[Federal Register Volume 59, Number 34 (Friday, February 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3703]


[[Page Unknown]]

[Federal Register: February 18, 1994]


_______________________________________________________________________

Part VIII





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Parts 240 and 249




Recordkeeping and Reporting Requirements for Trading Systems Operated 
by Brokers and Dealers, and Proprietary Trading Systems; Proposed Rules
SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-33605; File No. S7-3-94]
RIN 3235-AG03

 
Recordkeeping and Reporting Requirements for Trading Systems 
Operated by Brokers and Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rulemaking.

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SUMMARY: The Securities and Exchange Commission (``Commission'') 
proposes Rule 17a-23 (``Rule'') under the Securities Exchange Act of 
1934 to establish recordkeeping and reporting requirements for brokers 
and dealers that operate automated trading systems. Registered broker-
dealers sponsors of these systems would be required to maintain 
participant, volume and transaction records, and to report system 
activity periodically to the Commission. The Rule would provide the 
Commission with the information necessary to effectively monitor and 
evaluate these systems.

DATES: Comments must be received on or before April 19, 1994.

ADDRESSES: Comments should be submitted in triplicate and addressed to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street NW., Mail Stop 6-9, Washington, DC 20549. Comment letters 
should refer to File No. S7-3-94, and will be made available for public 
inspection and copying in the Commission's Public Reference Room, 450 
Fifth Street NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Gordon K. Fuller, Special Counsel, 
Sheila C. Slevin, Branch Chief, or Kristen N. Geyer, Attorney Advisor, 
202/272-2067, Office of Automation and International Markets, Division 
of Market Regulation, Securities and Exchange Commission, room 5040 
(Mail stop 5-1), 450 Fifth Street NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Commission solicits comment on proposed Rule 17a-23 
(``Rule'')1 under the Securities Exchange Act of 1934 
(``Act'').2 Rule 17a-23 would require specific recordkeeping and 
reporting by broker-dealer sponsors of screen-based automated trading 
systems (``Broker-Dealer Trading System,'' or ``BDTS'').
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    \1\17 CFR 240.17a-23.
    \2\15 U.S.C. 78a et seq.
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    Under the Act, sponsors of BDTSs must register as broker-dealers, 
and, accordingly, are subject to the general recordkeeping and 
reporting requirements of Section 17 of the Act and the rules 
thereunder. While these rules require broker-dealers to keep records 
relating to general brokerage activity and provide the Commission and 
self-regulatory organizations (``SROs'') access to those records, they 
do not require BDTS sponsors to keep records that separately identify 
transactions effected through an automated trading system or provide 
readily accessible summaries of system volume, identification of 
securities trading on such system, or descriptions of system operation. 
This lack of system-specific information makes it difficult for the 
Commission to evaluate the operation of BDTSs with regard to national 
market system goals, to monitor the competitive effects of these 
systems, to ascertain whether broker-dealer regulation remains 
appropriate for the operation of such systems, and to identify areas 
where monitoring of such systems may be improved and where SRO 
surveillance may be more appropriately tailored to the detection of 
fraudulent, deceptive and manipulative practices in an automated 
environment.
    The Rule would establish a uniform recordkeeping and reporting 
structure for all broker-dealer sponsors of BDTSs and would provide 
prospective sponsors of BDTSs with certainty as to their 
responsibilities under the Act.

II. Existing Reporting and Recordkeeping by BDTSs

    Broker-dealers operate a variety of automated systems, not all of 
which would be considered BDTSs under the Rule. The Rule as proposed 
would apply to two types of automated systems: (1) Systems that 
automatically execute orders to buy or sell securities based on 
quotations of the system sponsor or its affiliates; and (2) systems 
that both automate the dissemination or collection of quotations, 
orders, or indications of interest, and provide a mechanism for 
matching or crossing orders (or for otherwise facilitating agreement 
between participants to the basic terms of securities transactions 
through use of the system). This would include trading systems that 
have been referred to in previous Commission releases as proprietary 
trading systems (``PTSs''),3 as well as some automated trading 
systems operated by third market makers.
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    \3\See Securities Exchange Act Release No. 26708 (April 11, 
1989), 54 FR 15429.
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    Currently, BDTSs are subject to Commission oversight through 
broker-dealer registration, recordkeeping, and reporting requirements 
in the Act. In addition, sponsors of a number of systems have obtained 
no-action letters as discussed below that require supplemental 
recordkeeping and reporting.

A. Broker-dealer Requirements

    Like any other entity effecting securities transactions, sponsors 
of BDTSs must comply with the broker-dealer registration requirements 
of the Act.4 As registered broker-dealers, sponsors are subject to 
Section 17(a) of the Act and rules thereunder, which require them to 
keep current records regarding their brokerage activity and to file 
certain reports with the Commission.5 These sponsors also are 
subject to oversight by an SRO,6 including inspection by the SRO 
of a sponsor's internal transaction records. These regulations require 
broker-dealers to record, maintain and make available to the Commission 
and the SROs information about any trade executed by a registered 
broker-dealer, including trades executed through BDTSs, but do not 
require broker-dealers to keep records that present BDTS activity 
separately from other brokerage activity, summarize system volume, 
describe securities trading on the system, or describe system operation 
and execution methods or to report such information on a regular basis 
in a usable format to the Commission.
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    \4\The activities inherent in the operation of BDTSs generally 
require the system sponsor to register with the Commission as a 
broker-dealer under Section 15 of the Act. Section 15(a) of the Act 
generally provides that a ``broker'' or ``dealer'' who uses the 
mails or any means of interstate commerce to effect transactions in, 
or to induce or attempt to induce the purchase or sale of, any 
security must register with the Commission, unless an exemption 
applies. Section 3(a)(4) of the Act defines a ``broker'' as ``any 
person engaged in the business of effecting transactions in 
securities for the account of others, but does not include a bank.'' 
Section 3(a)(5) of the Act defines a ``dealer'' as ``any person 
engaged in the business of buying and selling securities for his own 
account, through a broker or otherwise, but does not include a bank, 
or any person insofar as he buys or sells securities for his own 
account, either individually or in some fiduciary capacity, but not 
as part of a regular business.'' See sections 3(a)(4), 3(a)(5) and 
15 of the Act, 15 U.S.C. 78c(a)(14), 78c(a)(15) and 78o. Cf. Letter 
regarding Security Pacific National Bank (July 19, 1985).
    \5\See, e.g., Rules 17a-3, 17a-4, 17a-5, and 17a-11 (17 CFR 
240.17a-3, 17a-4, 17a-5, and 17a-11); and 17 CFR Parts 400-405, 449-
450. Section 17(a) authorizes the Commission to require broker-
dealers to make and keep such records and to make such reports as 
the Commission, by rule, prescribes as necessary or appropriate in 
the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act, such as removing 
impediments to the national market system for securities and for the 
clearance, settlement, and safeguarding of securities and funds, and 
imposing requirements necessary to make such regulation and control 
reasonably complete and effective. 15 U.S.C. 78q(a).
    \6\Registered broker-dealers that effect transactions in the 
over-the-counter (``OTC'') market are required to become members of 
the National Association of Securities Dealers (``NASD''). 15 U.S.C. 
78o(b)(8).
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B. No-action Letters

    The automation of a broker-dealer's order handling through BDTSs 
often involves the use of order execution algorithms and methodologies 
that differ from traditional broker-dealer operations. Sponsors of 
these BDTSs have requested and received assurances in the form of no-
action letters from the Division that it will not recommend enforcement 
action if the system operates without registering as an exchange or 
other registered entity.7
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    \7\The Division has issued no-action letters in this context to 
sponsors of 22 trading systems, 9 of which are operating currently. 
See letters regarding: Cantor Fitzgerald G.P. (October 1, 1993); 
Lattice Network (September 9, 1993); Crosscom Trading Network 
(November 24, 1992); Instinet Corporation's ``Market Match'' 
Crossing Session (December 6, 1991); LIMITrader (November 25, 1991); 
Franklin Advantage Crossing Networks (November 22, 1991); POSIT's 
Refined Pricing Feature (October 28, 1991); Exchange Services, Inc. 
(September 11, 1991), (May 22, 1985), and (September 5, 1985); 
Portfolio Trading Services, Inc. (May 16, 1991); Wunsch Auction 
Systems, Inc, (February 28, 1991); NYSAC (June 15, 1990); CapitaLink 
Bond Auctions, Inc. (December 11, 1989); RMJ Securities/Delta 
Government Options (January 12, 1989); ECON Investment Software 
(October 11, 1988); POSIT (July 28, 1987); Instinet (August 8, 
1986); Security Pacific National Bank (July 19, 1985), (August 8, 
1986); Robert L. Adler & Co. (August 7, 1985); NAPEX (August 2, 
1985), (July 14, 1986); Troster Singer Corporation (May 23, 1985), 
(September 3, 1985); Transaction Services, Inc. (May 15, 1985), 
(September 5, 1985); and B&K Securities, Inc. (March 18, 1985), 
(September 5, 1985).
    The 9 active BDTSs which have been issued no-action letters are: 
(1) Instinet, which permits participants to enter indications of 
trading interest and permits other subscribers to execute against 
those indications of interest automatically through the System; (2) 
Instinet Crossing Network, a daily after-hours session to match 
trades for execution at the day's closing price on the primary 
market for exchange-listed stocks, and the mean of the closing 
inside bid and ask prices on NASDAQ for issues traded in the over-
the-counter market. A subcomponent of the Crossing Network, Instinet 
Market Match, matches orders to buy securities in a session that 
occurs prior to the opening of trading on registered exchanges and 
NASDAQ, and subsequently executes the orders after the close of the 
day's regular trading at a volume-weighted average price; (3) POSIT, 
which provides order matching and execution of exchange-listed and 
OTC securities by institutional customers for single stocks or 
substantial securities portfolios. A subcomponent of POSIT, POSIT's 
Volume Weighted Average Pricing Session, matches participants' 
orders to trade equity securities prior to the opening of registered 
exchanges and the NASDAQ system and executes matched trades at 
volume-weighted average prices at the close of the day's regular 
trading on the exchanges and NASDAQ; (4) RMJ--Delta, which permits 
users of the system to effect trades on U.S. Treasury options 
through an intermediary or ``blind broker,'' or on a fully disclosed 
basis through an automated communications network; (5) AZX, Inc., a 
single-price auction system that is an exchange operating pursuant 
to a so-called ``limited volume'' exemption; (6) CrossCom, which 
permits a network of subscribers linked by computers to enter bids 
and offers in high-yield and other fixed-income bonds to be matched 
and automatically executed by the System; (7) The Lattice Network, 
which facilitates trading in registered equity securities by 
combining order-routing and order matching features to execute 
transactions; (8) NAPEX, which gathers and disseminates indications 
of interest for registered limited partnerships; and (9) a system 
operated by Cantor Fitzgerald G.P., which facilitates trading in 
limited partnership interest by displaying offers to sell and bids 
to purchase publicly registered limited partnership interest.
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    In addition to the broker-dealer requirements applicable to BDTS 
sponsors generally, these systems are monitored through conditions 
incorporated into such no-action letters, which are substantially 
similar to the requirements of Rule 17a-23.8
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    \8\These conditions require system sponsors to submit periodic 
reports to the staff setting forth volume information, names of 
system participants and applicants denied participation, and 
affiliations between the sponsor and system participants. The 
letters also require sponsors to notify the staff prior to 
implementing material system changes.
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    The Commission previously has considered formalizing its oversight 
of automated trading systems. Most recently, the Commission proposed 
rule 15c2-10, which would have subjected sponsors to a number of 
procedural and substantive requirements.9
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    \9\See Securities Exchange Act Release No. 26708 (April 13, 
1989), 54 FR 15429. The Commission received comments from 32 
commenters in response to the 1989 proposal of rule 15c2-10 and the 
Division's Market 2000 concept release addressing regulation of 
PTSs. See Securities Exchange Act Release No. 30920 (July 14, 1992), 
57 FR 32587 (``Market 2000 concept release'') at 32594-32595. 
Sponsors of PTSs generally opposed the rule, while SROs generally 
supported the rule (except to the extent they questioned the 
authority of the Commission to regulate PTSs as broker-dealers or 
otherwise believed PTSs should be subject to the same regulation as 
SROs). A summary of comments that were made on the 1989 proposal and 
the Market 2000 Study has been prepared by the Commission's staff 
and is available in public reference file S7-3-94. See also Market 
2000: An Examination of Current Equity Market Developments, Division 
of Market Regulation, SEC (January 1994) (``Market 2000 Study''), 
Appendix VI (Summary of Comments), pp. 32-38.
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    The Commission does not believe it is necessary at this time to 
adopt proposed rule 15c2-10.10 At the same time, the Commission 
believes there is a need for enhanced recordkeeping and reporting by 
sponsors of BDTSs, as described below.
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    \1\0Some commenters to proposed rule 15c2-10 and the Division's 
Market 2000 Study have objected to the Commission's regulation of 
BDTSs as broker-dealers. They have argued that certain BDTSs compete 
for order flow with the exchanges and should be subject to exchange 
registration and regulation. See Market 2000 Study, Appendix VI 
(Summary of Comments), pp. 32-38. The Commission disagrees. There 
are many different competitors for order flow, e.g., derivative 
products, upstairs dealers, third market makers, and BDTSs. These 
should not all be regulated identically simply because they compete 
for market share. The level of regulation should be tailored to the 
functions being performed by an entity and the corollary need for 
regulation. The functions performed by BDTSs are most closely 
aligned with the functions performed by broker-dealers; 
consequently, broker-dealer regulation of BDTS sponsors is 
appropriate.
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III. Need For Oversight of Broker-Dealer Trading Systems

    In adopting the Act, Congress recognized the need for oversight of 
the securities markets and participants, including requiring 
appropriate reports, to ensure the maintenance of fair and honest 
markets and to protect the public interest.11 The Rule will 
further these goals by enabling the Commission to evaluate the 
operation of BDTSs with regard to national market system goals, to 
monitor the competitive effects of these systems, to ascertain whether 
broker-dealer regulation remains appropriate for the operation of such 
systems, and to identify areas where monitoring of such systems may be 
improved and where SRO surveillance may be more appropriately tailored 
to the detection of fraudulent, deceptive and manipulative practices in 
an automated environment.
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    \1\115 U.S.C. 78b.
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    Automation of securities trading provides significant 
benefits.12 Computerization, however, has undeniably changed the 
operation of the securities industry, and the operation of BDTSs 
appears to be a significant and growing part of such change. The 
Commission's efforts to gauge the impact of automation are hindered if 
critical information regarding the activity of automated systems is not 
recorded by system sponsors and regularly reported to the Commission in 
a useful form.
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    \1\2Automation of securities trading reduces transaction costs, 
promotes competition, improves transparency of markets, increases 
opportunities for best execution and enlarges the opportunities for 
orders to be executed without the participation of a dealer. See 
Letter from Richard C. Breeden, Chairman, SEC, to Edward J. Markey, 
Chairman, Subcomm. on Telecommunications and Finance, Comm. on 
Energy and Commerce, U.S. House of Representatives, July 11, 1991, 
attaching memorandum to Chairman Breeden from the Division 
(``Breeden Letter''), at 11-15 (discussing how computerization of 
trading generally is consistent with national market system goals) 
reprinted in Market 2000 Concept Release, 57 FR 32587 (July 22, 
1992). Technology is not infallible, however. Automated markets are 
vulnerable to myriad difficulties which could affect market 
operation and stability, including hardware failure, 
telecommunications interruptions, software failure and design flaws, 
and intrusion by unauthorized persons.
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    Because existing recordkeeping and reporting rules do not require 
broker-dealers to record BDTS volume and activity information 
separately from other brokerage activity or to report such information 
to the Commission on a regular basis, the Commission receives system-
specific information only through conditions to no-action letters, as 
described above. The no-action letter process is an imperfect vehicle 
for these purposes: it provides the Commission with information on a 
limited number of BDTSs, and does not provide sufficient clarity and 
guidance to enable prospective sponsors of BDTSs to assess accurately 
their potential obligations under the Act. In order to review trading 
effected through an automated system that is not subject to a no-action 
letter,13 or to analyze trading patterns in BDTSs as a whole, the 
Commission or SROs currently would have to cull system-specific 
information from each sponsor's extensive brokerage activity records or 
rely on system sponsors to do so voluntarily each time the Commission 
needed such information, an inefficient and time-consuming task.14
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    \1\3In this release, the concept of transactions being 
``effected through'' a trading system includes the matching, 
crossing or other negotiating of execution terms through the 
communication facilities of such a system. For these purposes, 
transactions can be considered ``effected through'' BDTSs even if a 
transaction that is matched, crossed, or negotiated through system 
facilities ultimately is executed, compared, confirmed, cleared and/
or settled through means other than the system.
    \1\4These concerns are minimized to some extent with regard to 
broker-dealers which operate solely as a BDTS.
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A. Market Structure and Competitive Concerns

    In the Securities Acts Amendments of 1975 (``1975 Amendments''), 
Congress clearly intended that the Commission actively evaluate its own 
regulations, the regulations of SROs, and the functioning of the 
securities market in general to further national market system goals 
and ensure that the public interest is protected as the national market 
system develops.15 Although the Act recognizes that computerized 
trading generally has positive implications for the National Market 
System,16 the Commission must thoroughly examine the implications 
of automated trading systems in order to fulfill its responsibilities 
under the 1975 Amendments.17
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    \1\5See, e.g., S. Rep. No. 75, 94th Cong., 1st Sess. (1975) 
(``Senate Report'') at 12-14.
    \1\6See Section 11A(a)(1)(B) of the Act (``new data processing 
and communications techniques create the opportunity for more 
efficient and effective market operations''); Breeden Letter, 57 FR 
32587 at 32601.
    \1\7Cf. Senate Report, at 9; Breeden Letter, 57 FR 32587, at 
32601.
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    As the number, variety, complexity, and trading volume of BDTSs 
continues to expand, these systems have the potential to significantly 
affect over-the-counter trading markets,18 and trading patterns in 
listed securities.19 Volume statistics and other information 
obtained from these systems would enable the Commission on an ongoing 
basis to assess the effects of these systems on the national market 
system structure.20 Because market reporting mechanisms do not 
separately identify trades occurring through BDTSs,21 absent a 
review of each system sponsor's records the Commission obtains 
incomplete information about industry-wide BDTS volume and trading 
activity, making it difficult to measure accurately the effect of these 
systems on market transparency, competition, and the distribution of 
trading activity among different markets.
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    \1\8For example, trade volume on PTSs has steadily increased 
since 1989. The total share volume on PTSs was almost the same in 
the first half of 1993 (4.7 billion) as for the entire 1992 year 
(4.9 billion), which was itself an increase of more than 60% over 
the previous year's volume of 2.9 billion. Almost 87% of the PTS 
volume in the first half of 1993 was in NASDAQ stocks, 13% was in 
listed stocks. Although still relatively low, the rising trend in 
PTS volume is consistent with the increasing volume occurring in the 
equity markets as a whole. During the first half of 1993, PTSs 
captured 1.4% of the volume in NYSE stocks and 13% of the volume in 
NASDAQ/NMS stocks. Market 2000 Study, Study II (Structure of U.S. 
Equity Markets), p. 13.
    \1\9For example, third market makers handled 7.4% of reported 
NYSE volume in 1993 and 9.3% of the reported trades. Market 2000 
Study, Study II (Structure of U.S. Equity Markets), p. 11. Under 
current reporting requirements, the Commission cannot readily 
identify how much of third market volume is attributable to 
transactions effected through BDTSs.
    \2\0In particular, Rule 17a-23 can provide the Commission with 
information not currently available about technological developments 
and market structure changes that could affect national market 
systems. For example, no current recordkeeping or reporting 
requirement provides a means for assessing the potential impact of 
redirecting order flow from trading systems operated by SROs, which 
are fully integrated into the national market system, to BDTSs.
    \2\1Trades occurring through BDTSs are subject to the same 
reporting requirements as other trades executed by registered 
broker-dealers, and therefore are generally reported to consolidated 
reporting systems during normal trading hours and to SROs for 
regulatory purposes after normal trading hours. These reported 
trades, however, are not identified as occurring through BDTSs, 
making it difficult to obtain accurate trading volume data for BDTSs 
which are not otherwise providing data to the Commission.
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    Not only may a significant amount of trading in national market 
system securities occur through BDTSs, it is probable that sponsors 
will continue to create BDTSs to facilitate transactions in products 
not trading in organized markets, including various derivative 
products. Standardized reporting requirements would assist the 
Commission in monitoring the interaction between activity in these 
markets and activity in underlying markets. In addition, some of these 
``niche'' systems may provide the only readily identifiable source of 
trading opportunity in a particular over-the-counter instrument.22 
A reporting mechanism such as Rule 17a-23 would help alleviate the 
difficulty of obtaining accurate information on a regular basis about 
cumulative trading in these instruments.
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    \2\2The Division has issued no-action letters to four automated 
trading systems which provide a trading facility for securities 
otherwise trading in a dispersed manner: RMJ-Delta (Treasury 
options); CrossCom (high-yield debt); and NAPEX and Cantor 
Fitzgerald's system (limited partnership interests).
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B. Adequacy of Broker-dealer Regulation and the Detection of Fraudulent 
or Manipulative Activity

    The information required by the Rule is necessary to understand the 
implications of the ongoing integration of BDTSs into existing market 
structures and to evaluate the appropriateness of current regulations 
and oversight as applied to non-traditional market participants,23 
such as automated third market makers. In its Market 2000 Study, the 
Division recommended trading principles to which third market makers 
should adhere and the development by SROs of examination modules 
tailored to third market makers.24 Recordkeeping and reporting 
that specifically identifies trading activity in BDTSs operated by 
third market makers is a crucial element in enhancing current oversight 
programs of these automated dealers. Comprehensive examination of these 
market makers would be enhanced by the ready availability of 
information about execution algorithms, transaction records, and 
activity summaries. Without such information, it is difficult for the 
SROs to evaluate and monitor the trading activity of automated third-
market makers and other BDTSs accurately.25 This difficulty 
inhibits the ability of the SROs and the Commission to ensure that 
broker-dealer regulation keeps pace with the changing attributes of 
technologically advanced broker-dealers.
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    \2\3The fact that BDTSs do not conform to traditional 
conceptions of broker-dealer activity does not, by itself, mean that 
such systems are securities ``exchanges.'' The Commission has 
interpreted the definition of ``exchange'' primarily to encompass 
those entities that have been designed, whether through trading 
rules, operational procedures, or business incentives, to centralize 
trading and provide buy and sell quotations on a regular or 
continuous basis so that purchasers or sellers have a reasonable 
expectation that they can regularly execute their orders at those 
price quotations. For a discussion of factors relevant to 
applicability of exchange definition, see Securities Exchange Act 
Release No. 27611 (January 12, 1990), 55 FR 1890; Board of Trade of 
the City of Chicago v. SEC, 923 F.2d 1270 (7th Cir. 1991), rehearing 
en banc denied, No. 90-1246 (7th Cir. 1991); and In re Wunsch 
Auction Systems, Inc., Securities Exchange Act Release No. 28899 
(February 20, 1991), 56 FR 8377.
    \2\4Market 2000 Study, Main Report, pp. 25-26.
    \2\5For example, understanding the execution algorithms of a 
BDTS is necessary to evaluate whether the automated execution 
provided by the system complies with SRO fair practice rules. The 
Rule would require a BDTS sponsor to provide the Commission with 
information describing the system's operation and execution 
procedures, so that the Commission may evaluate the system's volume 
and activity information accurately.
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    The lack of routinely reported, system-specific information in a 
useful format also hampers the Commission's ability to identify areas 
where SRO surveillance may be more appropriately tailored to the 
detection of fraudulent, deceptive and manipulative practices in an 
automated environment. Although sponsors of BDTSs are regulated as 
broker-dealers, automation of their activities has enabled these 
entities to collect, disseminate, and process trading interest and 
activity in a manner that is not customary of (and often not possible 
with) traditional non-automated broker-dealer trading techniques. This 
has the potential to expose these non-traditional broker-dealer systems 
to manipulative practices typically associated with markets, not with 
traditional broker-dealers. The availability of system-specific trading 
information to appropriate SROs will provide better tools to detect 
potential trading abuses.26
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    \2\6The Commission recognizes that there are significant 
economic incentives for BDTSs to provide reliable and fair 
facilities for experienced market participants to effect 
transactions. Economic incentives, however, will not always provide 
sufficient motivation to prevent fraudulent practices. See Oversight 
Hearings on the Future of the Stock Market Focusing on Proprietary 
Trading Systems Before the Subcomm. on Telecommunications and 
Finance of the House Comm. on Energy and Commerce, 103d Cong., 1st 
Sess. (May 26, 1993).
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    The Rule also would enable the Commission to identify ways in which 
securities law violations can occur in an automated environment. For 
example, the availability of automated means for a broker-dealer to 
broadcast interest in securities, to groups whose composition is not 
determined by the broker-dealer, may make it more difficult for the 
broker-dealer to satisfy the conditions of Rule 144A under the 
Securities Act.27 The Rule would provide the Commission with 
information necessary to its evaluation of the effectiveness and 
enforceability of the securities laws in an automated trading 
environment, which is currently not readily available.
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    \2\7In this context, sponsors should consider that requirements 
of the Securities Act may make it inappropriate for broker-dealers 
to trade certain restricted or unregistered securities on BDTSs 
unless the system is configured to accommodate Securities Act 
regulations governing trading of such securities.
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IV. Description of the Rule

    The proposed Rule would require a registered broker-dealer who acts 
as the sponsor of a ``broker-dealer trading system'' to make and keep 
current specified records, and file reports with the Commission and the 
appropriate SRO on proposed Form 17A-23. The records that system 
sponsors would be required to keep under the Rule consist of: (1) daily 
summaries of trading in the system and time-sequenced records of 
trades; (2) information regarding system participants and applicants 
who have been refused participation in the system; and (3) notices sent 
by the sponsor to participants.28 The reports that system sponsors 
would be required to file under the Rule consist of: (1) An initial 
description of the system, including its organization, operation, 
automated facilities, and date of commencement of operation; (2) 
quarterly summaries of activity in the system; and (3) notification, 
when appropriate, of material changes to the system and its cessation 
of operations.29
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    \2\8The Rule would not require sponsors of BDTSs to duplicate 
trading records maintained in the course of its normal recordkeeping 
operations; however, the Rule would require that sponsors develop 
and maintain the ability to sort and retrieve system records 
separately.
    \2\9The Rule does not dictate a format for submitting the 
required information. This will enable a BDTS sponsor to comply with 
this requirement without significant adjustment to its own internal 
volume monitoring systems.
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A. Scope

1. Application to Registered Broker-Dealers
    Rule 17a-23 applies to any ``registered broker or dealer'' that 
acts as the sponsor of a trading system. ``Registered broker or 
dealer'' is defined in Section 3(a)(48) of the Act to include any 
broker or dealer registered or required to register pursuant to section 
15(b) (the majority of broker-dealers) or 15B (municipal securities 
broker-dealers) of the Act.30 As noted earlier, absent an 
exemption from or exception to the broker-dealer registration 
provisions of the Act, the types of activities conducted by BDTSs can 
be lawfully conducted only by a broker-dealer registered with the 
Commission pursuant to the Act.
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    \3\0The Rule would not apply to government securities brokers or 
government securities dealers registered under Section 15C of the 
Act, which are required to comply with the recordkeeping and 
reporting requirements of regulations promulgated by the Department 
of the Treasury under the Government Securities Act of 1986, 17 CFR 
400 et seq. In addition, the Rule would not apply to operators of 
systems that do not involve activities requiring broker-dealer 
registration, such as ``bulletin board'' systems displaying 
quotations and orders, and identifying telephone numbers or other 
information to allow participants to contact an entity displaying 
quotations or orders without further intercession and without 
receipt of transaction-based compensation by the system operator. 
See Letters regarding Farmland Industries, Inc. (Aug. 26, 1991); 
Troy Capital Services, Inc. (May 1, 1990); Real Estate Financing 
Partnership (May 1, 1990); Ivestex Investment Exchange, Inc. (April 
9, 1990); and Petroleum Information Corporation (Nov. 28, 1989). Cf. 
Securities Exchange Act Release No. 27017 (July 11, 1989), 54 FR 
30013, text accompanying n. 66.
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2. Sponsor
    The Rule defines a sponsor as ``any entity that organizes, 
operates, administers, or otherwise directly controls a broker-dealer 
trading system.'' In addition, the Rule includes within this term any 
registered broker-dealer that regularly executes or processes 
transactions on behalf of participants of a system operated by a non-
registered entity. This provision is designed to prevent the operator 
of a BDTS from avoiding applicability of the Rule to its system by 
avoiding registration as a broker-dealer. Some entities that operate 
BDTSs may attempt to do this by ``contracting out'' responsibility for 
executing system transactions to another entity (which generally would 
not be considered to operate, administer or control the system).31 
In such circumstances Rule 17a-23 would apply to the registered broker-
dealer executing transactions on behalf of the system sponsor. Although 
the Commission recognizes the need to allow for flexibility in a 
trading system's operational structure, improved oversight of BDTSs can 
be achieved only if automated trading systems provide uniform and 
consistent information to the Commission and the SROs on a regular 
basis, regardless of organizational structure.
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    \3\1Such an arrangement may be permissible in certain 
circumstances, however the Division will evaluate such arrangements 
based on the facts and circumstances of each case.
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3. Broker-dealer Trading System
    The term ``broker-dealer trading system'' is defined as ``(i) any 
system that automatically executes orders to buy or sell securities 
against quotations of the system sponsor or its affiliates * * * or 
(ii) any system that both automates the dissemination or collection of 
quotations, orders to buy or sell securities, or indications by any 
person announcing a general interest in buying or selling a security, 
submitted by entities other than the system sponsor and its affiliates, 
and provides a mechanism for matching or crossing orders in the system, 
or for otherwise facilitating agreement between participants to the 
basic terms of a purchase or sale of a security through use of the 
system.'' (Emphasis added.)
    This definition is intentionally broad. Part (i) of the definition 
would include systems that provide automated access to, and execution 
against, proprietary two-sided quotations of market makers. This would 
make the Rule applicable to large, integrated dealers in NASDAQ and 
exchange-listed securities that offer automated execution of the market 
orders of other brokers and dealers at the best consolidated bid and 
ask price.32
---------------------------------------------------------------------------

    \3\2Some of these systems also offer the possibility of price 
improvement for orders in securities whose bid/ask spread exceeds 
defined parameters and limit order protection for priced orders that 
are ``away'' from the inside market.
---------------------------------------------------------------------------

    Part (ii) of the definition would only apply to systems that both 
automate the collection or dissemination of orders, interest, or 
quotations, and provide a mechanism for matching, crossing, or 
otherwise facilitating execution of orders through the system. In order 
for a system to fall within this part of the definition, it must 
provide a mechanism for facilitating participant agreement to the terms 
of a transaction through use of the system.33 Broker-dealer 
operated systems that automate the collection of orders, but do not 
provide a mechanism for matching, crossing, or facilitating participant 
agreement to terms of a transaction through use of the system would not 
be included in this definition.34 The definition would include 
systems that automate the collection of orders and match those orders 
against other participant trading interest, regardless of whether or 
not those orders are disseminated to system participants prior to 
matching.35
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    \3\3The term ``use of the system'' includes contacting the 
sponsor of a system to finalize a transaction based on trading 
interest displayed in the system, whether such contact is telephonic 
or automated. See note 34, infra.
    \3\4Several broker-dealers operate ``bulletin board'' systems on 
which participants display indications of interest or orders and 
provide telephone numbers or other identifying information. Other 
system users may then utilize this information to contact that 
participant directly and execute a transaction without intercession 
by the system or the system operator. Such an arrangement does not 
allow participants to agree to the terms of a transaction ``through 
use of the system''; participants must contact each other outside of 
system facilities or the system sponsor to conclude a transaction. 
Therefore, the Rule would not apply to these systems. In contrast, 
the Rule would apply to broker-dealer operated systems that automate 
the collection of orders, and display those orders to participants, 
but require a participant to contact the system sponsor 
telephonically or otherwise (rather than another participant) in 
order to finalize a transaction through the system.
    \3\5If a match of trading interest occurs in listed securities 
subject to off-exchange trading restrictions, the system would 
generally send those matched orders to an exchange or other market 
center to be ``printed'' as an ``agency cross.''
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4. Exclusions
    A number of broker-dealer automated systems have been expressly 
excluded from the definition of ``broker-dealer trading systems'' to 
clarify application of the Rule. The Commission recognizes that many 
broker-dealers have automated their internal operations without 
significantly changing the nature of traditional broker-dealer 
operations. For this reason, the Rule would not apply to a system that 
merely automates the collection and routing of orders to the sponsor's 
trading desk, through automation of the sponsor's order entry, order 
collection or internal order-routing functions. Nor would it apply to a 
system that merely routes customer orders to the execution facilities 
of another dealer, a registered national securities exchange, or a 
trading system operated by a person other than the routing system 
operator.36 These exclusions are premised on the Commission's view 
that these routing systems do not require the same degree of Commission 
oversight and SRO surveillance as systems that have automated 
mechanisms for facilitating securities transactions outside of 
traditional organized markets or traditional over-the-counter brokerage 
activities. Because routing systems direct orders to organized markets 
such as exchanges, these systems are integrally tied into existing 
market oversight structures and do not pose the same concerns regarding 
potential effects on the national market system.
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    \3\6This exclusion would only apply to systems that route 
customer orders to other execution centers without any intervening 
matching or crossing by the system. Systems which match or cross 
orders internally and then route the matched orders to an exchange 
or other execution center for execution as an ``agency cross'' would 
not be excluded from application of the Rule under this exclusion. 
See note 35.
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    The Commission solicits comment on whether the Rule should also 
exclude interdealer brokers that facilitate trading of municipal or 
government securities.37
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    \3\7As proposed, the Rule would apply to interdealer brokers 
facilitating trading in municipal or government securities 
registered under Sections 15 or 15B. The Rule would not apply to 
interdealer brokers registered under Section 15C. See note 30.
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B. Requirements of the Rule

1. Recordkeeping
    Under the Rule, system sponsors would be required to keep and make 
available to the Commission and the appropriate SRO, upon request, 
records of: (1) daily summaries of trading in the system (including 
number of transactions, transaction volume, securities traded, and 
number of quotations and orders placed by participants); (2) the 
identities of system participants (including any affiliations between 
those participants and the sponsor) and applicants who have been 
refused participation in the system; and (3) time-sequenced records of 
each transaction effected through the system. The sponsor would be 
required to keep these records, as well as any notices provided by the 
sponsor to participants, for three years (the first two years in an 
easily accessible place).
    Sponsors of BDTSs already may be maintaining some or all of the 
transaction information pursuant to the requirements of Rules 17a-3 or 
17a-4 under the Act. The Rule does not require a sponsor to keep 
duplicate records in such circumstances, if the sponsor's recordkeeping 
system can sort and retrieve the information required under the Rule 
from its other records promptly upon request.
2. Reporting
    Sponsors also would be required to file confidential reports with 
the Commission (with duplicate originals filed simultaneously with the 
appropriate SRO) in accordance with proposed Form 17A-23. This Form 
would contain three parts: (1) an initial report filed at least 20 
calendar days prior to the operation of the system; (2) quarterly 
reports filed within 20 calendar days after the end of the calendar 
quarter; and (3) a final report filed within 10 calendar days after a 
sponsor ceases to operate the trading system. The pre-operational 
report would describe the system, its procedures for reviewing 
capacity, security and contingency planning, and protecting participant 
funds and securities (if an entity other than the sponsor will hold or 
safeguard participant funds or securities on a regular basis). It also 
would identify an appropriate system contact. The quarterly reports 
would contain volume information, notification of the intent to offer 
(or the current availability of) services to U.S. customers that would 
allow them to trade with entities outside the U.S. otherwise than 
through a registered broker or dealer,38 and notification of 
material system changes. The report notifying the Commission of 
cessation of operations would contain, in addition to the notification, 
a final transaction summary.
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    \3\8See Securities Exchange Act Release No. 27017 (July 13, 
1989), 54 FR 30013 (foreign broker-dealers whose quotes are 
distributed through third-party systems may not initiate contacts 
with U.S. persons without registering as broker-dealers under 
Sec. 15 of the Act, except as allowed by Rule 15a-6).
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3. Record Maintenance
    Records may be produced, reproduced, and maintained pursuant to the 
provisions of Rule 17a-4(f) under the Act.39 Although record 
maintenance under the Rule is the sole responsibility of the sponsor, 
records required to be maintained and preserved under the Rule may be 
prepared or maintained by a service bureau, depository or other 
recordkeeping service on behalf of the sponsor, provided such entity 
complies with Rule 17a-4(i) under the Act.
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    \3\9Rule 17a-4(f) provides for the maintenance of records on 
microfilm. The Commission recognizes that BDTS sponsors generally 
will wish to maintain records in electronic formats. The Commission 
has proposed and published for comment an amendment to Rule 17a-4 
which would provide for optical disk storage if certain protective 
safeguards are employed to preserve the data. See Securities 
Exchange Act Release No. 32609 (July 9, 1993), 58 FR 38092. See also 
Letter to Michael D. Udoff, Chairman, Ad Hoc Record Retention 
Committee, Securities Industry Association, Re: Optical Storage 
Technology (June 18, 1993).
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4. Exemptions
    The Commission could exempt any system sponsor from any or all of 
these requirements, if the Commission determines that such exemption is 
consistent with the public interest, the protection of investors, the 
maintenance of fair and orderly markets and the removal of impediments 
to, and perfection of the mechanisms of, a national market system for 
securities and a national system for the clearance and settlement of 
securities transactions.

C. Effect of the Rule on Existing No-Action Letters40

    The Commission recognizes that BDTS sponsors subject to no-action 
letters already may comply with many of the reporting requirements of 
the Rule pursuant to conditions of such letters. The Commission 
anticipates that the Rule would become effective six months after 
adoption. Sponsors of BDTSs subject to reporting requirements pursuant 
to no-action letters or other Commission orders may contact the 
Division to discuss the continuing applicability of such conditions if 
the Rule is adopted.
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    \4\0The Rule does not address the issue of whether a particular 
trading system may be required to register as a national securities 
exchange, clearing agency, or other SRO. Sponsors of BDTSs seeking 
relief from exchange, clearing agency, and other SRO registration 
requirements may continue to request no-action positions from the 
Division.
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V. Request for Comments

    The Commission requests comment on the issues raised in the 
release, including without limitation the consistency of the Rule's 
approach with the policies underlying the Act, and the scope of terms 
defined in the proposed Rule, including ``broker-dealer trading 
system'' and ``sponsor.'' Commenters are encouraged to focus on the 
following matters:

    (1) The number of entities that would be required to comply with 
the Rule as proposed;
    (2) Whether the Rule should apply to systems excluded in the 
proposed Rule from the definition of broker-dealer trading systems 
and, if so, why;
    (3) Whether the Rule should apply to bulletin board information 
systems, or whether the Commission should separately adopt a rule 
for bulletin board systems pursuant to its authority under section 
11A(b)(1) of the Act41 relating to securities information 
processors, and what the content of any such rule should include; 
and
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    \4\115 U.S.C. 78k-1(b)(1).
---------------------------------------------------------------------------

    (4) Whether government or municipal securities brokers, dealers, 
or interdealer brokers registered under section 15 or 15B of the Act 
should be excluded from application of the Rule and, if so, why;
    (5) The interval at which sponsors should file reports required 
by the Rule (i.e., quarterly, semi-annually, etc.);
    (6) whether the Rule should require a sponsor to provide the 
Commission with direct, on-line access to its system upon request; 
and
    (7) the costs and benefits of the proposed Rule, especially 
whether the Rule's requirements are duplicative or burdensome.

    With regard to this last issue, based upon the Commission's 
experience, the anticipated costs to sponsors of existing BDTSs and the 
developers of new BDTSs if the Commission adopts the Rule do not appear 
to be significant or to unduly impede the development or viability of 
new systems. The complete automation of trading which characterizes 
BDTSs is particularly well suited for maintaining comprehensive and 
accurate records. Many BDTS sponsors already maintain records and 
provide information to the Commission pursuant to no-action letters 
which are substantially similar to the requirements of the Rule. Some 
BDTS sponsors that are not subject to conditions of a no-action letter 
nonetheless currently maintain many of the records required by Rule 
17a-23. Thus, compliance with the Rule would appear to require little 
adjustment to their current recordkeeping. Similarly, for BDTS sponsors 
that have automated all of their trading operations, the Rule would 
appear to entail few operational changes or additional costs.

VI. Competition Findings

    Section 23(a)(2) of the Act42 requires the Commission, in 
adopting rules under the Act, to consider the anti-competitive effects, 
if any, of such rules and to balance any impact against the regulatory 
benefits gained in terms of furthering the purposes of the Act. The 
Commission has considered the proposed Rule in light of the standard 
cited in Section 23(a)(2) and preliminarily believes that adoption of 
the proposed Rule will not impose any burden on competition not 
necessary or appropriate in furtherance of the Act.
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    \4\215 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

VII. Summary of the Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory flexibility 
Analysis (``IRFA'') in accordance with 5 U.S.C. sec. 603 regarding the 
proposed Rule. The following summarizes the conclusions of the IRFA.
    The IRFA uses certain definitions of ``small entities'' adopted by 
the Commission for purposes of the Regulatory Flexibility Act. The IRFA 
states that the Commission currently has no uniform reporting mechanism 
regarding the number of broker-dealers that operate automated trading 
systems as defined by the proposed Rule, and the Commission is, 
therefore, unable to reasonably estimate the number of small entities 
that would be required to comply with the Rule. The Division's 
experience with PTSs has indicated that the implementation of automated 
trading systems requires large capital expenditures. Therefore, the 
Commission believes BDTSs that operate pursuant to the proposed Rule 
will be sponsored, with few exceptions, by larger, well-capitalized 
broker-dealer firms.
    The IRFA states that the proposed Rule would allow the Commission 
to confirm that investors effecting trades through BDTSs are adequately 
protected, the systems do not impede the maintenance of fair and 
orderly markets, or otherwise operate in a manner that is inconsistent 
with the federal securities laws. The IRFA sets forth the concerns with 
the current regulatory approach, and discusses possible alternatives to 
the proposed Rule for the regulation of small entities. Finally, the 
IRFA solicits comments on any possible costs the proposed Rule might 
have on small entities, and on possible alternatives with regard to 
small entities.
    A copy of the IRFA may be obtained from Sarrita J. Cypress, Office 
of Automation and International Markets, Division of Market Regulation, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549, 202/272-2827.

VIII. Statutory Basis

    Pursuant to the Securities Exchange Act of 1934 and particularly 
Sections 2, 3, 11A, 15(c), 17, and 23(a) thereof, 15 U.S.C. 78b, 78c, 
78k-1, 78o(c), 78q, and 78w(a), the Commission proposes to add 
Sec. 240.17a-23 in chapter II of title 17 of the Code of Federal 
Regulations.

List of Subjects in 17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Rule 17a-23

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for Part 240 is amended by adding the 
following citation:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 
78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4 and 80b-11, unless otherwise noted.

* * * * *
    Section 240.17a-23 also issued under 15 U.S.C. 78b, 78c, 78o, 78q, 
and 78w(a);
* * * * *
    2. Section 240.17a-23 is added to read as follows:


Sec. 240.17a-23  Recordkeeping and reporting requirements relating to 
broker-dealer trading systems.

    (a) Scope of section. This section shall apply to any registered 
broker or dealer that acts as the sponsor of a broker-dealer trading 
system.
    (b) Definitions. For purposes of this section:
    (1) The term registered broker or dealer shall have the meaning 
ascribed to it in Section 3(a)(48) of the Act.
    (2) The term broker-dealer trading system means:
    (i) Any system that automates the execution of orders to buy or 
sell securities based on quotations of the system sponsor or its 
affiliates (whether such quotations are disseminated through the 
system, a quotation consolidation system operated pursuant to a plan 
approved by the Commission under Section 11A of the Act, an electronic 
interdealer quotation system operated by a registered national 
securities association, or otherwise); or
    (ii) Any system that both automates the dissemination or collection 
of quotations, orders to buy or sell securities, or indications by any 
person announcing a general interest in buying or selling a security, 
submitted by entities other than the system sponsor and its affiliates, 
and provides a mechanism for matching or crossing, or for otherwise 
facilitating agreement between participants to the basic terms of a 
purchase or sale of a security through use of the system. ``Broker-
dealer trading system'' does not include:
    (A) A system that automates the collection and routing of orders to 
a broker or dealer's trading desk or individual trading personnel, 
through automation of the broker or dealer's order entry, order 
collection or internal order-routing functions, where the system does 
not provide automated matching, crossing, or execution of orders in the 
system based on preset or programmed parameters without intervention by 
individual trading personnel; or
    (B) An automated system that routes customer orders to the 
execution facilities of a dealer other than the operator of such 
routing system, of a registered national securities exchange, or of a 
broker-dealer trading system operated by a person other than the 
operator of such routing system, where the operator of the routing 
system does not provide a mechanism for matching, crossing, or 
executing orders in the system against other orders in the system, or 
for otherwise allowing agreement to the basic terms of a transaction in 
a security through use of the system, apart from the execution 
facilities of those other entities.
    (3) The term sponsor means any entity that organizes, operates, 
administers, or otherwise directly controls a broker-dealer trading 
system; and any registered broker or dealer that, pursuant to contract, 
affiliation, or other agreement with the system operator, is involved 
materially on a regular basis with effecting or processing transactions 
executed in connection with use of the system, other than for its own 
account or as a participant in the system, if the sponsor of such 
broker-dealer trading system is not a broker or dealer registered 
pursuant to Section 15 of the Act.
    (c) Recordkeeping. Every registered broker or dealer subject to 
this section pursuant to paragraph (a) of this section shall:
    (1) Make and keep current the following records relating to the 
broker-dealer trading system:
    (i) A record of participants in the system (identifying any 
affiliations between system participants and the system sponsor) and 
applicants who have been refused participation in the system;
    (ii) Daily summaries of trading in the system, including:
    (A) Securities trading in the system;
    (B) Transaction volume (separately stated for trading occurring 
during hours when consolidated trade reporting facilities are not in 
operation), expressed in trades, shares and in dollar value with 
respect to stock, and for other securities, expressed in trades, number 
of units of securities, par value, dollar value, or any other commonly 
used measure of amounts of securities; and
    (C) Number of quotations and orders placed in the system by persons 
other than the sponsor and its affiliates, if applicable (expressed 
separately for limit and market orders and for any other relevant order 
specification required or allowed by the system other than price and 
size);
    (iii) Time-sequenced records of each transaction effected through 
the broker-dealer trading system, including date and time executed, 
price, size, security traded, counterparty identification information, 
and method of execution (if broker-dealer trading system allows 
alternative means or locations for execution, such as routing to 
another market, matching with limit orders, or executing against the 
system sponsor's quotations); and
    (2) Preserve, for a period of not less than three years, the first 
two years in an easily accessible place, the following records relating 
to the broker-dealer trading system:
    (i) All records required to be made pursuant to paragraph (a)(1) of 
this section; and
    (ii) Any notices provided by the system sponsor to system 
participants, including, but not limited to, notices addressing hours 
of system operations, system malfunctions, changes to system 
procedures, maintenance of hardware and software, instructions 
pertaining to access to the system, and notices of denials or 
limitations of access to the system.
    (d) Reporting. (1) Every registered broker or dealer subject to 
this section pursuant to paragraph (a) of this section shall:
    (i) At least 20 calendar days prior to operating a broker-dealer 
trading system, file Part I of Form 17A-23 (Sec. 249.636 of this 
chapter);
    (ii) During the operation of a broker-dealer trading system of 
which the broker or dealer is the sponsor, file the information 
described in Part II of Form 17A-23 (Sec. 249.636 of this chapter) 
within 20 calendar days after the end of the calendar quarter; and
    (iii) Within 10 calendar days after a broker-dealer trading system 
of which the broker or dealer is the sponsor ceases to operate, file 
the notice described in Part III of Form 17A-23 (Sec. 249.636 of this 
chapter).
    (2) The reports provided for in this paragraph (d) shall be 
considered filed upon receipt at the Commission's principal office in 
Washington, DC. Duplicate originals of such reports must be filed with 
the self-regulatory organization designated as the examining authority 
for the broker or dealer pursuant to Sec. 240.17d-1 simultaneously with 
filing with the Commission. All reports filed pursuant to this 
paragraph (d) shall be deemed to be confidential.
    (e) Maintenance of records in alternative form. The records 
required to be maintained and preserved pursuant to this section may be 
produced, reproduced and maintained pursuant to the provisions of 
Sec. 240.17a-4(f).
    (f) Compliance with other recordkeeping and reporting rules. 
Nothing in this section obviates the need for any broker or dealer to 
comply with any other applicable recordkeeping or reporting requirement 
under the Act and the rules and regulations thereunder. If the 
information in a record required to be made pursuant to this section is 
preserved in a record made pursuant to Sec. 240.17a-3 or Sec. 240.17a-
4, paragraph (c) of this section shall not require the sponsor to 
maintain such information in a separate file, if the sponsor can 
promptly sort and retrieve the information as if it had been kept in a 
separate file as a record made pursuant to this section.
    (g) Maintenance of records by others. The records required to be 
maintained and preserved pursuant to this section may be prepared or 
maintained by a service bureau, depository or other recordkeeping 
service on behalf of the sponsor of a broker-dealer trading system, 
provided such entity complies with the provisions of Sec. 240.17a-4(i). 
Agreement with such an entity shall not relieve the sponsor of a 
broker-dealer trading system from the responsibility to prepare and 
maintain records as specified in this section.
    (h) Furnishing copies of records. Every broker or dealer subject to 
this section pursuant to paragraph (a) of this section shall furnish to 
any representative of the Commission and of the self-regulatory 
organization designated as its examining authority pursuant to 
Sec. 240.17d-1, promptly upon request, legible, true and complete 
copies of those records of the sponsor that are required to be 
preserved under this section.
    (i) Exemption from this section. The Commission, by rule or order, 
may exempt any sponsor of a broker-dealer trading system from all or 
any of the provisions of this section, either unconditionally or on 
specified terms and conditions, if the Commission determines that such 
exemption is consistent with the public interest, the protection of 
investors, the maintenance of fair and orderly markets and the removal 
of impediments to, and perfection of the mechanisms of, a national 
market system for securities and a national system for the clearance 
and settlement of securities transactions.
    (j) Effective date. The effective date of this section shall be 
[six months after date of adoption of final rule].

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    3. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
    4. Section 249.636 and Form 17A-23 are added to read as follows:

    Note: The text of proposed form 17A-23 appears in Appendix A to 
this document and will not appear in the Code of Federal 
Regulations.


Sec. 249.636  Form 17A-23, information required of certain brokers and 
dealer sponsors of trading systems pursuant to section 17 of the 
Securities Exchange Act of 1934 and Sec. 240.17a-23 of this chapter.

    This form shall be used by every registered broker and dealer that 
is required to file reports under Sec. 240.17a-23 of this chapter.

    Dated: February 9, 1994.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

BILLING CODE 8010-01-P

TP18FE94.000


TP18FE94.001


TP18FE94.002


[FR Doc. 94-3703 Filed 2-17-94; 8:45 am]
BILLING CODE 8010-01-C