ones we 
provided to our customers on our own.
    Mr. Kanjorski. Let me understand, because I really haven't 
been able to inquire into the question. My understanding is the 
broker, or the Exchange, but it is really the broker that is 
handling the transaction, pays the company for its order flow, 
and then that money reverts back to the company. But it isn't 
distributed to the investors in that company if their mutual 
fund buyers or if their investors through that company, those 
revenues, stay with the corporation; is that correct?
    Ms. Dwyer. Well, there are many different kinds of payment 
for order flow, and in some cases monies are remitted back to 
customers; in other cases, traditionally the SEC has allowed 
payment for order flow to stay legal because it reduces the 
cost that customers pay.
    In our situation we have a very traditional--today we have 
a very traditional arrangement on Wall Street, which is paying 
someone else to execute our orders and being paid for the value 
of that----
    Mr. Kanjorski. Do you see a big distinction between that 
practice and insurance companies paying brokers for certain 
insurables?
    Ms. Dwyer. Well, I hope you are not going to get me 
indicted here, but I----
    Mr. Kanjorski. No, I----
    Ms. Dwyer. I do think there is a big difference.
    Mr. Kanjorski. I can tell you, I have been to a number of 
exchanges now where the question has been raised to me--and I 
am flabbergasted--that you all in the securities business don't 
see the inherent conflict of interest in being paid by the 
person you are giving the business to, and he is buying perhaps 
at a higher price which affects your investor. And let me ask 
anyone else. Do you all see any conflict, potential conflict of 
interest, or a problem in paying for order flow?
    Mr. Joyce. Mr. Kanjorski, I would like to take a run at 
that. We at Knight, in fact, do pay some brokers to provide us 
with order flow. By definition order flows have value, by 
definition. That is obvious. But any and all.
    Mr. Kanjorski. Well, what is that? It is a payment to 
somebody--somebody gets the business that you give them because 
they pay you, right?
    Mr. Joyce. We get order flow brought to us because of, in 
point of fact, we compensate them under certain circumstances 
for routing the order flow to us. Now, the point is that----
    Mr. Kanjorski. They used to call that rebates or something 
in the railroad?
    Mr. Joyce. Rebates. Rebate, payment for order flow.
    Mr. Kanjorski. I mean, this has been a practice going on in 
American capitalism for a couple hundred years in different 
forms.
    Mr. Joyce. Yeah. And I think it started in the securities 
industry in the late 1960s when there were eight-point spreads.
    Mr. Kanjorski. I understand payment for order flow 
specifically, but rebates and paying for business and the 
conflict of interest that is inherent in that concept, that has 
been going on in American business for years.
    Mr. Joyce. Well, I can't comment on the rest of American 
business. I do know the conflict of interest in this case, I 
think, is negligible at best because none of these payments 
take place before the execution is considered. This is all 
after the fact of securing the absolute best execution for the 
investor.
    Mr. Kanjorski. But it may cause a worse price.
    Mr. Joyce. With all due respect, Mr. Kanjorski, I challenge 
that. The best price procedures that are taking place in the 
NASDAQ--in point of fact, 2 years ago----
    Mr. Kanjorski. You mean you pay somebody money for order 
flow even though you could have had the same order flow from 
anyone else and have paid them nothing?
    Mr. Joyce. Or, theoretically, we----
    Mr. Kanjorski. Or they wouldn't pay you for the order?
    Mr. Joyce. Well, we wouldn't have that order flow if we 
didn't pay for it. We wouldn't just get it.
    Mr. Kanjorski. Why?
    Mr. Joyce. Because we have to--one of the reasons, we get 
it in competition with other members of the industry. By the 
way, this is not just an isolated case in one firm or another; 
this is an industry practice. In order to compete in the 
industry----
    Mr. Kanjorski. I understand, it is rather broad. Does 
anyone at that table, eight of you, see anything potentially as 
a conflict of interest or improper about that activity on the 
exchanges? And I am just curious.
    Ms. Dwyer. Let me see if I could answer that in another 
way. Any business is full of conflicts, and it is how you 
manage them that matters; do they affect the quality, as you 
have pointed out, of what the customer receives. So the SEC in 
this matter has required, I think very properly, that we all do 
fulsome disclosure to our customers, and that we still be 
subject to the highest standards of best execution, which we 
demonstrate regularly to all and sundry. And I would like you 
to look at the disclosures that are made so customers know 
absolutely.
    Mr. Kanjorski. Unlike the insurance industry----
    Ms. Dwyer. I think very unlike the insurance industry.
    Mr. Joyce. I agree it is unlike the insurance industry. You 
can look up right now on the Internet, and you can see what our 
execution statistics and the quality of those statistics are.
    Mr. Kanjorski. Why would so many brokers----
    Mr. Joyce. The insurance industry does that.
    Mr. Kanjorski. Why would so many brokers----
    Mr. Joyce. We are very----
    Mr. Kanjorski. When I went on to the floor of one of the 
exchanges, I must have had 25 brokers come up to me and say, 
Congressman, you have got to do something about this. This is 
the most immoral, illegal practice, and most conflict-of-
interest practice we have ever seen. And we have no alternative 
but to pay for order flow.
    Are they--their idea of this is grossly wrong, or is there 
something missing in this?
    Mr. Joyce. I don't know where they are coming from, Mr. 
Kanjorski. I can't speak for them.
    Chairman Baker. And let me say, that might be the 
gentleman's last question, but please feel free to respond, 
anybody who wants to answer his question.
    Mr. Bang. A piece of the problem may tie back to access 
fees that are currently permitted by the SEC to charge access 
fees, ECNs to charge access fees, exchanges charge access fees. 
And as a result of those charges, competitive pressures 
essentially make it such that rebates are funneled back to 
market participants for posting bids and offers. Our position, 
Bloomberg Tradebook's position, is that it is a market-
distorting element and that we should do away with access fees.
    Mr. Kanjorski. Your position, you should do away with the 
payment of order?
    Mr. Bang. Access fees, which access fees is an element that 
provide the ability to pay for limit orders. If you eliminated 
access fees, the ability to pay rebates for limit orders would 
diminish significantly.
    Chairman Baker. Mr. Greifeld, did you want to add?
    Mr. Greifeld. Yeah. I think the broader issue is a conflict 
between acting as principal and agent. And our industry really 
has had to grapple with that through the years, where you have 
traders who can act both as principal and agent. And most 
notably in the recent history is the specialists on the New 
York Stock Exchange, where they did a very good job for a 
number of years, decades, and postdecimalization you saw that 
they were putting their principal interest ahead of the 
customer interest, and that resulted in the $250 million fine.
    Now, NASDAQ market makers have also run into problems with 
managing that principal and agency conflict. I think Carrie 
says it properly: Conflict is there, it is a question of how 
the SEC, the SROs discharge their responsibilities to make sure 
that conflict is managed.
    Mr. Joyce. And if I just may clarify. Knight Trading Group 
neither endorses nor opposes payment for order flow. It is 
simply a function of the competitive environment. What we do 
feel exceptionally strong about is that the retail investor has 
never had it so good. So any and all payment for order flow 
issues are above and past the execution issue, because the 
execution issue is one that is public, and we are exceptionally 
proud that the retail investor gets top-flight executions, and 
then the payment for order flow issue comes in. But we neither 
endorse it nor oppose; it is just sort of a competitive part of 
life, and it does not, repeat not, affect the quality of the 
execution.
    Mr. McCooey. As a pure agency broker, the Griswold Company 
sees the conflict and does not pay for any order flow.
    Chairman Baker. Mr. Fossella, did you have a question at 
this time or comment?
    Mr. Fossella. Thank you, Mr. Chairman. Thank you, panel.
    Just to follow up on Mr. Britz's comments. I guess I 
don't--I guess I will paraphrase it. But I think he said that 
the Reg NMS, I guess, will neutralize the differences relative 
to the speed of execution among the exchanges. Given that, if 
that is true, is there anybody on the panel who thinks on 
balance that a Reg NMS as currently proposed is bad for the 
markets and thus bad for investors, or does everybody believe 
that on balance Reg NMS is good for the markets and thus good 
for investors?
    Mr. Joyce. I would be happy to comment. I think parts of 
Reg NMS are good for investors, like getting rid of subpenny 
trading and limiting access fees. It is a fundamental 
difference that I guess some of us have. There is a view that 
regulation, i.e., extending the trade-through rule, is going to 
enhance markets. I fundamentally believe that regulation stops 
innovation. Long-term innovation will improve the investor 
experience. So as long as Reg NMS includes an extension of the 
trade-through rule, it will be, in point of fact, a detriment 
to the investor experience.
    Mr. Fossella. Is there anybody who believes that it will be 
a detriment? If not, is it safe to assume that everybody thinks 
that, on balance, as currently proposed, it is a plus for the 
markets and thus investors?
    Ms. Dwyer. I think, speaking for me, I think I testified to 
the opposite, that, on balance, it would not be a benefit. I 
would say--before I came here, I looked at some order execution 
statistics from our own order flow in the last week, and, 
contrary to Bob's assertion that we would normalize speed in 
this market, last week, for example, New York Stock Exchange 
executions, which were of an equal quality of execution that we 
received elsewhere, were on average four times slower. And I 
think what I said in my testimony--across all bands of orders. 
And I think what I said in my testimony was that that kind of a 
break on the current trading process, something that clogs the 
pipeline and slows it down.
    If you think about the fact that a firm like ours sends 
probably 40,000 orders an hour out into the markets to be 
executed, you start to put a drag on that pipeline, and it is 
not just one investor who may get an execution for seconds, you 
know, slower or faster, it is the cumulative effect on that 
entire stream.
    Mr. Fossella. And that is currently--you don't feel that, 
as proposed, Reg NMS will satisfy that?
    Ms. Dwyer. No. It will make it worse.
    Mr. Fossella. Because Mr. Britz followed up, again, 
different markets, different models, different structures, and 
different models, that it would be an incentive for these 
regional markets including the Stock Exchange to become more 
hybrid, and thus speed of execution will, his point--is to 
neutralize it. You don't buy it?
    Ms. Dwyer. Speaking for us, we think the opposite.
    Mr. Fossella. Okay.
    Ms. Dwyer. That the ability--that the necessity to compete 
fully with more automated markets will cause the Stock 
Exchange, which is one of the greatest markets in the world, to 
move forward and innovate.
    Mr. Britz. If I may, it is inarguable that Reg NMS will 
normalize the speed across markets in order to have quotes 
eligible for competition in the marketplace. I don't know at 
what level right now the language is automatic execution, 
essentially untouched by human hands. Our own speed for 
automatic execution is now down to seven-tenths of 1 second. 
But the point is inarguable that under a Reg NMS regime, speed, 
or at least some minimum standard of speed, will be normalized 
across all markets.
    I would make one other point relative to Carrie's comment. 
She was, I am sure, accurately portraying her own firm's data. 
If you look at the data required to be filed with the 
Securities and Exchange Commission, you will see that the New 
York Stock Exchange in a number of trade size categories, for 
example, the largest trades, is actually faster than any other 
marketplace.
    Ms. Dwyer. Bob is correct, I was speaking for us alone.
    Mr. Andresen. I think that one thing that is important to 
note here is that I think the trade-through debate has been 
mischaracterized as a choice between speed and price. I think 
that, speaking for Citadel or speaking for any market 
participant, this is always a choice about price. But there are 
different factors in price. There is the advertised price of a 
trade, and there is the true price of a trade. When you buy an 
automobile, you have delivery charges, you have taxes that 
might impact the true cost of execution that may very well 
differ from the advertisement you saw in the newspaper.
    And when we talk about normalizing execution costs between 
exchanges with Reg NMS, the possibility here is to face each--
before each exchange a binary choice to either be a manual 
market or an electronic market. Once you are in an electronic 
market, one of the most major implicit costs of execution on 
the floor of the New York or the American Stock Exchanges 
disappear. That is the optionality for someone trading their 
own account to selectively trade with that incoming order. Once 
that choice is removed, and they must immediately execute that 
trade or immediately not execute that trade, then the incoming 
order cannot be gamed. And that--if that is the case, in 
someone's manual, whether they are seven-tenths of a second or 
seven-tenths of a millisecond, as long as the gaming is gone, 
then an investor can take those costs into effect when choosing 
their routing table.
    Mr. Joyce. If I may just say, normalizing to me sounds like 
appealing to the lowest common denominator, which sounds like 
to me a complete lack of competition, which sounds like to me a 
detriment to the investor community long term.
    Mr. Greifeld. When we think about Reg NMS, when we started 
this process, we truly had hopes and dreams that it would 
represent a true step forward for the U.S. equity marketplace. 
So I guess I take some issue with saying is it detrimental. I 
believe that is not the right question. It is a question of are 
we doing this once in a generational change to the markets, and 
are we taking best advantage of this opportunity.
    There are things in Reg NMS, as I stated in my testimony, 
that clearly improve the markets. But when we look at the 
imposition of a trade-through on NASDAQ where there is no 
discernable benefit and there is substantial cost, we are 
wondering if we really are spinning our wheels and wasting our 
time for this really unique set of opportunities.
    Chairman Baker. The gentleman's time has expired, unless 
there is somebody else who wants to respond. If not, Mr. 
Ackerman.
    Mr. Ackerman. Thank you, Mr. Chairman.
    I am still trying to get my arms around this whole issue. I 
would like to ask the panel, which of you would like to go away 
with the award for having lousy testimony, having little effect 
on the committee, but having been the fastest in delivering it? 
No takers.
    I remember a couple years ago I got a hip replacement, and 
I was talking to a whole bunch of different surgeons about it. 
One had told me that he was renowned because he could do six 
hip replacements before noon. He wasn't that good at it. I went 
with the guy who could do three but was an excellent surgeon. I 
think for me anyway it was the right choice. It might not have 
been the right choice for everybody. I mean, some people just 
don't want to be on the operating table that long. But that 
should be their choice.
    I remember when I was a teacher, we used to have questions 
like, two planes leave New York for Washington at 3:00; one 
travels at 400 miles an hour and crashes and burns upon 
landing. The other travels 250 miles an hour, gets there 15 
minutes later, safely. If I would ask my students which plane 
would they rather be on, I think they all get it right.
    Is there an application of these things to what we are 
talking about now?
    Mr. Bang. I would like to comment briefly on that. We 
believe that investor choice is really the cornerstone of the 
creating a competitive, dynamic marketplace. The problem what 
we have right now is that there is no true choice, because 
customers, clients, investors do not have the ability to see 
available liquidity and access it without being intermediated 
by a manual process. And that means they don't really have the 
choice between opting in for an option process, let us say 
manual execution, and a purely electronic direct market access 
choice.
    We don't favor a trade-through rule, but what we favor is 
providing that transparency and that ability for the investor 
to make the choice, go for the direct electronic execution, 
immediate execution, or choose to go to the auction process in 
the manual market. But that choice does not exist in today's 
market structure for the New York Stock Exchange.
    Mr. McCooey. I am sorry, but, yes, it does. We have an 
automatic execution at the New York Stock Exchange. We have had 
it for years. Right now the average trade size is 399 shares 
at--and--across all listed securities at the New York Stock 
Exchange. That is the average print size, the trade size. Our 
execution facility direct plus is 1,100 shares and under. So it 
encompasses the 399 shares that is the average share size, and 
that is an automatic execution. There is no human intervention. 
That is, the order is there. There is an offer that wants to be 
taken, a bid that wants to be hit, the investor hits that bid 
and immediately is removed from the screen, and there is no 
human intervention. So that is a mischaracterization on how the 
market works today.
    Mr. Bang. The markets are capped. There is a trade size cap 
to up to just a little over--under 1,100 shares. And you can 
only repeat that process every, I think, 15 or 20 seconds. So 
there is a speed bump, if you would like, along the way.
    With the proposal, hybrid market proposal, from the New 
York Stock Exchange, they are proposing to do away with that, 
and we commend that. But as it is today, it is capped in both 
time and size, and there is no realtime visibility beyond the 
top of file. So one penny below, you have no visibility and no 
access to that liquidity.
    Mr. Ackerman. What is the object of an investor?
    Mr. Bang. To get done, typically.
    Mr. Ackerman. To get done? I had this house I bought, and 
as I was looking around for painters, I hired this painter, I 
said, I have got to get this done in 3 days. I got there at the 
end of the second day to see how he was doing, and he was 
wrapping up. There was paint pouring down the exterior brick 
walls of the house, the inside had paint all over the floors 
and everything. And I said, you messed up my whole house. And 
he says, yeah, but I finished in 2 days.
    Mr. Joyce. Ah, but the wonderful thing is you had choice. 
The wonderful thing is, in that example, you had a choice, and 
you made it. And the way this is--the way NMS is laid out, 
there will be a limitation of choice.
    Mr. Ackerman. But if my choice was to get the painter out 
of there faster, I could have shook hands with him the day I 
met him and sent him home.
    Mr. Joyce. But at least you had a choice.
    Mr. Ackerman. The object that I was gunning for was to get 
my house painted. I would think that the object of an 
investor--and correct me if I am wrong, but if I am an 
investor, I am investing money with the object of making money. 
And if somebody says to me, you are going to lose money, but 
you are going to lose it faster, you know, is that what the 
investors are looking for?
    Mr. Britz. Congressman, if I may. If your question is one 
more of whether or not, from a public policy point of view and 
the health of our U.S. capital markets, unleashing this raw 
speed to the traders, who have great a appetite for it, will 
ultimately serve U.S. capital markets, the jury is going to be 
out on that for sure as to whether or not that injects 
increased volatility into the marketplace.
    When I broke into this business 30 years ago, it used to be 
that behind every order that came to the New York Stock 
Exchange was someone looking at a balance sheet and an income 
statement and doing some fundamental work, and then coming to a 
conclusion and sending an order to our market or anyone else's 
market. Regrettably, Congressman, that is a very quaint notion 
today. People simply trade on a momentum basis. They cancel. 
The cancel rate for orders that are sent to the New York Stock 
Exchange, the so-called manual slow market, is about 80 percent 
of all orders that are sent to us are cancelled. And an 
extraordinary percentage of those are cancelled within the same 
second that the original order is sent to us. So what becomes 
of all of this endless speed vis-a-vis the health of the U.S. 
Capital markets is a question that I don't think anybody can 
answer right now.
    Chairman Baker. And that is the gentleman's last question, 
but if anybody else wants to respond?
    Mr. Greifeld. I just wanted to say that this Reg NMS debate 
clearly has gone on for too long, because I do remember the 
house painting analogy I guess it was a year ago, and I 
chuckled at it then, I chuckle at it now.
    Just a comment I will make. With NASDAQ, it is not a 
question of speed versus price. You truly get both speed and 
price. And by any objective measure, today the NASDAQ Stock 
Market yields a better outcome for investors than the New York 
Stock Exchange.
    Chairman Baker. The gentleman's time has expired. If no one 
else wishes to comment on that question----
    Chairman Baker. Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Assuming for the moment that best price is what the 
consumer is looking for and assuming for the moment that, be it 
through regulation or legislation, we should impose this, I was 
reading in Ms. Dwyer's testimony that in the New York Stock 
Exchange you can have a delay between 30 seconds and 2 minutes 
on order execution and that the price volatility obviously can 
cause an investor, under the trade-through rule, not to 
actually get the best price. My guess is, Mr. Britz, here in 
part of your testimony that you disagree with that factual 
assertion. If so, where has she gotten her facts wrong?
    Mr. Britz. Congressman, I think the author of that 
disagrees with that.
    Ms. Dwyer. If you are referring to my testimony--maybe not.
    Mr. Hensarling. I think I was--I guess Mr. Andresen. Maybe 
it was in Mr. Andresen's testimony. It was in somebody's 
testimony. I don't think I made it up.
    Mr. Britz. Congressman, I will take a shot at responding to 
it.
    The average turnaround time for every order that is sent to 
the New York Stock Exchange across the board, as we speak, is 
about 12 seconds. I wouldn't deny that there are occasions when 
it is something north of that by definition. That is an 
average, so there has to be something north of that.
    The facility that we have in place that now handles 11 
percent of our volume, the direct-plus facility that Bob 
McCooey referenced a moment ago, is a sub-second execution 
which accommodates a multiple of average trade sites, even with 
the current restriction as to the limitation on size. So any 
notion that there is a 30-second or a 2-minute execution 
experience at the NYSE is an artifact, Congressman.
    Mr. Andresen. I think that you know one important thing to 
consider here is the certainty of an execution. Citadel 
executes over a hundred million shares a day through various 
venues. If I knew when I was sending an order that I was 
definitely going to get an execution, I just wasn't going to 
find out about it for 12 seconds, I really wouldn't care that 
much. The issue is, if in 12 seconds I might find out that I 
got, I might find out that I didn't get it.
    If I was trying--you know, if I offered you tickets to the 
Duke Carolina game later this year for $10, you would probably 
think it is a pretty deal. But if I didn't deliver the tickets 
until after the game was played, you would not think it was 
such a good deal.
    There is a time value to having the certainty of an 
execution realized. And we talk about like how quickly we get 
execution. The real issue here is not just, you know, if the 
execution is fast. It is, you know, if it happens at all. And 
especially is there an option for the person on the other end 
of that line to take advantage of price fluctuations in the 
meantime. If I send an order and it takes 12 seconds to respond 
but the stock moved during that intervening time and I only get 
filled if the stock moved against my order and never filled 
when it went with my order, then that 12 seconds starts to look 
like a pretty raw deal.
    Mr. Britz. Congressman, if I may respond that.
    Matt, I don't disagree with the principle you articulated, 
but I find it interesting that when you trade NYSE stocks, if 
you trade them away from the NYSE, you have certainty of 
execution. You get a fill rate on NASDAQ at 59 percent; INET at 
18 percent; ARCA, 40 percent; and Brut, 29 percent; versus 79 
percent for the NYSE. So who wins the certainty race there, 
Matt?
    Mr. Andresen. Actually, our percentage executions are 
actually far lower than that. But that speaks to our 
strategies. When you are standing ready to buy or sell 
something and you put in an order, that price is good as long 
as the value doesn't change. When the value changed, you must 
cancel that and replace it to update what the new price is.
    Mr. Hensarling. Mr. Andresen, let me ask you different 
question here. And that is, it appears that the ECNs have a 
much greater market share in NASDAQ traded stocks than they do 
New York Stock Exchange. Does the trade-through rule play any 
factor in this, or what are the factors that account for that?
    Mr. Andresen. Well, the most important thing is inertia. 
The New York Stock Exchange has been around a long time. They 
have done a very good job with their business. They have over 
80 percent market share. If you are going, you know, shopping 
and 80 percent of the time you find everything you want in one 
place, you will tend to stay in that place. So, first, you know 
credit is due to the New York Stock Exchange for their 
business.
    When you look at NASDAQ marketplace, maybe 6, 7 years ago 
electronic markets had also a very small percentage of volume, 
but they have been able to be successful there and have not 
been successful on the New York Stock Exchange. I think part of 
the reason is the competitive nature of the New York Stock 
Exchange, but also part of that is the trade-through rule.
    Electronic markets attempt to compete using--across various 
value propositions. There is the cost of the execution--not the 
price of the trade but the actual explicit cost and fees 
associated with making a transaction. They offer varying 
degrees of certainty of execution. They offer different speeds. 
And the trade-through rule right now, because where there is a 
better price away your choice as a market is either to match 
that price internally or route it to that better price. Well, 
if you are an electronic marketplace that acts as an agent, you 
are not allowed to trade for your own account. Therefore, your 
only choice is to send that order away.
    Now if you are an electronic market, you are trying to sell 
services based off speed of execution. But every time there is 
a superior price you have to mail that off to a different 
marketplace. You have then lost control of the user experience 
on that order. And once that happens the customer--and I used 
to run an electronic network. Now I am part of the problem. I 
am a customer of these. I don't like that result.
    Chairman Baker. The gentleman's time has expired, unless 
somebody else wants to jump on in on that. Yes, sir.
    Mr. Nicoll. I would just like to remind everybody here that 
the--a couple of fundamental--I think we need to step back, 
okay?
    We have two markets. One has a trade-through rule; one 
doesn't have a trade-through rule. Whenever you are considering 
the parade of horribles that the New York Stock Exchange 
marches before you about what will happen to their market 
without a trade-through rule, you have to say to yourself, why 
hasn't that happened in the NASDAQ marketplace? That's number 
one.
    Number two, you are going to be thrown a lot of statistics 
which are always in the favor of the person who is delivering 
them to you.
    Let's take this issue that Bob just brought up of fill 
rates. Fill rates are a consequence of how many executions you 
get versus how many orders you send. So if you send down 10 
orders and you only get one execution, you have got a 10 
percent fill rate. If for every order you send you get an 
execution, you get 100 percent fill rate. Now you would think 
100 percent is better than 10 percent. But the fact of the 
matter is that the better the marketplace, the more certain the 
marketplace is, the more apt you are to send more orders to 
them, and the more comfortable you feel sending those orders. 
Therefore, the better marketplaces don't have higher 
percentages of fill rates. They actually have lower percentages 
of fill rates.
    Now I am saying that to you because I have a low fill rate 
percentage. Bob is going to say to you, no, no, my 79 percent 
is better than his. Okay? I assure you that whoever makes the 
argument is going to be using the statistics for their own 
benefit.
    I hope you buy my logic. But what I want you to buy, first 
and foremost, is that these are very sophisticated people up 
here, what we call on the street, arguing their own book, 
making the best case for themselves and using very 
sophisticated arguments to do that. And to me, in a situation 
like that, the best public policy is to allow competition to 
play out.
    Don't buy into these arguments that you need to 
overregulate these markets. What we need are minimal 
regulations. Let these markets compete with each other and let 
investors choose. Let investors choose which are the best 
markets.
    I assure you the New York Stock Exchange, with its 80 
percent market share, all it has to do is meet the needs of 
investors and it will retain that 80 percent market share. It 
doesn't need the benefits of the trade-through rule and the 
barriers to competition that the trade-through rule creates.
    Chairman Baker. I thank the gentleman.
    Ms. McCarthy.
    Mrs. McCarthy. Thank you, Mr. Chairman.
    I probably agree with you, Mr. Nicoll. It sounds like 
Republicans and Democrats when we are trying to sell each one 
of our points.
    I remember when this conversation started, I guess about 18 
months ago or 2 years ago, and we first started hearing about 
trade-through and best price; and now we seem to be, 18 months 
later, dealing with a situation that in my opinion seems worse 
than what we started off with. Mainly because I happened to ask 
the question going back then--I have NASDAQ and I have the New 
York Stock Exchange, certainly wonderful members of New York, 
and they add to the economy to, certainly, our great State. But 
the question kept going back, competition.
    If we overregulate, don't think it is going to be good for 
anybody. But, with that, the one question I still don't get a 
real answer for, the companies, the investors, the clients are 
going to go to whoever they feel comfortable with or who they 
feel they are getting the best service for. So here we are, in 
my opinion, starting to even more overregulation than what we 
started off in the beginning, and nobody is happy.
    I don't even know how this all started, to be honest with 
you. I don't have the answers. But I am certainly more confused 
today than I was before I read all my notes and all the 
testimony before we started.
    So I know it is a separate language down on Wall Street, 
and it is, and it is a different world. But, you know, we are 
here, I think all of us, to really try and figure out what is 
the best thing for the consumer. I mean, that is what we are 
concerned about in the end. And, hopefully, I think, in my 
opinion, that we should proceed very cautiously before we make 
any radical changes.
    I think that the rules that are coming through, again, 
looking at them, and I guess I will ask Mr. Andresen and Mr. 
Bang, I--from hearing your testimony, it seems to me that you 
are suggesting a cautious approach to what Congress and the SEC 
can judge the impact of any new proposals on the national 
market. And I guess if your answer is yes--or if it is no, tell 
me differently. To me, the market and the BBO alternative seems 
to offer the more cautious approach. That is my--from hearing 
everything, between those--between NASDAQ and the New York 
Stock Exchange and all of you in between. And correct me if I 
am wrong or give me suggestions on where we should be going.
    Mr. Andresen. You are absolutely correct. The BBO 
alternative is the more incremental approach. But if you look 
at the NASDAQ example, right now there is no trade-through 
rule. The BBO, alternatively, merely says, well, you have to 
look at the best price from a competing marketplace. Depth of 
book says that if someone displays all of their orders, whether 
it be the best price, the next-best price, the next, next-best 
price, you must consider all of those. So, naturally, if we are 
concerned about the costs and unintended consequences of 
additional regulation, then making someone look at one order 
versus a potentially infinite number of orders, it is clear 
which one is less invasive and less apt to have unintended 
consequences.
    Mr. Bang. You are basically correct that we do favor a 
phased or cautious approach, particularly because the New York 
has two proposals out there that we think will have significant 
impact on the way market structure evolves. New York's open 
book proposal, which is essentially to extend in real time 
transparency beyond just top of file, which we think is very 
significant; and, secondly in the hybrid proposal which has 
this element of extending the direct plus, direct immediate 
access capability without any share limits and without any time 
limits. That goes also beyond just the top penny quotation.
    Once that happens--although, you know, there are some 
technicalities with both of those proposals that we have some 
issues with, but that can be debated and sort of sorted out. 
But once that happens, investors will have much greater choice. 
They will have choice to route and go for this electronic, 
unintermediated approach for an execution, or they will have 
the choice to go through the auction process.
    And we believe that market participants today have very 
sophisticated execution management systems. They have linkages 
to these various points of liquidity, and bandwidth is very 
cheap, and there are smart routers that are designed to get 
best execution, which in most cases are always best price. It 
is, you know, not the speed issue. It is a best-price issue.
    So, yes, we do favor a phased approach. Once you go through 
those steps, however, we don't think there is any need for any 
sort of trade-through rule, whether top of file or depth of 
book.
    Chairman Baker. Will the gentlelady yield on that point? I 
just want to echo one perspective of her comment in going slow.
    I would think going slow would be to take most of the 
recommendations made, if that would be the committee's wisdom, 
and not extending the trade through the NASDAQ. To me, that is 
just as Draconian as repealing the trade-through rule for the 
New York. There ought to be some mid-ground here.
    I think taking the old western style of ranching and 
applying it to the modern dairy doesn't make a lot of sense 
until we get all the pieces sorted out. And I just want to 
commend the gentlelady's observations and say to her, unless 
she has further comment----
    Mrs. McCarthy. Well, taking on that point and just explain 
that to me, because it seems to me that NASDAQ does not want to 
go through the trade-through rule and the New York Stock 
Exchange wants to go through the trade-through rule but 
doesn't--probably doesn't like the--I lost it here. So neither 
one of them like----
    Chairman Baker. There is enough wrong here to go around for 
everybody, yeah.
    Mr. Greifeld. We are certainly not in favor of the trade-
through rule.
    And going back to your original comment, how did this come 
about? It came about that investors recognized that something 
was broken on the floor of the stock exchange in this 
decimalization world. And there was a hue and a cry to bring 
about some reform.
    They are the only floor-based market essentially left in 
the world. So, as the rules were put in place to encourage them 
to automate it, automate their markets, the rules then were 
extended to NASDAQ. NASDAQ is already an automated market, 
already has a fast and efficient price discovery mechanism, and 
we are left wondering why do we bear the burden of the cost for 
a market that already works so well.
    Mrs. McCarthy. Well, then going back to the New York Stock 
Exchange, is actually, because competition is actually moving 
everything to faster time, correct?
    Mr. Britz. Correct, Congresswoman.
    Congresswoman, if I may, I don't know whether this will 
bring you the clarity that you seek, and it probably won't, but 
of the 130 respondents to the SEC across all market 
participants on reg NMS, 100 were in favor of keeping the 
trade-through rule in New York, extending it to New York. It 
breaks out 92 top of book market BBO, if you will, and 8 depth 
of book. And another five were in favor of the trade-through 
rule tied to the NBBO, which is more closely aligned to some 
trade-through rule than it is none at all. Only 27 out of those 
130, again across a broad constituency, were in favor of 
eliminating the trade-through rule.
    Chairman Baker. The gentlelady's time has expired.
    Mrs. McCarthy. Thank you, Mr. Chairman.
    Mr. Bang. Can I get one quick comment?
    Chairman Baker. Sure.
    Mr. Bang. A middle-of-the-road opportunity may be to take 
the proposed reg NMS which is looking at firm quotations and 
extending transparency to five levels deep, which is nothing 
more than restoring transparency that was lost to 
decimalization. And then investors will then chose and route 
accordingly.
    Chairman Baker. Gentlelady's time has expired.
    Chairman Oxley.
    Mr. Oxley. Thank you, Mr. Chairman; and congratulations on 
putting together an excellent panel. I see a lot of familiar 
faces out there who have compiled this panel before on a number 
of occasions. We have always enjoyed your expertise and good 
cheer. This is, what, your fifth or sixth hearing, Mr. 
Chairman, on the new market system?
    Chairman Baker. I have lost count.
    Mr. Oxley. Somewhere around there. Who is counting when you 
are having fun?
    Chairman Baker. I will say, though, I note this one wasn't 
nearly as entertaining as the field hearing in New York.
    Mr. Oxley. Well, I am so sorry that I missed the field 
hearing in New York.
    Chairman Baker. It was real entertainment, I have got to 
tell you. I think we need to go back.
    Mr. Oxley. Yes, we do.
    And our good friend, Mr. Andresen, I noticed talked about 
Duke and North Carolina versus Duke versus Maryland, which I 
thought was----
    Mr. Andresen. We don't talk about that.
    Mr. Oxley. I didn't think you would want to pursue that 
subject.
    This--I guess we are here today, and the whole issue 
revolves around, and I would be interested in the comments from 
the panel, two relatively recent phenomena that have affected 
the market. One, obviously, is technology, IT technology, and 
what technology can do in terms of accuracy and speed and 
productivity and all of that. And, secondly, of course, was 
going to decimals. Have I missed anything? Is that--are those 
the two issues that are driving this whole debate? Is there any 
other--does anybody want to pile on or add anything else? Okay.
    And I think this Committee can take some credit for 
certainly the second--the decimals, which we finally joined the 
rest of the world in trading in decimals, and Mr. Andresen 
still has his famous penny somewhere I think that provided 
visual aids for the hearing a few years ago. That really did, I 
think, change the whole equation for all of us as policymakers, 
for you, market makers and participants in the most robust 
markets in the world. To that end, there is no question we 
wouldn't be here today discussing the proposed rule by the SEC 
had it not been for those two phenomena.
    Given that and where we are today, it just seems to me that 
both the advent of technology and the change to decimals have 
made this a much more vigorous competitive marketplace. And the 
entry of ECNs, the NASDAQ's coming of age, all of these changes 
have meant one thing and that has been an incredibly 
competitive marketplace that has benefited all of our 
constituents, those folks who are participating in the market, 
either directly or indirectly, and it has had an enormous 
impact on our country and our society.
    Over half of the households today are invested in stocks. 
Ninety-five million plus own mutual funds. People are trading 
on the Internet. Some of the debate we are going to have about 
Social Security individual accounts in many ways will involve 
the arguments that we have got today in terms of people's 
ability to make decisions in the marketplace for their own 
future. The ability of those people to amass a fairly good nest 
egg over 40 or 45 years of saving and investing, the safety of 
the market, the cost of setting up these accounts, all of these 
issues and more really bring us to where we are today.
    What if--and I will just ask each one of the panel. I have 
got a pretty good idea where you are coming from. But let's say 
that, instead of the trade-through rule, that we say to the 
SEC, let's go back to the old fiduciary duty that brokers and 
investment managers owe to their clients, including the duty to 
obtain the best execution of their clients orders, and that we 
allow this unfettered competition to take place, we allow 
people in the marketplace to determine whether speed is their 
thing or whether best price is their thing or a combination--
however. What would be wrong with that approach going forward, 
given these incredible changes that have taken place in a 
relatively short period of time?
    Also, understanding that we as policymakers, whether we are 
in the Congress or the SEC, many times find ourselves 
following, not leading the changes that take place in the 
markets; that, in fact, in the case of Gramm-Leach-Bliley, we 
were essentially making a law that in many cases out in the 
real marketplace had already taken place because of technology, 
because of things that had happened in the marketplace--and so 
I don't think we are smart enough as policymakers to see into 
the future, and the only thing that happens is some--most of 
the time you get it wrong.
    So what is wrong with going back to this whole idea that, 
instead of this intrusive government regulation, we simply go 
back to the tried and true concept of best execution of the 
clients' orders which ultimately is their fiduciary 
responsibility.
    Let's begin with Mr. Nicoll.
    Mr. Nicoll. Well, I couldn't agree, first of all, that 
fiduciary responsibility exists today and has existed and will 
continue to exist. So the trade-through rule, these rules are 
on top of those existing fiduciary obligations which are 
established both in common law and enshrined in the SEC 
regulations. We already have that fiduciary responsibility 
imposed upon all of the agents in the marketplace. What--and 
when we started out this debate, we started with that issue.
    People said, well, if we have a trade-through rule, then 
people are going to take advantage of it and trade through for 
their customers and it will be unfair. So the SEC initially 
came up with this idea of an opt out and said, okay, in case 
there are unscrupulous people out there, if you want to trade 
through, you have to absolutely opt out. You have to say to 
your broker, I want to opt out. Okay. So now there can be no 
question with an opt out that people who are trading through 
are doing it in the interest of their customer.
    Well, when that happened, people said--people still wanted 
a trade-through rule. And so they shifted the argument. They no 
longer said that it is about protecting the person placing the 
order. They made this very complicated argument about limit 
order which said it is not about the person placing the order, 
it is about the order that is already there. That order that is 
already there might get traded through, and people will lose 
confidence. That order that is placed is important because 
limit orders are important to what is called price discovery, 
and what that really means is it is important to narrow the 
spreads between the bids and the offers.
    The problem with that argument is it is just not supported 
in evidence, and there is a lot to suggest that all that you 
need are a couple of simple rules of transparency and access. 
And, by the way, and surprise, surprise, people will not trade 
through better prices if they can get a better price. It is not 
a surprise that people seek the best price in the marketplace, 
and people do not trade through. The evidence that the SEC has 
already adduced with respect to the NASDAQ has shown that there 
are very little trade-throughs, and the NASDAQ says that the 
SEC evidence even overstates how many trade-throughs there are.
    So this is all about this sort of bizarre notion that there 
is this public good in these existing limit orders and if we 
don't protect them they are going to get traded through and 
that will impair the quality of the market. It is an 
interesting story. But, as I said, in my testimony, the facts 
just don't bear it out.
    And nobody talks about the--when they make this argument 
about this, they will always talk about the future. It is 
always in the future, okay? But they never talk about the 
facts. The fact is, we have a market without a trade-through 
rule and we have one with a trade-through rule; and there is 
not a whole lot of difference in the number of trade-throughs 
between those two market places. Whether it is 2 percent or 1 
percent or even 0 percent, there is very, very little 
difference. I would suggest to you that all that we need is 
that fiduciary responsibility to get the best price and let 
markets compete and we will have sufficient protection in the 
marketplace.
    Chairman Baker. Thank you.
    Mr. Britz?
    Mr. Britz. I would say to Ed, if you wear your seatbelt, 
why would you be worried about some sort of a prescription that 
requires you to wear a seatbelt?
    Congressman, more directly in response to yours, I think 
you cannot consider this in a vacuum. We don't have a blank 
sheet of paper here.
    Congressman Kanjorski has left us, but earlier he was 
voicing concerns relative to other things that are in the 
marketplace like payment for order flow. Payment for order flow 
and the lack of trade-through rule is a prescription for a bad 
price. Best execution is--I have yet to hear anyone clearly 
delineate what best execution means. It is a very broad, to use 
your word, fiduciary principle. And it is, at best, after the 
fact proved that you have gotten your customer best execution, 
whereas trade-through rule insures that you will get them the 
best price in real time.
    You know, I think, Congressman, through SEC hearings and 
congressional hearings and SEC concept releases and rule 
proposals we make this much more complicated than it needs to 
be. If you are a market destination that runs your business to 
deliver to investors the best prices, your best friend is the 
trade-through rule. On the other hand, if you are a market 
destination that runs your business off a business model that 
is based upon inducements to brokers and inferior prices for 
investors, I do understand why you would have a problem with 
the trade-through rule. What I don't understand is why you 
would think that that kind of a business model is worthy of 
relief from this body vis-a-vis the trade-through rule.
    We talk about--there is a lot of ``don't overlegislate and 
competition.'' the folks who are here talking about the trade-
through rule are asking you for relief from a rule that 
requires them to provide investors with the best price. 
Competing on the basis of other than the best price in a world 
where speed is neutralized, I don't understand that kind of 
deregulatory competition. 
    Mr. Oxley. Thank you.
    Miss Dwyer.
    Ms. Dwyer. Chairman Oxley, I think a lot of folks at the 
SEC where I used to work had an unofficial motto when they 
taught about rulemaking which was, first, do no harm. I think, 
as Ed has said, we have two models in front of us, one with a 
trade-through rule and one without. The one without is wildly 
competitive, produces, you know, equal order execution 
statistics to anything that the vaunted specialist system can 
produce, sometimes a lot better. I think we ought to be guided 
by what we see in front of us in terms of what works and what 
doesn't and be very careful about layering, you know, 
protectionist rulemaking on top of a market where two and a 
half billion shares a day pass through it. It is fairly 
fundamental to the health of our economy.
    There are conflicts everywhere. We have to continually 
strive to manage them better, even on the floor of the New York 
Stock Exchange, as we have seen in the last few years.
    Do we have suboptimal performance? I think that allowing 
the markets to work freely, possibly even being incremental--
the SIA, which represents the majority of the securities 
industry, has commented against the trade-through rule and has 
proposed something that I think was very ingenious which, as a 
compromise, would be an exemption from the trade-through rule 
across all markets for highly liquid securities that obviously 
don't need one. Something to think about.
    Also, the opt out is very a fruitful suggestion. So that 
you have a trade-through rule if you feel you need one only 
where you need to have it.
    I think we ought to look at those things before we impose 
what is a government design on how every single firm operates. 
I don't think I can explain the trade-through rule to our 
customers. I don't think it matters to them. They want to look 
at the price they got.
    As we said earlier, I think that the best possibility of 
getting best price consistently for customers is in a freely 
competitive market.
    Mr. Oxley. Thank you.
    Mr. Andresen.
    Mr. Andresen. Thank you. Thanks for bringing up Maryland 
again. I can't get enough of that.
    Well, Citadel, as we noted in our testimony, is in favor of 
the top of book reg NMS proposal for the listing department. 
And we do that because we think it puts in front of each of the 
manual markets a choice, that you either have to be--go ahead 
and stay a manual market or you have to have your quote be 
immediately and automatically executed without human 
intervention. That is Citadel's primary concern.
    You know, we talk about, well, you know, best price or you 
know maybe it is not best price. The thing to keep in mind is 
that just because a price is on a screen does not mean that 
that is the price you are going to get. You might get no price.
    You know, the Palm Pilot IPO years ago moved 27 points in 
the first 30 seconds. That is an extreme example. You can see 
with, you know, stocks like Taser or stocks like Fannie Mae, 
when they had bad news, that there are violent moves in 
securities. In those instances, it is most dramatic when you 
have big swings in stocks how much money is really at cost 
here, when there is optionality and time value, to someone 
deciding whether or not to execute your trade.
    What I am excited about with the top of book is, if markets 
are forced to choose to say, well, competitively, I have to be 
a so-called fast market, I have to be an automated market, once 
the price is automated I am less concerned as an investor about 
getting that price back in a second versus a millisecond. Than 
I am about making sure I either get it or don't and no one is 
taking advantage of my order.
    Mr. Oxley. Thank you.
    Mr. McCooey.
    Mr. McCooey. Chairman Oxley, thank you for bringing up this 
point.
    I think, as the agent here who has this fiduciary 
responsibility for his clients here every day, I would agree 
with you. I think it is important for the SEC to take up that 
mantle with, obviously, the oversight of this committee and to 
move forward with trying to define best execution obligations.
    I think it is very--for us, it is very difficult each and 
every day to have to deal with brokers and see trade-throughs 
and see our customers traded through in a way where we are not 
getting an execution because other markets have traded through 
us. We want to make sure that we get the best execution we can 
for our customers, and it would certainly be much easier for us 
in this regulatory environment, where people have been put into 
regulatory jeopardy over the past number of years, to have a 
better understanding of what the SEC does define as best 
execution. So we would support that, and we think that that is 
something that this committee should encourage the SEC to take 
up.
    Mr. Oxley. Thank you.
    Mr. Joyce.
    Mr. Joyce. Chairman Oxley, just as an observation, Mr. 
Britz keeps referring to inferior prices to investors as some 
business model that I think he has referred to two or three 
times today. I get a sense it is a veiled shot at NASDAQ. 
Perhaps it is. Perhaps it isn't.
    In any event, I can assure you that we trade a lot of 
NASDAQ stocks, and never in the history of retail investors 
have retail investors gotten such a good deal trading the 
NASDAQ stocks or New York Stock Exchange stocks, for that 
matter, too. And it is because of what you said earlier. There 
is vibrant competition taking place in the markets, and I think 
what this committee and what the SEC needs to focus on is 
maintaining, encouraging that vibrant competition to continue.
    As you see the results over the last 2 years, where 
turnaround times have come down from 20 seconds, in some cases, 
to sub-seconds now, to people getting the best price they see 
on the screen, if not an enhanced price, those best-execution 
responsibilities in a competitive, transparent environment have 
driven those results.
    So I believe, sir, that your blueprint is entirely 
accurate. A light regulatory touch enhancing and encouraging 
transparent competition is the only blueprint that this market 
should pursue.
    Mr. Oxley. Thank you.
    Mr. Bang.
    Mr. Bang. We believe that change is needed. We believe that 
leveling the playing field between professional market 
participants and the investor is really important. That is what 
is going to promote greater competition and choice for the 
investor.
    For the investor to really have choice, we believe that 
there needs to be firm quotations in the marketplace, greater 
level of transparency, at least restoring what was lost to 
decimalization and perhaps a dose of additional oversight in 
terms of what the fiduciary obligation of the particular market 
participants are with regard to best execution.
    Now, best execution is not clearly defined, if you like, 
but there are certainly a number of guidelines, one through the 
11Ac1-5 statistics, or through third-party independent 
performance cost analysis firms such as Abel Moser, Plexus and 
Elkins/McSherry. All of these attempt to measure the quality of 
execution, and it is certainly something that is available to 
investors, particularly, you know, the professional 
institutional investors. They watch those sort of statistics 
very carefully, and, based on that information, they decide 
where to send their orders for execution. But, right now, there 
is not a level playing field and in that choice certainly, not 
with respect to the manual markets of the New York Stock 
Exchange.
    Mr. Oxley. Thank you.
    Mr. Greifeld.
    Mr. Greifeld. My comment is very easy.
    Mr. Chairman, I agree with your thought, and it is the way 
the NASDAQ stock market operates today. There is not a trade-
through rule. There is not a heavy burden of unnecessary 
regulation. Our market does not trade through, and it trades 
incredibly well, and, by objective measures set up by the 
Commission, namely the -5 stats, it trades better than the New 
York Stock Exchange.
    I think it is interesting, if we flip the scenario, where 
NASDAQ was the institution that had been around for 211 years 
and NASDAQ was the electronic market, and the entrant who had 
been in business for 30 years had the manual slow market, we 
wouldn't conceive of imposing upon the larger markets the 
solutions that are intended to fix the smaller market. So we 
have a situation here where, by all objective measures, the New 
York Stock Exchange has to move forward based upon technology 
and based upon decimalization, and there is no clear or 
compelling case or really any case for imposing their remedies 
upon the NASDAQ stock market.
    Mr. Oxley. Thank you. Thank you, Mr. Chairman.
    Chairman Baker. The gentleman's time has expired.
    Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman.
    I believe I am--well, I guess--I thought I was going to be 
last, next to last. That doesn't mean I will be brief.
    The gentleman from Ohio, I think, reflects wisdom in his 
question, which is, basically, why not rely on the fiduciary 
rule and allow investors, perhaps, to specify what they are 
looking for? Some, as Mr. Ackerman points out, just want the 
hip replaced as quickly as possible. Others may care about the 
quality. Some will want a top of the book, others want a depth 
of book. Some will want to opt out. And I don't always agree 
with the chairman. It is a joy to do so. I think most wisdom 
comes from California. And CALPERS----
    Chairman Baker. You just lost the chairman again. I am 
sorry.
    Mr. Sherman. I had him for a second--writes us and says we 
still believe that investors should have an opportunity to make 
choices and, therefore, an opt-out provision appropriate within 
regulation NMS. And they go on to say that CALPERS, it looks 
for best execution, but best depends upon best price discovery, 
and also they have a number of different objectives--speed of 
execution, price, probability of trade completion, convenience 
and, for them, anonymity. So I am a little surprised that an 
SEC appointed chiefly by the other party, a party that is 
always telling us to avoid excessive regulation and to allow 
investor choice is about to, I guess, clash with the right wing 
libertarians at CALPERS and, I might add, with perhaps its most 
prominent board member, our treasurer, Phil Angelides, who 
writes us pretty much along the same lines.
    So, again, I am surprised that it would take government to 
impose one model or the other, in part--I don't see whether 
investors are crying out for this, and I am going to ask Ms. 
Dwyer, because I know your company is in a marketing 
competition. Some brokers are offering, you know, free trades; 
some will give you a free toaster. Some will give you this; 
some will give you that. You have got a huge marketing 
department trying to figure out what investors might want, and 
you can offer them what they might want, and I recommend the 
toaster oven. But the--is there anybody in your business that 
has a plan, a marketing plan, a way you can sign up for an 
account where they guarantee you top of the book? Has anybody 
got that as a marketing strategy?
    Ms. Dwyer. Well, I would answer that by saying I think we 
already guarantee them much more than that.
    Mr. Sherman. I know. The SEC is about to put a rigid rule, 
or one of two rigid rules in place, and I wanted to know if 
there is--any of your marketing geniuses have discovered a 
group of investors who want either of these two rigid rules.
    Ms. Dwyer. No, our customers want----
    Mr. Sherman. Okay. Is there anybody out there who has come 
up with a marketing strategy of depth of book? And I realize 
that might be a little harder to offer, but is anybody offering 
as close to an equivalent of that as possible?
    Ms. Dwyer. Not that I am aware of.
    Mr. Sherman. So they are all offering the fiduciary duty 
that the chair put forward, that is to say, best execution, and 
we--none of the marketing geniuses have been able to find a 
group of investors who want a rigid rule imposed, at least for 
their own trades.
    I wonder if anyone else has a comment on that?
    Mr. Britz. Congressman, you talk about investor choice. 
Let's maybe get a little granular here. Supposing you are the 
investor and supposing you choose to be the best bid and offer 
in the marketplace. You want to--you have topped the best bid 
because you aggressively want to buy the securities. And 
suppose it trades in another marketplace, and you are willing 
to pay $20, and it trades at $19.90 in another marketplace. Did 
you choose to get traded through?
    There is an old expression, Congressman, it takes two to 
tango; and there are both sides of that. You would not have 
opted out in that.
    Mr. Sherman. It does. The buyer's broker is retained by the 
buyer. The buyer's broker--hey, if I am buying a house and my--
and I retain a broker and I say I don't want one that is 
purple, great. Well, lo and behold, you know, if the best deal 
on the block is purple, he won't show it to me. And I would say 
that if you have got the highest offer on one side and for some 
reason the broker on the other side doesn't pick you, that is a 
choice, just as if you have a purple house, my real estate 
broker has the right to pass you by.
    I wonder if we could get some comment on the idea of why 
this SEC rule doesn't give investors the choice. Because there 
are at least three choices: opt out, top of book or depth of 
book. What if I am just fanatically in favor of top of the book 
and the SEC comes up with depth of book? Will I be given a 
chance to have my fanaticism reflected in my trading behavior?
    Mr. Nicoll. A couple of things. First of all, I ran two 
large retail brokerage firms before. I now run Instinet. In 
each one of those instances over the past 20 years I have 
represented customers in the NASDAQ marketplace without a 
trade-through rule. It is my responsibility to make sure that I 
got my customers their price. And if they were traded through, 
they give me a limit order, I was the one responsible for that. 
I have the fiduciary responsibility.
    So in Mr. Britz--the proper response to Mr. Britz is, if 
that happened, you would be calling up your broker and say, why 
the hell are you on the wrong market, you idiot. And you owe me 
an execution. And, by the way, you would get it. Okay? So we 
are confusing here the broker's responsibility with the 
customer's responsibility.
    Second, as to why the SEC is proposing what it is 
proposing, all I can say is that it has been--the market reg 
apparently has been in love with the CLOB for a long, long 
time. It has tried to impose it before. It--and each time it 
does, I think cooler heads prevail.
    I think this was another opportunity for rethinking the 
marketplace; and, once again, the SEC, you know, tended to go 
towards its roots. I mean, it is a regulator. It believes in 
regulations. It tends to propose what it believes in, and I 
just think that it missed the mark. And I don't----
    Mr. Sherman. Thank you.
    I see my time is expiring, but, Mr. Chairman, I would hope 
that we would bring the SEC before our subcommittee and ask 
them why they want to deprive those investors who would want to 
opt out with the opportunity to do so and, also, if for some 
reason they oppose a depth of book rule, why they would 
prohibit investors from choosing a broker who goes with a top 
of the book rule. I would like to explore why the SEC seems 
opposed to investor choice.
    Chairman Baker. I thank the gentleman for his perspective 
and would just say for the record the Commission is bipartisan 
and it is unclear, quite yet, which members are voting which 
way. I have my suspicions, but I would not wish to prejudice 
those positions until they are finally determined.
    But let me quickly add----
    Mr. Sherman. Mr. Chairman, you know the SEC is about to 
make a mistake when I am trying to give you responsibility for 
them and you are trying to say that we should take 
responsibility for them.
    Chairman Baker. I appreciate the gentleman's effort to make 
it my fault, and I am conscious of his continuing efforts to do 
that.
    But I also want to join with him in his observations that 
we would--perhaps are losing sight here of something. It is an 
investor giving his money to somebody. And if the investor 
chooses to dictate how his resources are deployed, it just 
seems to me--and I am agreeing with the gentleman, even if he 
is from California--that there is something basically fair 
about that. And if we are not getting to a standard of 
fairness, then we need understand why we are not and how we can 
without bringing unnecessary adverse consequences to a 
marketplace where has performed admirably by making reckless 
change in the conduct of the market.
    But it is certainly worth, I think, continued effort on the 
part of the economy to understand more comprehensively the 
consequences of this debate today and certainly--and I can 
assure the gentleman of our renewed interest, and we will 
return to this subject perhaps more times than most members 
would like. I thank him for his courtesy.
    I wish to express my appreciation to all of you for your 
long-suffering patience.
    Our meeting stands adjourned.
    [Whereupon, at 5:46 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                           February 15, 2005

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