[Federal Register Volume 65, Number 39 (Monday, February 28, 2000)]
[Notices]
[Pages 10577-10588]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4595]



[[Page 10577]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42450; File No. SR-NYSE-99-48]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. to Rescind Exchange Rule 
390; Commission Request for Comment on Issues Relating to Market 
Fragmentation

February 23, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on December 10, 1999, the New York Stock Exchange, Inc. 
(``NYSE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') a proposed rule change to 
rescind Exchange Rule 390. The proposal is described in Items I, II, 
and III below, which Items have been prepared by the NYSE. The 
Commission is publishing this notice to request comments on the 
proposed rule change from interested persons. In addition, the 
Commission is requesting comment in Item IV below on a broad range of 
issues relating to market fragmentation.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

Table of Contents

Commission's Introduction
I. NYSE's Statement of the Terms of Substance of the Proposed Rule 
Change
II. NYSE's Statements Concerning the Proposed Rule Change
    A. NYSE's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rule Change
    1. Purpose
    2. Statutory Basis
    B. NYSE's Statement on Burden on Competition
    C. NYSE's Statement on Comments on the Proposed Rule Change 
Received from Members, Participants, or Others
III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action
IV. Commission's Request for Comment on Market Fragmentation
    A. Overview of Current Market Structure
    1. Investor Interests and Competition on Price
    2. Market Center Competition, Internalization, and Payment for 
Order Flow
    3. Current Market Structure Components that Address Fragmentation
    a. Price Transparency
    b. Intermarket Linkages to Displayed Prices
    c. Broker's Duty of Best Execution
    B. Commission's Regulatory Role in Overseeing the National Market 
System
    C. Requests for Comment
    1. Effect of Fragmentation on the Markets
    a. Fragmentation in General
    b. Internalization and Payment for Order Flow
    c. Best Execution of Investor Limit Orders
    2. Possible Options for Addressing Fragmentation
    a. Require Greater Disclosure by Market Centers and Brokers 
Concerning Trade Executions and Order Routing
    b. Restrict Internalization and Payment for Order Flow
    c. Require Exposure of Market Orders to Price Competition
    d. Adopt an Intermarket Prohibition Against Market Makers Trading 
Ahead of Previously Displayed and Accessible Investor Limit Orders
    e. Provide Intermarket Time Priority for Limit Orders or Quotations 
that Improve the NBBO
    f. Establish Price/Time Priority for All Displayed Trading Interest
V. Solicitation of Comments

Commission's Introduction

    Subject to many exceptions, NYSE Rule 390 prohibits members and 
their affiliates from effecting transactions in NYSE-listed securities 
away from a national securities exchange. The Rule's restrictions on 
off-board trading frequently have been criticized as an inappropriate 
attempt to restrict competition among market centers. Two Exchange Act 
rules already restrict the scope of Rule 390.\3\ On October 27, 1999, 
Chairman Levitt, in congressional testimony given on behalf of the 
Commission, cited Rule 390 as an example of a rule that introduced 
unnecessary costs and distorted competition and that should not be part 
of the future of the securities markets.\4\ Subsequently, the NYSE 
submitted a proposed rule change to rescind the Rule.
---------------------------------------------------------------------------

    \3\ Exchange Act Rule 19c-1, 17 CFR 240.19c-1; Exchange Act Rule 
19c-3, 17 CFR 240.19c-3.
    \4\ Testimony of Arthur Levitt, Chairman, SEC, Concerning Market 
Structure Issues Currently Facing the Commission, before the 
Subcommittee on Securities, Committee on Banking, Housing and Urban 
Affairs, U.S. Senate (Oct. 27, 1999) at 14-15.
---------------------------------------------------------------------------

    The Commission's congressional testimony also noted that its staff 
was preparing a release that would request the public's views on 
whether fragmentation--the trading of orders in multiple locations 
without interaction among those orders--was a problem in today's 
markets and, if so, what steps should be taken to address it.\5\ The 
elimination of off-board trading restrictions raises at least the 
potential for increased fragmentation of the trading interest in 
exchange-listed equities.\6\ The proposed rescission of Rule 390 will 
allow NYSE members to act as over-the counter market makers or dealers 
in all NYSE-listed securities. As a consequence, a significant amount 
of order flow that currently is routed to the NYSE may be divided among 
a number of different dealers in the over-the-counter market, where 
there may be a reduced opportunity for order interaction.
---------------------------------------------------------------------------

    \5\ Id. at 16.
    \6\ In addition to the NYSE, the American Stock Exchange LLC 
(``Amex'') and the Chicago Stock Exchange, Incorporated recently 
have moved to rescind their off-board trading rules. The 
Commission's staff has sent letters to the other national securities 
exchanges urging them to review any off-board trading restrictions 
they may have and to consider measures to rescind those 
restrictions.
---------------------------------------------------------------------------

    The 1975 Amendments to the Exchange Act \7\ created a framework for 
fostering transparency and competition in our securities markets. As a 
result, today, equity market centers compete with one another in an 
environment where quotes and transaction prices are widely available to 
all market participants. Linkages among competing market centers help 
ensure that brokers can access the best quotes available in the market 
for their customers. Market centers (including exchange markets, over-
the-counter market makers, and alternative trading systems) have an 
incentive to offer improvements in execution quality and to reduce 
trading costs in order to attract order flow away from other market 
centers. This competition among market centers encourages ongoing 
innovation and the use of new technology. Within an individual market 
center, investor orders may interact directly without the intervention 
of intermediaries, allowing investors to obtain executions at better 
prices than otherwise would be available.
---------------------------------------------------------------------------

    \7\ Pub. L. No. 94-29, 89 Stat. 97 (1975).
---------------------------------------------------------------------------

    The Commission is concerned, however, that customer limit orders 
and dealer quotes may be isolated from full interaction with other 
buying and selling interest in today's markets. As a result, vigorous 
quote competition may go unrewarded. For example, a customer today may 
enter a limit order to buy at a price higher than the current

[[Page 10578]]

quote, thus setting a new best price in the market. Even though the 
customer offers to pay more than any other market participant, market 
centers holding sell orders have no obligation to route a sell order to 
fill the price-setting buy order. Rather, they can trade as principal 
with their order flow by matching the price-setting buy order. To the 
extent that the price-setting customer's limit order remains unexecuted 
and subsequent buying interest is filled at the customer's price, the 
customer's order has been isolated, and the incentive of customers to 
improve prices potentially compromised. Similarly, where a dealer 
improves the current bid, and then watches transactions occur at the 
price it set without attracting order flow, the incentive to quote 
aggressively may be substantially inhibited.
    Other practices have contributed to an environment in which 
vigorous quote competition is not always rewarded. Broker-dealers that 
trade as principal with customer order flow may use part of their 
trading profits to buy order flow from certain retail firms, giving the 
firm the opportunity to trade with the retail orders without competing 
for them on the basis of quotes. Broker-dealers that have access to 
retail customer order flow and that own or are affiliated with market-
making operations have a similar ability to trade as principal with 
their retail customers without quoting aggressively. These order flow 
arrangements may discourage quote competition by isolating investor 
order flow from investor limit orders and dealer quotes displayed in 
other market centers. Even when wholesale and internalizing broker-
dealers execute trades at prices better than the national best bid and 
offer (``NBBO''), these superior transaction prices are often in part 
determined by formulas dependent on the NBBO.
    The Commission therefore believes that the proposed rescission of 
Rule 390 presents an opportune time to consider the effects of 
fragmentation on the securities markets. In particular, the Commission 
is evaluating whether the national market system will continue to meet 
the needs of investors by: (1) Maintaining the benefits of vigorous 
quote competition and innovative competition among market centers; (2) 
encouraging and rewarding market participants (including both investors 
and dealers) who contribute to public price discovery by displaying 
trading interest that is widely accessible and can be easily executed 
by other market participants; (3) assuring the practicability of best 
execution of all investor orders, including limit orders, no matter 
where they originate in the national market system; and (4) providing 
the deepest, most liquid markets possible that facilitate fair and 
orderly trading and minimize short-term price volatility.
    The Commission believes that it would be beneficial to obtain the 
views of the public on these issues in order to conduct a systematic 
and balanced evaluation of fragmentation concerns--both in the equities 
and options markets.\8\ Accordingly, this release, after setting forth 
the NYSE-prepared submissions in Items I, II, and III below, includes a 
Commission discussion of market structure issues and a broad request 
for comments on market fragmentation in Item IV.
---------------------------------------------------------------------------

    \8\ The equities and options markets differ in several important 
respects, and the specific nature of the tools needs to address 
fragmentation may vary between them. For example, all trading of 
listed options occurs on national securities exchanges--there is no 
off-board trading by over-the-counter market makers. In addition, 
the pricing of an option contract, as a derivative instrument, 
significantly differs from the pricing of a stock. Nonetheless, the 
fundamental goals of the Exchange Act, including the efficient 
execution of transactions at fair prices, are equally applicable to 
both types of markets. The Commission is raising for comment the 
issues of options market fragmentation in this release, but also is 
addressing these issues in the specific context of multiple trading 
of options. See, e.g., Securities Exchange Act Release No. 43029 
(Oct. 19, 1999), 64 FR 57674 (ordering the options markets to 
develop a linkage plan for multiply-traded options).
---------------------------------------------------------------------------

I. NYSE's Statement of the Terms of Substance of the Proposed Rule 
Change

    The proposed rule change consists of the rescission of NYSE Rule 
390.

II. NYSE's Statements Concerning the Proposed Rule Change

    In its filing with the Commission, the NYSE included statements 
concerning the purpose of, and basis for, the proposed rule change, the 
burden of the proposed rule change on competition, and any comments it 
received on the proposed rule change from members, participants, or 
others. The text of these statements, which were prepared by the NYSE, 
is set forth in Items A, B, and C below.

A. NYSE's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rule Change

1. Purpose
    The purpose of this filing is to rescind Exchange Rule 390, which 
has operated to preclude, among other matters, NYSE member firms from 
internalizing their agency order flow by trading as dealer or principal 
against it. The Exchange believes that the anti-internalization 
concerns addressed by Rule 390 are significant enough that they should 
not be addressed by a series of similar rules of individual market 
centers, such as the NYSE's Rule 390. Rather, the Exchange urges that 
the Commission, in approving the rescission of Rule 390, adopt a 
market-wide requirement as described more fully below that broker-
dealers not be permitted to trade against their customer orders unless 
they provide a price to the order that is better than the national best 
bid or offer against which the order might otherwise be executed.
    Rule 390, the Exchange's ``Market Responsibility Rule,'' was 
adopted in 1976 in the wake of the 1975 Amendments to the Exchange Act 
to replace a predecessor rule. The rule was intended to maximize the 
opportunity for investors' orders to interact with one another in 
agency auction markets and be executed without dealer intervention. 
Accordingly, Rule 390 as originally adopted prohibited members and 
member organizations, and any non-member broker or dealer in a control 
relationship with them (``affiliated persons''), from effecting any 
transaction in any listed stock in the over-the-counter market, either 
as principal or agent. Pursuant to Exchange Act Rule 19c-3, which was 
adopted in 1980, Rule 390 currently applies only to stocks listed on 
the Exchange as of April 26, 1979, otherwise known as ``covered 
securities.'' In accordance with Exchange Act Rule 19c-1, Rule 390 was 
amended in 1978 to permit members to trade as agent in the over-the-
counter market with another person, except where the member was also 
acting as agent for such other person (``in-house agency cross''). Rule 
390 contains ten specific exceptions for unique or away from the 
current market situations, and permits members, member organizations, 
and affiliated persons to trade in a foreign over-the-counter market 
outside of Exchange trading hours.
    Thus, the principal restrictions in Rule 390 today are two-fold:
    (i) A member, member organization, or affiliated person may not 
trade as principal in the over-the-counter market in a covered security 
with an agency order; and
    (ii) A member, member organization, or affiliated person may not 
effect an in-house agency cross in the over-the-counter market in a 
covered security.
    The Exchange believes that the restriction against in-house agency 
crosses of market and marketable limit orders does not raise the same 
concerns as the restriction against proprietary internalization. With 
respect to markets linked by the Intermarket Trading System, one side 
or the other of an agency cross transaction receives an

[[Page 10579]]

improved price, if the cross is executed at either the national best 
bid or offer, and both sides of the cross receive an improved price if 
the cross is executed between the national best bid and offer.
    If a broker-dealer is trading as principal against agency orders, 
however, the Exchange believes that serious concerns arise about 
whether agency orders are being afforded an opportunity to receive the 
best possible price that may be available. Typically, broker-dealers 
internalize agency market orders by buying from sell orders at the bid 
price, and selling to buy orders at the offer price. While such agency 
orders may be receiving the national best bid or offer price, they do 
not interact with other public orders, and they are often denied the 
opportunity to receive any degree of price improvement, such as, for 
example, an execution at the offer price (in the case of a sell order) 
or an execution at the bid price (in the case of a buy order), or an 
execution between the bid and offer prices. In an agency auction market 
such as the Exchange, a member seeking to trade with an agency order 
must first expose the order to the market for possible price 
improvement before consummating the transaction. In any event, 
continuous interaction among broker-agents in an agency auction market 
frequently results in customers receiving better prices than the 
national best bid or offer.
    The Exchange believes that broker-dealer internalization also 
raises concerns about market fragmentation, as public orders are denied 
the opportunity to interact with one another. Such interaction creates 
the most efficient pricing mechanism based on an equilibrium between 
public supply and demand. The Exchange believes that broker-dealer 
internalization results in the most objectionable of all forms of 
market fragmentation: the execution of ``captive'' customers'' orders 
in such a manner as to insulate them from meaningful interaction with 
other buying and selling interest. This not only decreases competitive 
interaction among markets and market makers, but also isolates segments 
of the total public order flow and impedes competition among orders, 
with no price benefit to the orders being internalized. The Exchange 
believes that internalization, as typically conducted, always involves 
broker-dealer intervention as principal, usually excludes ``captive'' 
orders from opportunities for price improvement, and is rife with 
conflicts of interest, as a broker-dealer can seize a trading 
opportunity to trade with a captive customer order at an unimproved 
price (e.g., buying from a sell order at the bid price), and then 
immediately offer what was just purchased at a higher price, thereby 
capturing a virtually riskless dealer turn by exploiting its own agency 
order flow.
    Section 11A(a)(1) of the Exchange Act \9\ expresses the 
Congressional mandate that investor protection and the maintenance of 
fair and orderly markets require assurance of economically efficient 
execution of securities transactions in the best market for those 
transactions, and, consistent with these considerations, for investors' 
orders to be afforded the opportunity to be executed without the 
participation of a dealer. The Exchange believes that this 
Congressional mandate can be most reasonably effectuated, and public 
investors best served, if internalization/dealer intervention is 
limited to those situations where public investors, rather than the 
broker-dealers handling their orders, are given improved prices, and in 
essence are permitted to capture the bid/offer spread instead of the 
broker-dealer.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------

    Accordingly, the Exchange believes it would be appropriate for the 
Commission to adopt a new rule, pursuant to its authority under Section 
11A, providing that broker-dealers may trade as principal with their 
own customer orders only where:
    (i) In the case of a customer market or marketable limit order to 
buy stock, the broker-dealer sells to its customer only at the price of 
the national best bid, or sells to its customer at a price that is 
between the national best bid and offer, and
    (ii) in the case of a customer market or marketable limit order to 
sell stock, the broker-dealer buys from its customer only at the price 
of the national best offer, or buys from its customer at a price that 
is between the national best bid and offer.
    The Exchange believes that such requirements would assure that 
investors receive the fairest pricing of their internalized orders, and 
would eliminate broker-dealer conflicts of interest in trading against 
their own customer order flow to capture the spread.
2. Statutory Basis
    The Exchange believes that the basis under the Exchange Act for 
this proposed rule change is the requirement under Section 6(b)(5) \10\ 
that a national securities exchange have rules that are designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest. The rescission of Rule 390 and the Exchange's request that 
the Commission adopt an industry-wide customer price protection rule 
serve to support the perfection of a free and open market and a 
national market system.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. NYSE's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act.

C. NYSE's Statement on Comments on the Proposed Rule Change Received 
from Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Commission's Request for Comment on Market Fragmentation

    As noted in the Introduction, the Commission believes that it will 
be helpful to provide the public with an opportunity to submit their 
views, data, and proposals on market fragmentation. The markets for 
listed equities currently reflect a fairly low degree of fragmentation. 
In September 1999, for example, 74.4% of the trades and 83.9% of the 
share volume in NYSE-listed equities were executed on the NYSE. \11\ 
Similarly, approximately 68.7% of the trades and 70.5% of the share 
volume in Amex-listed securities were executed on the Amex.\12\ Thus, a 
large proportion of the order flow in listed equity securities 
currently is routed to a single market center with rules that provide 
for

[[Page 10580]]

extensive interaction of investor buying and selling interest in a 
security, but only one market maker--the specialist. In 1998, for 
example, specialists acted as either the buyer or seller in 25.3% of 
the share volume executed on the NYSE.\13\ Aside from the primary 
exchanges, trades in listed equities are executed on the regional 
exchanges (14.5% of NYSE-listed trades in September 1999) and by over-
the-counter market makers (11.1% of NYSE-listed trades in September 
1999).\14\ These percentages could change after the rescission of off-
board trading restrictions such as NYSE Rule 390.
---------------------------------------------------------------------------

    \11\ Source: NYSE.
    \12\ Source: Amex.
    \13\ NYSE, 1998 Fact Book 18.
    \14\ Source: NYSE.
---------------------------------------------------------------------------

    In the market for Nasdaq equities, in contrast, trading interest is 
much more divided among different market centers. It is primarily a 
dealer market, in which multiple market makers compete for order flow. 
In September 1999, for example, there was an average of 11.4 market 
makers per Nasdaq issue.\15\ In addition, a number of alternative 
trading systems (``ATSs'') operate electronic limit order books for the 
trading of Nasdaq equities. In September 1999, nine of these ATSs 
collectively accounted for 28.0% of trades in Nasdaq equities.\16\
---------------------------------------------------------------------------

    \15\ NASD, http://www.marketdata.nasdaq.com (visited Dec. 11, 
1999). There was an average of 47.5 market makers in the top 1% of 
issues by daily dollar trading volume, 24.0 market makers in the 
next 9% of issues, and 4.9 market makers in the bottom 10% of 
issues. Id.
    \16\ Id. In calculating the market share of ATSs, the NASD adds 
the orders executed internally on an ATS and the orders routed to an 
ATS for execution. Orders routed out to another market participant 
are not included.
---------------------------------------------------------------------------

    The NYSE's request for rulemaking set forth in Item II.A.1 above 
relates to a specific type of fragmentation--the internalization by 
integrated broker-dealers of their agency market and marketable limit 
orders. The Commission, however, is interested in receiving comments on 
the full spectrum of fragmentation issues. Accordingly, this Item IV 
first provides an overview of the current market structure and a 
discussion of the Commission's regulatory role in overseeing the 
national market system. The public then is requested to evaluate the 
current market structure and comment on six potential options for 
Commission action to address fragmentation.

A. Overview of Current Market Structure

    Section 11A(a) of the Exchange Act sets forth findings and 
objectives that are to guide the Commission in its oversight of the 
national market system. For purposes of evaluating market structure, 
these findings and objectives can be summed up in two fundamental 
principles:
    (1) the interests of investors (both large and small) are 
preeminent, especially the efficient execution of their securities 
transactions at prices established by vigorous competition; \17\ and
---------------------------------------------------------------------------

    \17\ Section 11A(a)(1)(C) of the Exchange Act, for example, 
provides that one of the five principal objectives of the national 
market system is to assure an opportunity for investor orders to be 
executed without the participation of a dealer. This objective is 
conditioned upon two of the other Section 11A(1)(C) objectives of 
assuring the efficient execution of transactions and the execution 
of investor orders in the best market. The order two objectives are 
fair competition among broker-dealers and among market centers and 
the public availability of information concerning quotations and 
transactions.
---------------------------------------------------------------------------

    (2) investor interests are best served by a market structure that, 
to the greatest extent possible, maintains the benefits of both an 
opportunity for interaction of all buying and selling interest in 
individual securities and fair competition among all types of market 
centers seeking to provide a forum for the execution of securities 
transactions.
    Market centers compete to offer innovative services and reduced 
trading costs to attract order flow from other market centers. Market 
center competition may contribute to economically efficient execution 
of securities transactions in other ways as well.\18\ At the same time, 
the existence of multiple market centers competing for order flow in 
the same security may isolate orders and hence reduce the opportunity 
for interaction of all buying and selling interest in that security. 
This may reduce competition on price, which is one of the most 
important benefits of greater interaction of buying and selling 
interest in an individual security. Price competition also may be 
enhanced by competition among market centers when this involves 
multiple dealers competing for order flow based on displayed 
quotations. Consequently, although the objectives of vigorous 
competition on price and fair market center competition may not always 
be entirely congruous, they both serve to further the interests of 
investors and therefore must be reconciled in the structure of the 
national market system.
---------------------------------------------------------------------------

    \18\ Market centers compete to provide, among other things, 
trading services that are fast, cheap, reliable, and as error free 
as possible as one means of attracting order flow.
---------------------------------------------------------------------------

1. Investor Interests and Competition on Price
    The secondary securities markets exist to facilitate the 
transactions of investors. Investors should have confidence that their 
brokers will deal with them fairly and that their orders will be routed 
to market centers where they will be executed efficiently and at prices 
that are set by vigorous competition. In fulfilling their intermediary 
role, organized markets reduce the costs that every investor would 
otherwise incur to find contra-parties to their securities transactions 
and to negotiate a price. Fair and efficient securities markets thereby 
benefit investors by reducing their transaction costs, as well as the 
economy in general by establishing prices for the allocation of capital 
among competing uses.
    Accordingly, one of the principal Exchange Act objectives for the 
national market system is to assure the ``economically efficient 
execution of securities transactions.'' \19\ Investors transaction 
costs can be divided into two categories--explicit costs, which are 
separately disclosed to investors, and implicit costs, which often can 
be greater, though less visible, than explicit costs. Most of the 
explicit transaction costs of investors are paid directly to the 
brokers who provide them with access to the securities markets. A 
broker's commissions will reflect, among other things, the membership 
and market fees that it pays to market centers and others to obtain the 
execution, clearance, and settlement of customer transactions.
---------------------------------------------------------------------------

    \19\ Section 11A(a)(C)(i) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(C)(i).
---------------------------------------------------------------------------

    Implicit costs, in contrast, are reflected in the execution price 
of a transaction and are less visible to investors than explicit costs. 
Implicit costs include, for example, the effective spread between bid 
and asked prices \20\ paid by those investors who submit market orders 
and are willing to pay a premium for immediate liquidity. With market 
orders, investors direct their broker to buy or sell at the best price 
reasonably available in the market at the time the order is submitted. 
In contrast, limit orders--orders to buy or sell a security at a 
specified price or better--enable investors to control the prices at 
which they are willing to trade. For example, use of a limit order can 
assure that investors do not receive an execution at a price that is 
far different

[[Page 10581]]

from what they expected if the market moves rapidly between the time 
the order is placed and the time the order is executed.
---------------------------------------------------------------------------

    \20\ The effective spread for a transaction does not necessarily 
equal the quoted spread. The quoted spread is the difference between 
the best displayed bid and the best displayed offer. The effective 
spread is twice the difference between the transaction price and the 
mid-point of the best displayed bid and the best displayed offer at 
the time of execution. If an investor's transaction is executed at 
the best displayed bid or offer, the effective spread will equal the 
quoted spread. If the transaction is executed at a better price than 
the best displayed bid or offer, the effective spread will be less 
than the quoted spread.
---------------------------------------------------------------------------

    Investors who submit market orders therefore tend to be price-
takers--they demand immediate liquidity and are willing to pay a 
premium to assure that they obtain an execution of their order. That 
premium is the effective spread, and it can constitute a substantial 
transaction cost for investors who submit market orders (as well as 
``marketable'' limit orders).\21\ For example, if the quoted spread in 
a security is \3/16\ths and an investor submits a market order to buy 
500 shares that receives an automatic execution at the displayed 
quotation, the total ``round-trip'' premium for liquidity will be 
$93.75 (assuming a subsequent market order to liquidate the position 
that also is executed at the displayed quotation in a \3/16\ths 
market).\22\
---------------------------------------------------------------------------

    \21\ A ``marketable'' limit order has a limit price that makes 
it immediately executable at the time of entry (for example, a limit 
order to buy at a price that is equal to or higher than the best 
displayed ask price or a limit order to sell at a price that is 
equal to or lower than the best displayed bid price). By submitting 
a marketable limit order, an investor still is willing to accept the 
best price that the other side of the market is offering at the time 
and therefore likely will pay the effective spread as a premium for 
immediate liquidity. Unless expressed otherwise, use of the term 
``market orders'' subsequently in this release also includes 
marketable limit orders.
    \22\ The $93.75 figure in the text is calculated by multiplying 
\3/16\ths by 500 shares to reflect both the initial buy order and 
subsequent sell order to liquidate the position. See notes 55-56 
below and accompanying text for a description of the average quoted 
spreads in NYSE-listed and Nasdaq equities.
---------------------------------------------------------------------------

    Investors need not, however, always be price-takers and accept 
whatever prices the other side of the market is offering at the moment. 
They can participate in price competition by submitting limit orders to 
obtain better prices than the market is offering. These non-marketable 
limit orders can be priced between the quotes, at the quotes, or 
outside the quotes.\23\ A between-the-quotes limit order improves the 
market for a security by offering immediate liquidity at a price that 
reduces the quoted spread. An at-the-quote limit order improves the 
market by adding more size at the best displayed price. For investors, 
the primary benefit of participating in price competition and 
submitting a non-marketable limit order is the opportunity to earn, 
rather than pay, the effective spread. One of the most significant 
risks of a non-marketable limit order is that the market will move away 
and the order will not be executed, thereby causing the submitter of 
the order to lose a potential profit or to incur a loss that would have 
been avoided by submitting a market order that was executed. For 
example, a Commission analysis of NYSE trading found that 90.9% of 
marketable limit orders were filled, 74.0% of between-the-quotes limit 
orders were filled, and 45.5% of at-the-quote limit orders were 
filled.\24\ Despite the risk of submitting a limit order and missing an 
execution, many small investors recognize the advantage of being a 
price-setter rather than a price-taker and use limit orders to effect 
their trades. For example, an analysis of NYSE trading by the 
Commission's Office of Economic Analysis in 1996 found that customer 
limit orders accounted for 50% of customer trades of 100-500 shares and 
66% of customer trades of 600-1000 shares.\25\
---------------------------------------------------------------------------

    \23\ For example, if the national best bid and offer for a 
security is 10 and 10\3/16\, a between-the-quotes limit price could 
be either 10\1/16\ or 10\1/8\, an at-the-quotes limit price would be 
10 for a buy order and 10\3/16\ for a sell order, and an outside-
the-quotes limit price would be less than 10 for a buy order and 
greater than 10\3/16\ for a sell order.
    \24\ SEC, Report on the Practice of Preferencing (April 11, 
1997) (``Preferencing Report''), at Table V-17. The percentage given 
in the text reflect trading on the NYSE in October 1996 when the 
minimum tick size on the NYSE was \1/8\th. Another risk of limit 
order trading is commonly referred to as ``adverse selection''--
limit orders on average are more likely to be executed when the 
market is moving against them. One measure of this cost of limit 
order trading is the difference between the price of an executed 
limit order and the price of the security at some time in the 
future. See id. at 158-159 & Tables V-21, V-22 (for listed equity 
markets, comparing execution price of limit orders to the same-sided 
quote five minutes after the execution took place).
    \25\ Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 
61 FR 48290 (``Order Handling Rules Release''), at n.50. The 
analysis encompassed all NYSE customer trades that originated from 
orders routed through SuperDot, the NYSE's automated order delivery 
system. During 1998, SuperDot processed an average of 770,325 orders 
per day. NYSE, 1998 Fact Book 23. An analysis of SuperDot order flow 
after the initiation of trading in \1/16\th increments in June 1997 
found that limit orders represented 68.2% of total SuperDot orders. 
William J. Atkinson & Peter G. Martin, Office of Economic Analysis, 
SEC, Halving the Minimum Tick Size on the NYSE (April 1999), at 26.
---------------------------------------------------------------------------

    Another type of implicit transaction cost reflected in the price of 
a security is short-term price volatility caused by temporary 
imbalances in trading interest.\26\ For example, a significant implicit 
cost for large investors (who often represent the consolidated 
investments of many individuals) is the price impact that their large 
trades can have on the market. Indeed, disclosure of these large orders 
can reduce the likelihood of their being filled. Consequently, large 
investors often seek ways to interact with order flow and participate 
in price competition without submitting a limit order that would 
display the full extent of their trading interest to the market. Among 
the ways large investors can achieve this objective are: (1) To have 
their orders represented on the floor of an exchange market; (2) to 
submit their orders to a market center that offers a limit order book 
with a reserve size feature; or (3) to use a trading mechanism that 
permits some form of ``hidden'' interest to interact with the other 
side of the market.\27\ A market structure that facilitates maximum 
interaction of trading interest can produce price competition within 
displayed prices by providing a forum for the representation of 
undisclosed orders.
---------------------------------------------------------------------------

    \26\ In theory, short-term price swings that hurt investors on 
one side of the market can benefit investors on the other side of 
the market. In practice, professional traders, who have the time and 
resources to monitor market dynamics closely, are far more likely 
than investors to be on the profitable side of short-term price 
swings (for example, by buying early in a short-term price rise and 
selling early before the price decline).
    \27\ Although they often may negotiate the terms of a block 
transaction directly with a dealer, many large investors also seek 
to take advantage of opportunities to interact with order flow on 
the other side of the market. For example, one analysis of trading 
on the NYSE found that approximately 80% of the total dollar volume 
of block trades in stocks comprising the Dow Jones Industrial 
Average were executed in the intraday downstairs market without 
upstairs facilitation. Ananth Madhavan & Minder Cheng, In Search of 
Liquidity: Block Trades in the Upstairs and Downstairs Markets, 10 
Review of Financial Studies 175, 178 (1997).
---------------------------------------------------------------------------

    Whatever their particular trading strategy, investors that 
participate in price competition by offering immediate liquidity in a 
security are seeking primarily to interact with investor order flow on 
the other side of the market. Assuring an opportunity for this type of 
direct interaction between investors without the intervention of a 
dealer is one of the principal objectives of the national market 
system.\28\ Thus, an evaluation of the efficiency of the securities 
markets from the standpoint of investor interests must encompass not 
only the size of the effective spread paid by market order investors, 
but also the opportunity for other investors to earn, rather than pay, 
the effective spread by providing, rather than seeking, immediate 
liquidity. Moreover, a market structure that provides a full and fair 
opportunity for interaction of

[[Page 10582]]

investor trading interest may, by enhancing price competition, reduce 
the transaction costs of investors who submit market orders.\29\
---------------------------------------------------------------------------

    \28\ Section 11A(a)(1)(C)(v) of the Exchange Act provides that 
the national market system should assure an opportunity for 
investors' orders to be executed without the participation of a 
dealer. This objective is explicitly conditioned on its being 
consistent with the national market system objectives of efficiency 
and best execution of investor orders. It is not conditioned on 
consistency with the objective of fair competition among different 
types of market centers. Thus, dealer participation in securities 
transactions is warranted only to the extent that it leads to more 
efficient execution of securities transactions or the best execution 
of investor orders.
    \29\ See notes 51-53 below and accompanying text (Commission's 
adoption of an Exchange Act rule requiring the display of limit 
orders, by enhancing price competition, led to a narrowing of quoted 
and effective spreads in the trading of Nasdaq equities).
---------------------------------------------------------------------------

    Dealers also may contribute to price competition by displaying firm 
quotations that improve the market for a security. Indeed, one of the 
most significant benefits of providing an opportunity for multiple 
dealers to participate in the national market system (often through 
competing market centers) is provided by their willingness to step in 
and supply liquidity at prices that will absorb temporary imbalances in 
the trading interest of investors.\30\ Dealers that contribute to price 
competition in this way can help dampen short-term price volatility and 
thereby reduce transaction costs for investors.
---------------------------------------------------------------------------

    \30\ See e.g., S. Rep. No. 94-75, 94th Cong., 1st Sess. 14 
(1975) (``One of the fundamental purposes underlying the national 
market system contemplated by S. 249 is to enhance the competitive 
structure of the securities markets in order to foster the risk-
taking function of market makers and thereby to provide free market 
incentives to active participation in the flow of orders.'').
---------------------------------------------------------------------------

2. Market Center Competition, Internalization, and Payment for Order 
Flow
    Assuring fair competition among market centers is another of the 
principal objectives for the national market system.\31\ Market centers 
(including exchange markets, over-the-counter market makers, and 
alternative trading systems) compete to provide a forum for the 
execution of securities transactions, particularly by attracting order 
flow from brokers seeking execution of their customers' orders. One of 
the results of this competition among market centers, however, can be 
fragmentation of the buying and selling interest for individual 
securities.
---------------------------------------------------------------------------

    \31\ Section 11A(a)(1)(C)(ii) of the Exchange Act provides that 
the national market system should assure ``fair competition among 
brokers and dealers, among exchange markets, and between exchange 
markets and markets other than exchange markets.''
---------------------------------------------------------------------------

    In concept, market centers can be divided into two categories--
agency and dealer. An agency market center provides a mechanism for 
bringing buyers and sellers together (such as by matching investor 
market orders to buy with investor limit orders to sell) and charges 
fees for its services. A dealer market center, in contrast, executes 
trades as principal against incoming orders and receives its 
compensation primarily in the form of trading profits. In practice, 
most market centers include agency and dealer elements. \32\ For 
example, the NYSE is primarily an agency market, but incorporates a 
single market maker for each security--the specialist--that has direct 
access to order flow, subject to affirmative and negative market-making 
obligations. Although over-the-counter market makers are not required 
to accept limit orders,\33\ many in fact do accept such orders and may 
match them with market orders, thereby acting as an agent.\34\ The 
extent and nature of investor buying and selling interest in a 
particular security ultimately may determine whether transactions in 
that security are executed by market centers primarily as agents or as 
dealers. For example, dealer transactions may predominate in securities 
for which there is limited investor trading interest or that attract 
few limit orders for any reason. Conversely, agency transactions may 
predominate in actively-traded securities for which investor limit 
orders effectively establish the market.
---------------------------------------------------------------------------

    \32\ Some alternative trading systems restrict their activities 
to operating a limit order book without privileged dealer 
participation.
    \33\ See e.g., Securities Exchange Act Release No. 35751 (May 
22, 1995), 60 FR 27997 (``Manning II''), at n.19 and accompanying 
text. Although over-the-counter market makers are not required to 
accept limit orders, they also are not permitted to refuse to accept 
certain limit orders in a manner that unfairly discriminates among 
customers.
    \34\ See Order Handling Rules Release, note 25 above, at n.365 
and accompanying text (market maker that holds a customer limit 
order on one side of the market, priced better than the market 
maker's own quote, and a customer market order on the other side of 
the market cannot execute both orders as principal, rather than 
crossing the two orders, and thereby deprive the market order 
customer of the better price).
---------------------------------------------------------------------------

    In a market system with many competing market centers, brokers play 
a critical role in deciding where to route their customer orders. 
Market centers offering trading services compete to attract order flow 
from brokers, who generally have discretion to choose the market center 
because non-institutional customers rarely direct where their orders 
are to be executed.\35\ As a result, broker order-routing practices can 
decisively affect the terms of the competition among market centers.
---------------------------------------------------------------------------

    \35\ Individual customers that trade very frequently, such as 
day-traders, often do choose the market center to which they want 
their orders routed.
---------------------------------------------------------------------------

    The competition among market centers can take many forms, such as 
offering fast and reliable executions, low transaction fees, and 
innovative trading services. In addition, a market center may offer 
direct or indirect economic inducements to brokers in return for the 
broker agreeing to route all or part of its order flow to the market 
center. These inducements have taken many forms, but can be divided 
into two major categories--internalization and payment for order flow. 
Internalization is the routing of order flow by a broker to a market 
maker that is an affiliate of the broker. An integrated broker-dealer, 
for example, internalizes orders by routing them to the firm's market-
making desk for execution. In this context, the economic inducement for 
routing order flow is inherent in the common ownership of the broker 
and market maker.
    The other category of economic inducement for a broker to route 
order flow to a particular market center is payment for order flow. 
This is essentially a catch-all category that encompasses many 
different direct and indirect economic inducements. For example, a 
market maker may pay brokers an agreed upon amount per share or enter 
into explicit profit-sharing arrangements with brokers. Payment for 
order flow is defined in Exchange Act Rule 10b-10(d)(9) \36\ as 
follows:
---------------------------------------------------------------------------

    \36\ 17 CFR 240.10b-10(d)(9).

any monetary payment, service, property, or other benefit that 
results in remuneration, compensation, or consideration to a broker 
or dealer from any broker or dealer, national securities exchange, 
registered securities association, or exchange member in return for 
the routing of customer orders by such broker or dealer . . . 
including but not limited to: research, clearance, custody, products 
or services; reciprocal agreements for the provision of order flow; 
adjustment of a broker or dealer's unfavorable trading errors; 
offers to participate as underwriter in public offerings; stock 
loans or shared interest accrued thereon; discounts, rebates, or any 
other reductions of or credits against any fee to, or expense or 
other financial obligation of, the broker or dealer routing a 
customer order that exceeds that fee, expense, or financial 
---------------------------------------------------------------------------
obligation.

    From a broker's perspective, one of the primary motivations for 
internalization and payment for order flow arrangements is the 
opportunity to share in the profits that can be earned by a market 
maker trading as principal against a substantial flow of market orders. 
Under internalization and payment for order flow arrangements, such 
orders are routed to a particular market maker that will have an 
opportunity to execute the orders as principal without facing 
significant competition from investors or other dealers to interact 
with the directed order flow. Moreover, the linkages among market 
centers that are currently in place do not require that market orders 
be routed to the market center that is displaying the best prices, even

[[Page 10583]]

if that price represents an investor limit order.\37\ As a result, a 
market maker with access to directed order flow often may merely match 
the displayed prices of other market centers and leave the displayed 
trading interest unsatisfied.\38\ The profits that can be earned by a 
market maker trading at favorable prices with directed order flow can 
then be shared with the brokers that routed the orders.\39\
---------------------------------------------------------------------------

    \37\ Intermarket linkages (that is, linkages among multiple 
market centers trading the same security) are discussed in Item 
IV.A.3.b below.
    \38\ Some dealers offer formulas that provide executions inside 
the best displayed prices for certain types of orders.
    \39\ A practice that is somewhat similar to internalization and 
payment for order flow in the OTC market is preferencing on an 
exchange market. In 1997, the Commission issued a report on the 
practice of preferencing in listed equities at the Boston Stock 
Exchange and the Cincinnati Stock Exchange. See Preferencing Report, 
note 24 above. If found that the practice, subject to the regulatory 
protections adopted by the exchanges, had not diminished the quality 
of executions that could be obtained at the exchanges, but noted 
that its findings should not be taken to mean that adverse effects 
could not arise in the future. In particular, the Commission stated 
that preferencing programs would require reconsideration if `a 
significant increase in the amount of preferencing activity as a 
percentage of overall national market system activity'' resulted in 
the decline in execution quality on the national market system. Id. 
at 172. The number of preferenced trades in the study represented a 
small percentage of the total trades in the listed market. Id. at 
Table V-1. The rescission of NYSE Rule 390 raises the potential for 
a significant increase in the percentage of order flow in the listed 
markets that is subject to arrangements similar to preferencing.
---------------------------------------------------------------------------

3. Current Market Structure Components that Address Fragmentation
    To address the potentially adverse effects of fragmented buying and 
selling interest in individual securities, the national market system 
for listed equities and Nasdaq equities \40\ currently incorporates 
three components: (1) Price transparency; (2) intermarket linkages to 
displayed prices; and (3) the duty of best execution owed by brokers to 
their customers.
---------------------------------------------------------------------------

    \40\ The options markets are not included in this discussion 
because substantial multiple trading of options has only recently 
begun, and they have not yet established intermarket linkages 
between market centers. In addition, the options markets have not 
been subject to a variety of national market system rules. The 
Commission, however, has ordered the options markets to develop a 
linkage plan for multiply-traded options. Securities Exchange Act 
Release No. 42029 (Oct. 19, 1999), 64 FR 57674.
---------------------------------------------------------------------------

    a. Price Transparency. Price transparency is a minimum essential 
component of a unified national market system. All significant market 
centers are required to make available to the public their best prices 
and the size associated with the prices.\41\ This information includes 
not only the best quotations of market makers, but also the price and 
size of customer limit orders that improve a market center's 
quotations.\42\ The market centers provide quote and trade information 
through central processors that are responsible for collecting and 
disseminating the market information for different types of securities. 
The processors consolidate the information of individual market 
centers, determine the national best bid and best offer for each 
security (``NBBO''), and disseminate the information to broker-dealers 
and information vendors. Thus, the best displayed prices for a 
particular security are made available to the public, thereby helping 
to assure that investors are aware of such prices no matter where they 
arise in the national market system.
---------------------------------------------------------------------------

    \41\ See, e.g., Exchange Act Rule 11Ac1-1, 17 CFR 240.11Ac1-1; 
Exchange Act Rule 11Ac1-4, 17 CFR 240.11Ac1-4; NASD Rule 4613; NYSE 
Rule 60.
    \42\ Customers can request that their orders not be displayed. 
Exchange Act Rule 11ac1-4(c)(2).
---------------------------------------------------------------------------

    b. Intermarket Linkages to Displayed Prices. Another component of 
the national market system designed to address fragmentation is the 
establishment of systems that link the various market centers trading a 
security and provide access to the market center with the best 
displayed prices. The market centers that trade listed equities 
currently are linked through the Intermarket Trading System (``ITS''), 
which is linked to the NASD's Computer Assisted Execution System 
(``CAES''). The ITS linkage handles a relatively small proportion of 
trading in listed equities. In September 1999, for example, ITS volume 
represented 2.2% of total NYSE-listed trades.\43\ The ITS linkage has 
weaknesses that must be addressed, including restricted ECN access and 
slow and inefficient execution procedures. The specific features needed 
in an intermarket linkage system may depend to a significant extent on 
whether the Commission adopts one or more of the intermarket trading 
rules discussed in Item IV.C.2 below. The Commission intends to address 
issues concerning the ITS linkage in tandem with its consideration of 
whether action is needed to address market fragmentation.
---------------------------------------------------------------------------

    \43\ Source: NYSE.
---------------------------------------------------------------------------

    The market centers that trade Nasdaq equities currently are linked 
by the NASD's SelectNet system, by telephone, and through private 
links. In September 1999, approximately 30% of trades in Nasdaq 
equities were routed through SelectNet.\44\ The Commission recently 
approved a proposed rule change by the NASD to establish a revised 
order delivery and execution system for Nasdaq National Market 
securities--the Nasdaq National Market Execution System. The system 
will provide, among other things, automatic execution for customer and 
market maker orders up to 9900 shares.\45\
---------------------------------------------------------------------------

    \44\ NASD, http://www.marketdata.nasdaq.com> (visited Dec. 11, 
1999).
    \45\ Securities Exchange Act Release No. 42344 (Jan. 18, 2000), 
65 FR 3987.
---------------------------------------------------------------------------

    As the intermarket linkage systems are currently constituted, they 
provide access to the best displayed prices, but a market center is not 
required to route its incoming market orders to a market center that is 
displaying the best prices. Instead, the market center to which an 
order is initially routed is permitted to match the best price and 
execute the order internally. Indeed, the executing market center need 
not ever have displayed the best price.
    Thus, the current market structure allows price-matching rather 
than requiring that orders be routed to the market center that is 
displaying the best price, thereby isolating the orders of different 
market centers. Moreover, there is no intermarket time priority--the 
market center that was first to display the best price will not 
necessarily receive any order flow. Thus, the market participant 
(whether investor or dealer) who publicly displays an order or 
quotation at a better price than anyone else is offering is not 
entitled to any assurance that the order or quotation will interact 
with the next trading interest on the other side of the market. In Item 
IV.C.2.e below, comment is requested on whether the first trading 
interest to improve the NBBO should be entitled to intermarket time 
priority.
    In addition, the current market structure does not provide 
intermarket priority for investor limit orders over market makers' 
trading against customer order flow. Instead, market makers are 
permitted to trade ahead of investor limit orders held by another 
market center (that is, execute trades as principal at the limit order 
price without satisfying the limit order itself). Moreover, market 
makers are permitted to trade ahead of an investor limit order held by 
another market center even if the limit order was displayed prior to 
any market maker's quotation at the price. From the standpoint of the 
investor who submitted the limit order, the risk of not obtaining an 
execution (the most significant risk of limit order trading) is 
increased when the investor's

[[Page 10584]]

limit order is isolated and denied an opportunity to interact with 
investor orders that are executed by a market maker as principal. In 
contrast, on an intra-market basis, market makers generally are not 
permitted to execute a trade as principal while holding a customer 
limit order at the execution price.\46\ Further, in exchange markets 
(for example, the NYSE), the specialist usually is unable to trade 
ahead of any public order at the same price. In Item IV.C.2.d below, 
comment is requested on whether market makers should be prohibited from 
trading ahead of previously displayed and accessible investor limit 
orders, no matter where such orders are held in the national market 
system.
---------------------------------------------------------------------------

    \46\ See, e.g., NYSE Rule 92(b) (prohibiting members from 
trading ahead of customer limit orders held by the member); Manning 
II, note 33 above (prohibiting market makers from trading ahead of 
their customer limit orders in Nasdaq securities); NASD Rule 
6440(f)(2) (prohibiting members from trading ahead of their customer 
limit orders in listed equity securities traded in the over-the-
counter market).
---------------------------------------------------------------------------

    c. Broker's Duty of Best Execution. In accepting orders and routing 
them to a market center for execution, brokers act as agents for their 
customers and owe them a duty of best execution. The duty is derived 
from common law agency principles and fiduciary obligations. It is 
incorporated both in self-regulatory organization rules and, through 
judicial and Commission decisions, in the antifraud provisions of the 
federal securities laws. The duty requires a broker to seek the most 
favorable terms reasonably available under the circumstances for a 
customer's transaction.\47\
---------------------------------------------------------------------------

    \47\ See Order Handling Rules Release, note 25 above, section 
III.C.2.
---------------------------------------------------------------------------

    A broker's duty of best execution applies to both customer market 
orders and customer limit orders. In the past, much of the focus of 
best execution concerns has been directed to brokers' handling of 
market orders, for which obtaining the best price is the single most 
significant factor. Although the Commission has stated that a broker 
does not necessarily violate its duty of best execution by 
internalizing its agency orders or receiving payment for order 
flow,\48\ the duty also is not necessarily satisfied by routing orders 
to a market center that merely guarantees an execution at the NBBO (as 
is often done by market centers that internalize or offer payment for 
order flow). Some market centers offer the potential for ``price 
improvement'' to market orders--an execution at a price more favorable 
than the NBBO. On the NYSE, for example, brokers on the floor may hold 
undisplayed orders (such as a large order from an institutional 
investor that likely would move the market if displayed). The NYSE's 
floor provides an opportunity for this undisplayed trading interest to 
interact with incoming orders and can lead to executions at prices 
better than those displayed in the NYSE's quotes. In addition, some 
over-the-counter market makers offer an opportunity for price 
improvement for market orders. A broker must take these price 
improvement opportunities into consideration in deciding where to route 
its customers' orders.\49\
---------------------------------------------------------------------------

    \48\ See id. at n.360 and accompanying text.
    \49\ See id. at nn.356-357 and accompanying text.
---------------------------------------------------------------------------

    Price is not the sole factor that brokers can consider in 
fulfilling their duty of best execution with respect to customer market 
orders. The Commission has stated that a broker also may consider 
factors such as: (1) The trading characteristics of the security 
involved; (2) the availability of accurate information affecting 
choices as to the most favorable market center for execution and the 
availability of technological aids to process such information; and (3) 
the cost and difficulty associated with achieving an execution in a 
particular market center. \50\
---------------------------------------------------------------------------

    \50\ See Preferencing Report, note 24 above, at 89 n.207.
---------------------------------------------------------------------------

    With respect to customer limit orders, brokers also may assess the 
foregoing non-price factors in fulfilling their duty of best execution. 
A critical factor for non-marketable limit orders, however, is that 
they be routed to the market center that provides the greatest 
likelihood of execution. The importance of this factor is a corollary 
to the greatest risk of using limit orders as compared with market 
orders--that they will not be executed and will miss the market. 
Determining the market center that provides the greatest likelihood of 
execution is not, however, a straightforward matter. It will depend on 
a variety of factors, including the depth of the limit order books in 
the various market centers (or the number of limit orders already held 
by a market maker) and the flow of incoming orders that will satisfy 
the existing limit orders with time priority. Moreover, a broker may 
not have access to information concerning these factors that is 
sufficient to make a reasoned decision. Thus, obtaining best execution 
of customer limit orders under the current market structure can be a 
difficult task for brokers.

B. Commission's Regulatory Role in Overseeing the National Market 
System

    Section 11A of the Exchange Act charges the Commission with 
maintaining and strengthening a national market system for securities. 
In fulfilling this responsibility, the Commission has not attempted to 
dictate the ultimate structure of the securities markets. Instead, it 
has sought to establish, monitor, and strengthen a framework that gives 
the forces of competition sufficient room to flourish and that allows 
the markets to develop according to their own genius. The Commission 
remains committed to allowing the forces of competition to shape market 
structure in the first instance.
    In implementing this strategy, the Commission has acted when 
necessary to address practices that inhibit or distort competition and 
stand in the way of the development of fairer and more efficient 
trading mechanisms. For example, in 1996, after an extensive 
investigation of the over-the-counter market, the Commission adopted 
rules that included a requirement for the display of customer limit 
orders that improve the market for a security (``Order Handling 
Rules'').\51\ Some believed that the Order Handling Rules would weaken 
competition between different types of market centers. The Commission, 
however, determined that the rules, by providing greater price 
transparency and enhancing public price discovery, would both foster 
quote competition among market makers and introduce new price 
competition from customer limit orders.\52\ This determination has been 
confirmed by the narrowing of quoted spreads and reduction in 
transaction costs in the Nasdaq market after implementation of the 
Order Handling Rules. For example, one study of the implementation 
noted that ``[o]ur results confirm that many of the objectives of the 
SEC have been met. We find that quoted and effective spreads narrow by 
approximately 30 percent, with the largest benefit accruing to 
investors in stocks with relatively wide spreads prior to the 
implementation of the new SEC rules.'' \53\
---------------------------------------------------------------------------

    \51\ Order Handling Rules Release, note 25 above.
    \52\ Id. at nn.48-64, 75-89 and accompanying text.
    \53\ Michael J. Barclay et al., Effects of Market Reform on the 
Trading Costs and Depths of Nasdaq Stocks, 54 J. Finance 1, 3, 16 
(Feb. 1999) (``We find that effective spreads decline across all 
trade sizes, but the decline is particularly dramatic for smaller 
trades.''); see also Hendrik Bessembinder, Trade Execution Costs on 
NASDAQ and NYSE: A Post-Reform Comparison, 34 J. Finance & 
Quantitative Analysis 387, 400 (Sept. 1999) (``The different results 
observed here for 1997 as compared to the 1994 estimates [of average 
realized spreads] suggest that the new SEC order-handling rules have 
benefited small NASDAQ traders the most.''); Jeffrey W. Smith, The 
Effects of Order Handling Rules and 16ths on Nasdaq: a Cross-
Sectional Analysis, NASD Working Paper 98-02 (Oct. 29, 1998), at 17 
(``The OHR [Order Handling Rules] and 16ths had a major spread-
reducing effect on Nasdaq stocks * * * For most stocks, the OHR had 
a much larger role in reducing spreads than did 16ths, accounting 
for roughly 85% of the reduction.'') (available at http://www.academic.nasdaq.com>); cf. Justin Schack, Cost Containment, 
Institutional Investor, Nov. 1999, at 43 (study of the trading costs 
of 150 large institutions found that ``the average cost of executing 
a trade on the Nasdaq Stock Market fell by 23 percent in 1998, to 
29.9 basis points from 39 basis points, the third straight year of 
decline'').

---------------------------------------------------------------------------

[[Page 10585]]

    Because the securities markets are subject to an existing 
regulatory scheme that shapes the competition among market centers and 
among brokers, it is the Commission's task continually to monitor 
market conditions and competitive forces and to evaluate whether the 
structure of the national market system as it evolves is achieving its 
Exchange Act objectives. To achieve these objectives at times requires 
cooperation between market centers, or the establishment of market-wide 
standards that benefit the overall market, rather than particular 
market participants. In these cases, leaving market structure 
developments to the action of individual market centers, without 
consideration of the needs of the broader market, could result in a 
market structure that is deficient for investors and capital formation.
    Congress directed the Commission, with the benefit of the public's 
comments and careful deliberation, to remove barriers to competition 
and to provide investors with the fairest and most efficient markets 
possible. As noted in the Introduction, the Commission is concerned 
that the fragmentation of trading interest among competing market 
centers not inappropriately isolate orders, interfering with vigorous 
price competition, public price discovery, the best execution of 
investor orders, and market liquidity. After reviewing the comments 
submitted in response to this release, the Commission will consider 
whether it is necessary to take regulatory action to address market 
fragmentation.\54\
---------------------------------------------------------------------------

    \54\ The Exchange Act grants the Commission ample authority to 
address market fragmentation. Section's 6, 15A, and 19 provide 
substantial authority to assure that the rules of the self-
regulatory organizations further the national market system. Section 
11A(a)(3) authorizes the Commission to require the self-regulatory 
organizations to act jointly in establishing the national market 
system. In addition, Section 11A(c)(1)(E) grants the Commission 
rulemaking authority to assure that brokers route their customer 
orders in a manner consistent with the establishment and operation 
of a national market system. Finally, Section 15(c)(5) grants the 
Commission rulemaking authority to establish standards for over-the-
counter market makers that are necessary or appropriate to remove 
impediments to, and to perfect the mechanism of, a national market 
system.
---------------------------------------------------------------------------

C. Requests for Comment

    The Commission requests the views and data of commenters in general 
on whether fragmentation is now, or may become in the future, a problem 
that significantly detracts from the fairness and efficiency of the 
U.S. markets and, if so, on specific proposals to address the problem. 
To assist commenters, this Item IV identifies and requests comment on a 
variety of issues relating to market fragmentation that have been the 
subject of debate in recent months, as well as six potential options 
for addressing fragmentation.
    The Commission wishes to emphasize that it is concerned with the 
entire range of securities in the markets, not just the very top tier 
of actively-traded issues. Accordingly, commenters should consider the 
applicability of their views and proposals in terms of the most 
actively-traded issues (for example, the top 200 equity issues), the 
middle tiers, and the bottom tiers that are much less actively traded. 
Although equity issues in the top tier generally have quoted spreads of 
\1/16\th, these spreads are substantially narrower than the quoted 
spreads of the majority of issues. For example, the average NYSE 
volume-weighted quoted spread for all 3114 of its listed companies in 
1998 was $0.15.\55\ Similarly, although the average volume-weighted 
quoted spread for the top 1% of Nasdaq equities by market 
capitalization was less than $0.10 in September 1999, the average 
quoted spread for the next 19% of issues was greater than $0.20, and 
the average relative spread (quoted spread as a percentage of stock 
price) for the next 80% of Nasdaq issues ranged from approximately 1% 
to 8%. \56\ In this regard, the Commission does not believe that its 
task is to ascertain whether the current quoted or effective spreads 
reflect an ``optimum'' or ``ideal'' level of efficiency. Rather, the 
relevant question is much more pragmatic -- whether the efficiency of 
the markets for all or any particular category of securities could be 
substantially improved through market structure changes. Ultimately, 
only fair and vigorous competition can be relied upon to set efficient 
prices.
---------------------------------------------------------------------------

    \55\ NYSE, 1998 Fact Book 20. It should be noted that, because 
of price improvement opportunities, the average effective NYSE 
spread will be less than the average quoted spread. See note 20 
above for a definition of the effective spread.
    \56\ NASD, http://www.marketdata.nasdaq.com) (visited Dec. 11, 
1999>.
---------------------------------------------------------------------------

    Finally, commenters should be aware that decimal pricing of 
securities will be introduced to the markets in the coming months and a 
reduced quoting increment could significantly change current market 
dynamics. For example, quoting in penny increments could lead to a 
narrowing of quoted and effective spreads which could, in turn, make 
internalization and payment for order flow less attractive to market 
makers. It also could increase the ability of professionals with ready 
access to the markets to step ahead of publicly displayed trading 
interest merely by improving prices by a very small amount, which could 
discourage investor use of public limit orders. Commenters should 
consider the extent to which their comments will be affected by the 
initiation of decimal pricing.
1. Effect of Fragmentation on the Markets
    a. Fragmentation in General. To what extent is fragmentation of the 
buying and selling interest in individual securities among multiple 
market centers a problem in today's markets? For example, has 
fragmentation isolated orders, hampering quote competition, reducing 
liquidity, or increasing short-term volatility? Has fragmentation 
reduced the capacity of the markets to weather a major market break in 
a fair and orderly fashion?
    Is fragmentation in the listed equity markets likely to increase 
with the elimination of off-board trading restrictions, such as NYSE 
Rule 390?
    In the existing over-the-counter market, what are the incentives 
for investors and dealers to quote aggressively?
    If fragmentation is a problem, are competitive forces, combined 
with the existing components of market structure that help address 
fragmentation (price transparency, intermarket linkages to displayed 
prices, and a broker's duty of best execution), adequate to address the 
problem?
    Will the greater potential provided by advancing technology for the 
development of broker order-by-order routing systems, or for informed 
investors to route their own orders to specific market centers, address 
fragmentation problems without the need for Commission action?
    b. Internalization and Payment for Order Flow. What proportion of 
order flow currently is subject to internalization and payment for 
order flow arrangements in the listed equity and Nasdaq equity markets? 
Will the proportion increase in the listed equity

[[Page 10586]]

markets as a result of the elimination of off-board trading 
restrictions?
    Is it possible for a non-dominant market center to compete 
successfully for order flow by price competition, without using 
internalization and payment for order flow arrangements? If not, is the 
inability to obtain access to order flow through price competition a 
substantial reason for the existence of internalization and payment for 
order flow arrangements?
    To what extent can brokers compete as effectively for retail 
business based on execution quality (or implicit transaction costs), as 
opposed to commissions (or explicit transaction costs) and other 
services?
    Do investor market orders that are routed pursuant to 
internalization and payment for order flow arrangements receive as 
favorable executions as orders not subject to such arrangements? Even 
if these orders subject to internalization and payment for order flow 
arrangements receive comparable executions, does the existence of such 
arrangements reduce the efficiency of the market as a whole (by, for 
example, hampering price competition) so that its market orders receive 
less favorable executions than they otherwise would if there were no 
internalization or payment for order flow?
    Even if internalization and payment for order flow arrangements 
increase the fragmentation of the markets, are any negative effects of 
increased fragmentation outweighed by benefits provided to investors, 
such as speed, certainty, and cost of execution?
    c. Best Execution of Investor Limit Orders. Does increased 
fragmentation of trading interest reduce the opportunity for best 
execution of investor limit orders? Are brokers able to make effective 
judgments concerning where to route limit orders so as to obtain the 
highest probability of an execution?
    Does the opportunity for brokers to share in market maker profits 
through internalization or payment for order flow arrangements create 
an economic incentive to divide the flow of investor limit orders from 
investor market orders among different market centers? If so, does this 
adversely affect the opportunity for investor limit orders to be 
executed fairly and efficiently?
    Is it consistent with national market system objectives (such as 
efficiency, best execution of investor orders, and an opportunity for 
investor orders to meet without the participation of a dealer) for 
market makers to trade ahead of previously displayed investor limit 
orders held by another market center (that is, trade as principal at 
the same price as the limit order price)? Does this practice 
significantly reduce the likelihood of an execution for limit orders by 
reducing their opportunity to interact with the flow of orders on the 
other side of the market? Does the practice offer any benefits that 
outweigh whatever adverse effects it might have on limit order 
investors?
2. Possible Options for Addressing Fragmentation
    If action to address fragmentation is determined to be necessary or 
appropriate to further the objectives of the Exchange Act, a variety of 
approaches could be considered. Six options are briefly described 
below, followed by requests for comment that relate specifically to 
each one. The options could apply either individually or in some 
combination with one another. If commenters believe fragmentation 
should be addressed, they also are encouraged to submit any additional 
options for addressing fragmentation that they consider feasible.
    a. Require Greater Disclosure by Market Centers and Brokers 
Concerning Trade Executions and Order Routing. The Commission could 
require greater disclosure by market centers and brokers concerning 
their trade executions and order routing. Such disclosures could enable 
investors to make more informed judgments concerning the quality of 
executions provided by their brokers, as well as enable brokers and the 
general public to make more informed judgments concerning the quality 
of trade executions at all market centers.
    For example, all market centers could be required to provide 
uniform, publicly available disclosures to the Commission concerning 
all aspects of their trading and their arrangements for obtaining order 
flow. These disclosures could include the nature of their order flow 
(for example, the ratio of limit orders to market orders), their 
effective spreads for market orders for different types of securities 
(for example, securities that have different levels of trading), their 
percentage of market orders that receive price improvement, their speed 
in publicly displaying limit orders, their fill rates for different 
types of limit orders (for example, those with between-the-quotes and 
at-the-quotes limit prices), and their average time-to-fill for 
different types of limit orders. In addition, market centers could be 
required to make available comprehensive databases of raw market 
information that will allow independent analysis and interpretation by 
brokers, academics, the press, and other interested parties.
    Brokers, in turn, could be required to provide disclosures to their 
customers (and to the Commission for public availability) concerning 
the proportion and types of orders that are routed to different market 
centers, their arrangements with market centers for routing customer 
orders, and the results they have obtained through these arrangements.
    What would be the advisability and practicality of this option? 
Would it effectively address the problems presented by market 
fragmentation?
    Is there an effective and practical way to provide clear and useful 
disclosure to retail customers concerning execution quality? If not, 
does the difficulty of providing such disclosure preclude brokers from 
competing effectively on the basis of execution quality?
    b. Restrict Internalization and Payment for Order Flow. The 
Commission could restrict internalization and payment for order flow 
arrangements by reducing the extent to which market makers trade 
against customer order flow by matching other market center prices. 
Market makers would thereby be less assured of the profits that can be 
earned by trading against directed order flow and that are used to fund 
the economic inducements offered to brokers for their customers' order 
flow. For example, the NYSE has requested that the Commission take this 
type of action to address internalization.\57\ Under the NYSE proposal, 
broker-dealers would be limited in the extent to which they could trade 
as principal with their customers' market and marketable limit orders. 
A broker-dealer could buy from or sell to its customer only at a price 
that was better than the NBBO for the particular security. This type of 
prohibition could be extended to all market centers that receive orders 
pursuant to a payment for order flow arrangement, in addition to 
internalizing broker-dealers.
---------------------------------------------------------------------------

    \57\ See Item 11.A.1 above for a fuller description of the NYSE 
proposal.
---------------------------------------------------------------------------

    What would be the advisability and practicality of this option? 
Would it effectively address the problems presented by market 
fragmentation?
    Would restricting internalization and payment for order flow 
arrangements unduly interfere with competition among market centers to 
provide trading services based on factors other than price, such as 
speed, reliability, and cost of execution?
    c. Require Exposure of Market Orders to Price Competition. As a 
means to enhance the interaction of trading interest, the Commission 
could require

[[Page 10587]]

that all market centers expose their market and marketable limit orders 
in an acceptable way to price competition. As one example of acceptable 
exposure, an order could be exposed in a system that provided price 
improvement to a specified percentage of similar orders over a 
specified period of time. As another example of acceptable exposure, a 
market maker, before executing an order as principal in a security 
whose quoted spread is greater than one minimum variation, could 
publish for a specified length of time a bid or offer that is one 
minimum variation better than the NBBO. The Commission proposed such a 
rule for public comment in 1995 at the time it proposed the Order 
Handling Rules.\58\ Although it believed that an opportunity for price 
improvement could contribute to providing customer orders with enhanced 
executions, the Commission chose not to adopt the proposed rule at the 
time it adopted the Order Handling Rules. Instead, it stated that it 
was deferring action to provide an opportunity to assess the effects 
that the Order Handling Rules would have on the markets.\59\
---------------------------------------------------------------------------

    \58\ Securities Exchange Act Release No. 36310 (Oct. 6, 1995), 
60 FR 52792 (proposed Rule 11Ac1-5--Price improvement for customer 
market orders).
    \59\ Order Handling Rules Release, note 25 above, section 
III.C.1
---------------------------------------------------------------------------

    What would be the advisability and practicality of this option? 
Would it effectively address the problems presented by market 
fragmentation?
    Are there effective means of representing undisclosed orders in 
markets in which trading interest is divided among many different 
market centers? Would exposure of market orders through the quote 
mechanism provide a viable means of allowing the holders of undisclosed 
orders (particularly large orders) to interact with market orders? What 
other means to facilitate the interaction of undisclosed and disclosed 
orders is feasible and practical?
    Would requiring the exposure of market orders to price competition 
unwarrantedly delay the execution of those orders? If so, should order 
exposure be offered as a choice to customers?
    How would implementation of this option affect the opportunity for 
execution of displayed trading interest at the NBBO?
    d. Adopt an Intermarket Prohibition Against Market Makers Trading 
Ahead of Previously Displayed and Accessible Investor Limit Orders. The 
Commission also could establish intermarket trading priorities as a 
means to address fragmentation. One option would be to adopt an 
intermarket prohibition against market makers (including exchange 
specialists) using their access to directed order flow to trade ahead 
of investor limit orders that were previously displayed by any market 
center and accessible through automatic execution by other market 
centers. Under this option, each market center would be responsible for 
providing notice to other market centers of the price, size, and time 
of its investor limit orders that were entitled to priority, as well as 
participate in a linkage system that allowed automatic execution 
against the displayed trading interest.\60\ To execute a trade as 
principal against customer order flow, market makers would be required 
to satisfy, or seek to satisfy, investor limit orders previously 
displayed and accessible at that price (or a better price) in all 
market centers.\61\
---------------------------------------------------------------------------

    \60\ Comment is requested on whether intermarket priority should 
be extended to the ``reserve size'' orders used by some market 
centers to facilitate the trading of large investors.
    \61\ For purposes of this option, an ``investor'' limit order 
could be defined as all limit orders other than those placed for the 
benefit of a broker-dealer. If necessary or appropriate to maintain 
a fair and orderly market, the definition also could exclude limit 
orders placed for the benefit of professional traders (for example, 
any trader who repeatedly buys and sells a security within a short 
time-frame).
---------------------------------------------------------------------------

    To reward market makers willing to add liquidity to the markets 
through aggressive quote competition (as well as participate in public 
price discovery), a market maker could be allowed to trade with 
customers at its quote ahead of a subsequently displayed investor limit 
orders under certain circumstances. For example, a market maker could 
trade as principal against a customer order if, at the time it received 
a customer order, its quote was at the NBBO; its quote was widely 
displayed and accessible through automatic execution at a size at least 
equal to the customer order; and the market maker satisfied, or sought 
to satisfy, all investor limit orders that were displayed prior to the 
market maker's quote.
    What would be the advisability and practicality of this option? 
Would it effectively address the problems presented by market 
fragmentation?
    Would prohibiting market makers from trading ahead of investor 
limit orders, regardless of where the order entered the national market 
system, facilitate a broker's ability to obtain best execution of its 
customers' limit orders?
    Would an intermarket prohibition against market makers trading 
ahead of previously displayed and accessible limit orders encourage 
price competition and thereby enhance the efficiency of the market as a 
whole?
    Would implementation of this option reduce the willingness or 
capacity of market makers to supply liquidity? If so, would the problem 
be addressed by allowing market makers to trade at their quotations 
after satisfying previously displayed investor limit orders?
    Would this option be feasible without the establishment of a 
single, intermarket limit order file?
    e. Provide Intermarket Time Priority for Limit Orders or Quotations 
that Improve the NBBO. As another option for encouraging price 
competition, the Commission could establish intermarket trading 
priorities that granted time priority to the first limit order or 
dealer quotation that improved the NBBO for a security (that is, the 
order or quotation that either raised the national best bid or lowered 
the national best offer). To qualify for such priority, the limit order 
or quotation would have to be widely displayed and accessible through 
automatic execution. Only the first trading interest at the improved 
price (``Price Improver'') would be entitled to priority. No market 
center could execute a trade at the improved or an inferior price 
unless it undertook to satisfy the Price Improver. Subsequent orders or 
quotations that merely matched the improved price would not be entitled 
to any enhanced priority. If, prior to satisfaction of the Price 
Improver, another order or quotation was displayed and accessible at an 
even better price, the existing Price Improver would be superseded and 
permanently lose its priority. The subsequent trading interest at the 
better price would be the new Price Improver.
    What is the advisability and practicality of this option? Would it 
effectively address the problems presented by market fragmentation? 
Would it discourage competition among market centers or reduce market 
makers' willingness to supply liquidity?
    Would granting time priority only to the first trading interest to 
improve the NBBO provide an adequate incentive for aggressive price 
competition?
    How difficult would it be to implement this limited type of 
intermarket time priority? Would it require substantial modifications 
of currently existing linkage systems?
    f. Establish Price/Time Priority for All Displayed Trading 
Interest. To assure a high level of interaction of trading interest, 
the Commission could order the establishment of a national market 
linkage system that provides price/time priority for all displayed 
trading interest. Under this option, the displayed orders and 
quotations of all market centers would be displayed in the national 
linkage system (``NLS''). All

[[Page 10588]]

NLS orders and quotations would be fully transparent to all market 
participants, including the public. Orders and quotations displayed in 
the NLS would be accorded strict price/time priority. Market makers 
could execute transactions as principal only if they provided price 
improvement over the trading interest reflected in the NLS. Trading 
interest in the NLS could be executed automatically; however, the NLS 
would not be a market center itself: executions would continue to occur 
at the level of individual market centers. Public access to the NLS 
would be provided through self-regulatory organizations, alternative 
trading systems, and broker-dealers. The NLS could be administered and 
operated by a governing board made up of representatives from the 
public and relevant parts of the securities industry.
    What is the advisability and practicality of this option? Would it 
effectively address the problems presented by market fragmentation?
    Has advancing technology and increased trading volume created more 
favorable conditions for the establishment of a national market linkage 
system at the current time than at any time in the past? What would be 
the respective benefits and costs of such a system?
    Would a national market linkage system with strict price/time 
priority and automatic execution provide the most efficient trading 
mechanism? If so, why have competitive forces failed to produce such a 
system without the necessity for Commission action? Are there any 
regulatory rules or industry practices blocking competitive forces that 
otherwise would produce such a system? If so, what are they and how 
should they be addressed?
    Would a mandated national market linkage system substantially 
reduce the opportunity for competition among market centers to provide 
trading services? If so, would the costs of reduced market center 
competition outweigh the benefits of greater interaction of trading 
interest?
    Would implementation of a comprehensive national market linkage 
system effectively require the creation of a single industry utility? 
How should a national market linkage system be governed?
    Should there be any exceptions from the requirement that all orders 
yield price/time priority to trading interest reflected in a national 
market linkage system? For example, should there be an exception for 
block transactions or for intra-market agency crosses at the NBBO?
    Should a national market linkage system incorporate a reserve size 
function to facilitate the submission of large orders?

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the NYSE's proposed rule change and the 
Commission's request for comment on market fragmentation, including 
whether the NYSE's proposed rule change is consistent with the Exchange 
Act. Persons making written submissions should file six copies thereof 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street N.W., Washington, D.C. 20549-0609. Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room. Copies of the NYSE's proposal also will be available 
for inspection and copying at its principal office. All submissions 
should refer File No. SR-NYSE-99-48. Comments on the NYSE's proposed 
rescission of Rule 390 should be submitted by March 20, 2000. Comments 
responding to the Commission's request for comments on market 
fragmentation (including the NYSE's request for rulemaking action) 
should be submitted by April 28, 2000.

By the Commission.

Jonathan G. Katz,
Secretary.
[FR Doc. 00-4595 Filed 2-25-00; 8:45 am]
BILLING CODE 8010-01-P