SECURITIES AND EXCHANGE COMMISSION

     17 CFR Part 240

     Release No. 34-38672; International Series Release No. IS-1085; File No.

     S7-16-97

     Regulation of Exchanges

     AGENCY:  Securities and Exchange Commission.

     ACTION:  Concept Release.

     SUMMARY:  The Securities and Exchange Commission ("SEC" or "Commission") is

     reevaluating its approach to the regulation of exchanges and other markets

     in light of technological advances and the corresponding growth of

     alternative trading systems and cross-border trading opportunities. 

     Accordingly, the Commission is soliciting comment on a broad range of

     questions concerning the oversight of alternative trading systems, national

     securities exchanges, foreign market activities in the United States, and

     other related issues.  Following receipt of public comment, the Commission

     will determine whether rulemaking is appropriate.  

     DATES:  Comments must be received on or before [insert date 90 days after

     date of publication in the Federal Register].

     ADDRESSES:  Interested persons should submit three copies of their written

     data, views, and opinions to Jonathan G. Katz, Secretary, Securities and

     Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 

     Comments may also be submitted electronically at the following e-mail

     address: rule-comments@sec.gov.  All comment letters should refer to File

     No. S7-16-97; this file number should be included on the subject line if

     comments are submitted using e-mail.  All submissions will be available for

     public inspection and copying at the Commission's Public Reference Room,

     Room 1024, 450 Fifth Street, N.W., Washington D.C. 20549.  Electronically





     submitted comment letters will be posted on the Commission's Internet web

     site (http://www.sec.gov).

     FOR FURTHER INFORMATION CONTACT:  For questions or comments regarding this

     release, contact: Kristen N. Geyer, Special Counsel, at (202) 942-0799;

     Gautam S. Gujral, Special Counsel, at (202) 942-0175; Marie D'Aguanno Ito,

     Special Counsel, at (202) 942-4147; Paula R. Jenson, Deputy Chief Counsel,

     at (202) 942-0073; or Elizabeth K. King, Special Counsel, at (202) 942-

     0140, Division of Market Regulation, Securities and Exchange Commission,

     Mail Stop 5-1, 450 Fifth Street, N.W., Washington, D.C. 20549.  For

     questions or comments regarding corporate disclosure and securities

     registration issues raised in this release, contact David Sirignano,

     Associate Director, at (202) 942-2870, Division of Corporation Finance,

     Securities and Exchange Commission, Mail Stop 3-1, 450 Fifth Street, N.W.,

     Washington, D.C. 20549.

     SUPPLEMENTARY INFORMATION:

     Table of Contents

          I.   Executive Summary

               A.   Purpose of Concept Release

               B    Alternatives for Revising Domestic Market Regulation

               C.   Alternatives for Revising Regulation Applicable to

                    Foreign Market Activities in the United States

               D.   Conclusion

          II.  Regulation of Domestic Markets

               A.   Technological Advances

               B.   Market Regulation

                    1.   The Current Regulatory Approach Applies


                              ======END OF PAGE 2======





                         Inappropriate Regulation to Alternative Trading

                         Systems

                    2.   The Current Regulatory Approach Impedes

                         Effective Regulation

                         a.   Market Access and Fairness

                         b.   Market Transparency and Coordination

                         c.   Market Surveillance

                         d.   Market Stability and Systemic Risks

               C.   Conclusion

          III. Approaches to Market Oversight

               A.   Regulatory Structure

               B.   Regulatory Tools

          IV.  Proposals Under Consideration to Integrate Alternative Trading

               Systems into the Existing Regulatory Structure for Market

               Oversight

               A.   Integrating Alternative Trading Systems into the

                    National Market System Through Broker-Dealer

                    Regulation

                    1.   Fully Integrating the Orders of All Market Participants

                         into the Public Quotation System and Facilitating

                         Public Access to Such Orders

                    2.   Improving the Surveillance of Trading

                         Conducted on Alternative Trading Systems

                    3.   Ensuring Adequate Capacity of Alternative

                         Trading Systems

                    4.   Potential Problems with Regulating Alternative


                              ======END OF PAGE 3======





                         Trading Systems Under the Broker-Dealer Regulatory

                         Scheme

                         a.   Alternative Trading Systems Would Not Be

                              Subject to Requirements Designed to

                              Assure Fair Treatment of Investors

                         b.   Broker-Dealers that Operate Alternative

                              Trading Systems Will Still Be Required to

                              Comply with Potentially Inapplicable

                              Regulation and Be Subject to Oversight by

                              SROs

                         c.   Alternative Trading Systems Will Be Free

                              to Engage in Anticompetitive Activities

                    5.   Conclusion

               B.   Integrating Alternative Trading Systems into

                    Market Regulation Through Exchange Regulation

                    1.   Creating a New Category Called "Exempted

                         Exchanges" for Smaller and Passive Alternative

                         Trading Systems

                         a.   Low Impact Markets

                         b.   Passive Markets

                         c.   Requirements for Exempted Exchanges

                    2.   The Application of Exchange Regulation to

                         Alternative Trading Systems That Are Not Exempted

                         Exchanges

                         a.   Using the Commission's Exemptive

                              Authority to Encourage Innovation and to


                              ======END OF PAGE 4======





                              Eliminate Barriers to Non-Traditional

                              Exchanges

                              (i)  The Commission Could Consider Permitting

                                   Institutional Access to Exchanges

                              (ii) The Commission Could Consider Ways in

                                   Which Alternative Exchanges Can Meet

                                   Fair Representation Requirements

                    3.   Expanding the Commission's Interpretation of "Exchange"

                         a.   Effects of Expanding the Commission's

                              Interpretation of "Exchange" on Selected

                              Types of Alternative Trading Systems

                              (i)   Broker-Dealer Activities

                              (ii)  Organized Dealer Markets

                              (iii) Information Vendors and Bulletin Boards

                              (iv) Interdealer Brokers

                    4.   Effect of Broadening the Definition of

                         "Exchange"

                         a.   Regulation of Securities Trading on

                              Alternative Trading Systems

                         b.   Integration with National Market System

                              Mechanisms and Existing Exchange Practices

                              (i)  Inter-Market Plans

                                   (A)  Quotation and Transacting Reporting

                                   (B)  Intermarket Trading System

                              (ii) Uniform Trading Standards

                         c.   Oversight of Non-Broker-Dealers That


                              ======END OF PAGE 5======





                              Have Access to Exchanges and Clearance

                              and Settlement of Non-Broker-Dealer

                              Trades

                         d.   Application of Broker-Dealer Regulation

                              to Certain Exchanges

               C.   Conclusion

          V.   The Commission Could Consider Ways in Which Requirements Might Be

               Reduced or Expedited for Registered Exchanges

               A.   Ways to Further Expedite Rule Filings

               B.   Surveillance and Enforcement

          VI.  Costs and Benefits of Revising the Regulation of Domestic Markets



          VII. Regulation of Foreign Market Activities in the United States

               A.   The Need for A Clear Regulatory Structure to

                    Address U.S. Investors' Electronic Cross-Border

                    Trading

                    1.   The Applicability of the U.S. Regulatory

                         Structure to the Activities of Access

                         Providers Has Not Been Expressly Addressed

                    2.   U.S. Investors' Ability to Trade Directly on a

                         Foreign Market And Investor Protection Concerns

                         Under the Federal Securities Laws

               B.   Regulating Foreign Market Activities in the United

                    States

                    1.   Sole Reliance on Foreign Markets' Home Country

                         Regulation


                              ======END OF PAGE 6======





                    2.   Requiring Foreign Markets to Register as

                         National Securities Exchanges

                    3.   Regulating Access Providers to Foreign Markets

                         a.   Access Providers to U.S. Members of

                              Foreign Markets

                         b.   Broker-Dealer Access Providers

                         c.   Requirements Applicable to Access Providers

                              (i)  Conditions Relating to the Type of Foreign

                                   Market

                              (ii) Conditions Relating to Type of

                                   Persons and Securities

                              (iii)Recordkeeping, Reporting, Disclosure,

                              and Antifraud Requirements

               C.   Addressing the Differences Between U.S. and

                    Foreign Markets' Listed Company Disclosure

                    Standards

               D.   Costs and Benefits of Revising Regulation of

                    Foreign Market Activities in the United States

               E.   Conclusion

          VIII.     Summary of Requests for Comment

     I.   Executive Summary

          A.   Purpose of Concept Release

          Stock markets play a critical role in the economic life of the United

     States.  The phenomenal growth of the U.S. markets over the past 60 years

     is a direct result of investor confidence in those markets.  Technological

     trends over the past two decades have also contributed greatly to this


                              ======END OF PAGE 7======





     success.  In particular, technology has provided a vastly greater number of

     investment and execution choices, increased market efficiency, and reduced

     trading costs.  These developments have enhanced the ability of U.S.

     exchanges to implement efficient market linkages and advanced the goals of

     the national market system ("NMS").

          At the same time, however, technological changes have posed

     significant challenges for the existing regulatory framework, which is ill-

     equipped to respond to innovations in U.S. and cross-border trading. 

     Specifically, two key developments highlight the need for a more forward-

     looking, flexible regulatory framework:  (1) the exponential growth of

     trading systems that present comparable alternatives to traditional

     exchange trading; and (2) the development of automated mechanisms that

     facilitate access to foreign markets from the United States.

          The Commission estimates that alternative trading systems<(1)>

     currently handle almost 20 percent of the orders<(2)> in over-the-

                              

               <(1)>     Trading  systems not registered  as exchanges have
                         been referred to  in previous Commission  releases
                         as  "proprietary trading  systems," "broker-dealer
                         trading  systems," and  "electronic communications
                         networks."   The latter  two terms are  defined in
                         Rules  17a-23  and  11Ac1-1 under  the  Securities
                         Exchange  Act  of 1934  ("Exchange  Act"), 17  CFR
                         240.17a-23  and  240.11Ac1-1,  respectively.   The
                         term  "alternative trading  systems" will  be used
                         throughout  this  release  to  refer  generally to
                         automated systems that centralize, display, match,
                         cross, or otherwise  execute trading interest, but
                         that   are  not  currently   registered  with  the
                         Commission  as  national  securities exchanges  or
                         operated by a registered securities association.

               <(2)>     For purposes  of  this release,  the term  "order"
                         generally   means   any  firm   trading  interest,
                         including  both  limit  orders  and  market  maker
                         quotations.

                              ======END OF PAGE 8======





     counter ("OTC") stocks and almost 4 percent of orders in securities listed

     on the New York Stock Exchange ("NYSE").  The explosive growth of

     alternative trading systems over the past several years has significant

     implications for public secondary market regulation.  Even though many of

     these systems provide essentially the same services as traditional markets,

     most alternative trading systems are regulated as broker-dealers.  As a

     result, they have been subject to regulations designed primarily to address

     traditional brokerage, rather than market, activities.  For example, these

     systems are typically subject to oversight by self-regulatory organizations

     ("SROs") that themselves operate exchanges or quotation systems, which

     raises inherent competitive concerns.  

          At the same time, alternative trading systems are not fully integrated

     into the national market system.  As a result, activity on alternative

     trading systems is not fully disclosed to, or accessible by, public

     investors.  The trading activity on these systems may not be adequately

     surveilled for market manipulation and fraud.  Moreover, these trading

     systems have no obligation to provide investors a fair opportunity to

     participate in their systems or to treat their participants fairly, nor do

     they have an obligation to ensure that they have sufficient capacity to

     handle trading demand.  These concerns together with the increasingly

     important role of alternative trading systems, call into question the

     fairness of current regulatory requirements, the effectiveness of existing

     NMS mechanisms, and the quality of public secondary markets.  

          The impact of technological change has not been limited to domestic

     markets.  Foreign markets, information vendors, and broker-dealers have

     developed automated systems that enable U.S. persons to trade directly on


                              ======END OF PAGE 9======





     foreign markets from the United States.  The Commission to date has not

     addressed the regulatory status of entities that limit their activities to

     providing U.S. investors access to foreign markets.  As a result, many

     foreign markets have been reluctant to provide these services directly to

     U.S. investors.  This has highlighted the need to establish standards that

     can accommodate U.S. investors' growing interest in cross-border trading,

     and better ensure that this type of cross-border trading is subject to

     appropriate safeguards.  At the same time, improved foreign market access

     would mean that U.S. investors can trade securities of companies listed

     solely on foreign markets as easily as securities of companies that satisfy

     the Commission's disclosure and reporting requirements.  This would raise

     additional questions as to how to craft a regulatory scheme that provides

     sufficient information to investors about the securities they trade.

          These and other questions raised by the application of the existing

     regulatory approach to technologically changing markets are only likely to

     multiply as technology facilitates ways of trading and enables the creation

     of market structures that were unimaginable a few years ago.  In light of

     these issues, the Commission is now reevaluating its regulation of the

     markets, particularly its oversight of alternative trading systems,

     registered exchanges, and foreign market activities in the United States. 

     In doing so, the Commission seeks to develop a forward-looking and enduring

     approach that will permit diverse markets to evolve and compete, while

     preserving market-wide transparency, fairness, and integrity.  The issues

     raised by technology in the domestic markets are summarized in Part B below

     and discussed in greater detail in Sections II through VI.  The issues

     raised by technology in the foreign markets are summarized in Part C below


                              ======END OF PAGE 10======





     and discussed in greater detail in Section VII of this release.

          B.   Alternatives for Revising Domestic Market Regulation

          The questions raised by technological developments in the U.S. markets

     could be addressed in a variety of ways.  As an initial matter, the

     Commission is soliciting comment on whether the current statutory and

     regulatory framework remains appropriate in light of the myriad new means

     of trading securities made possible by emerging and evolving technologies. 

     The Commission is also soliciting comment on alternative ways of addressing

     these issues within the existing securities law framework.  The release

     discusses two alternatives in particular that would integrate alternative

     trading systems more fully into mechanisms that promote market-wide

     transparency, investor protection, and fairness.    

          First, the Commission could continue to regulate alternative trading

     systems as broker-dealers and develop rules applicable to these systems,

     and their supervising SROs that would more actively integrate these systems

     into NMS mechanisms.  The Commission could, for example, require

     alternative trading systems to provide additional audit trail information

     to SROs, to assist SROs in their surveillance functions, and to adopt

     standard procedures for ensuring adequate system capacity and the integrity

     of their system operations.  The Commission could then require SROs to

     integrate trading on alternative trading systems into their ongoing, real-

     time surveillance for market manipulation and fraud, and to develop

     surveillance and examination procedures specifically targeted to

     alternative trading systems they supervise.  In addition, the Commission

     could require alternative trading systems to make all orders in their

     systems available to their supervising SROs, and require such SROs to


                              ======END OF PAGE 11======





     incorporate those orders into the public quotation system.  The Commission

     could also require that alternative trading systems provide the public with

     access to these orders on a substantially equivalent basis as provided to

     system participants.

          Alternatively, the Commission could integrate alternative trading

     systems into the national market system as securities exchanges, by

     adopting a tiered approach to exchange regulation.  The first tier, under

     this type of approach, could consist of the majority of alternative trading

     systems, those that have limited volume or do not establish trading prices,

     which could be exempt from traditional exchange requirements.  For example,

     exempt exchanges could be required to file an application and system

     description with the Commission, report trades, maintain an audit trail,

     develop systems capacity and other operational standards, and cooperate

     with SROs that inspect their regulated participants.  Most alternative

     trading systems currently regulated as broker-dealers would be exempt

     exchanges.

          The second tier of exchanges under this approach could consist of

     alternative trading systems that resemble traditional exchanges because of

     their significant volume of trading and active price discovery.  These

     systems could be regulated as national securities exchanges.  The

     Commission could then use its exemptive authority to eliminate barriers

     that would make it difficult for these non-traditional markets to register

     as exchanges, by exempting such systems from any exchange registration

     requirements that are not appropriate or necessary in light of their

     business structure or other characteristics.  For example, the Commission

     could exempt alternative trading systems that register as exchanges from


                              ======END OF PAGE 12======





     requirements that exchanges have a traditional membership structure, and

     from requirements that limit exchange participation to registered broker-

     dealers.  The Commission could also use its exemptive authority to reduce

     or eliminate those exchange requirements that are incompatible with the

     operation of for-profit, non-membership alternative trading systems.  

          This approach could integrate these alternative trading systems more

     fully into NMS mechanisms and the plans governing those systems,

     potentially by requiring these systems to become members of those

     plans.<(3)>  Because alternative trading systems differ in several key

     respects from currently registered exchanges, this could require revision

     of those plans in order to accommodate diverse and evolving trading

     systems.

          Finally, a third tier of exchanges, consisting of traditional

     membership exchanges, could continue to be regulated as national securities

     exchanges.  The Commission could then use its exemptive authority to reduce

     overall exchange requirements.  In this regard, the Commission is

     considering ways to reduce unnecessary regulatory requirements that make it

     difficult for currently registered exchanges to remain competitive in a

     changing business environment.  The Commission, for example, could further

     accelerate rule filing and approval procedures for national securities

     exchanges and securities associations, and allow fully automated exchanges

     to meet their regulatory requirements in non-traditional ways.

          One way for the Commission to implement this tiered approach would be

     to expand its interpretation of the definition of "exchange."  For example,

     the Commission could reinterpret the term "exchange" to include any
                              

               <(3)>     See infra notes 162 to 175 and accompanying text.

                              ======END OF PAGE 13======





     organization that both:  (1) consolidates orders of multiple parties; and

     (2) provides a facility through which, or sets material conditions under

     which, participants entering such orders may agree to the terms of a trade. 



          C.   Alternatives for Revising Regulation Applicable to Foreign Market

               Activities in the United States 

          The questions raised by the activities of foreign markets in the

     United States could also be addressed in a number of ways.  As an initial

     matter, any proposal should address questions about the lack of comparable

     information about securities of non-reporting foreign companies.  In

     addition, any approach to regulating access to foreign markets from the

     U.S. should address the issue of whether sufficient information is

     disclosed to U.S. investors regarding the risks of trading on foreign

     markets and whether the Commission has the ability to enforce the antifraud

     provisions of the U.S. securities laws. 

          This release describes a number of different ideas for addressing

     foreign market activity in the United States, including applying

     traditional exchange regulation to foreign markets that seek to enter the

     United States.  At the other extreme, the Commission could rely solely on

     home country regulation of the foreign market.  Alternatively, the

     Commission could take an intermediate approach by establishing regulatory

     requirements for entities that provide U.S. persons with direct access to

     foreign markets ("access providers"), regardless of whether the entity is

     the foreign market itself, a broker-dealer, or another service provider. 

     Such access providers could be required to comply with limited

     recordkeeping, reporting, and disclosure requirements, as well as the


                              ======END OF PAGE 14======





     antifraud provisions of the federal securities laws.

          Under this type of approach, an access provider that provides a U.S.

     member of a foreign market with direct access to that foreign market's

     trading facilities would register as a securities information processor

     ("SIP") under Section 11A of the Exchange Act.  Foreign markets,

     information vendors, and other access providers could be required to

     register as SIPs, or to conduct their U.S. activities through another

     registered SIP.  As a condition of registration, SIPs could also be limited

     to trading foreign securities that are registered with the Commission under

     the Exchange Act or limited to dealing with sophisticated parties.

          Broker-dealers that act as access providers could be required to

     comply with the same, limited recordkeeping, reporting, disclosure, and

     antifraud requirements as SIPs.  The Commission could also permit broker-

     dealer access providers to provide both retail and sophisticated investors

     with electronic links to foreign markets, and to provide such links to

     foreign markets that trade U.S. and foreign securities, regardless of

     whether those securities are registered with the Commission.  This approach

     might provide adequate protections to U.S. investors trading on foreign

     markets, while facilitating greater transparency.  

          In creating an appropriate regulatory scheme to address U.S. investor

     access to unregistered foreign securities, the Commission seeks to balance

     the desire to craft a forward-looking and enduring approach to the

     oversight of the securities markets with concerns that U.S. investors have

     access to full and complete disclosure about the securities they trade. 

     The Commission has been working directly with fellow regulators around the

     world on a variety of initiatives to improve the efficiency of cross-border


                              ======END OF PAGE 15======





     capital flows.

          D.   Conclusion

          Regulation should not be static.  Changes in the markets should be

     accompanied by corresponding changes in market regulation.  In light of the

     rapid pace of technological advancements during the past two decades, it is

     critical to develop a regulatory framework that both accommodates

     traditional market structures and provides sufficient flexibility to ensure

     that markets of the future promote fairness, efficiency, and transparency. 

     The purpose of this release is to facilitate a dialogue as to how this can

     best be achieved. 

     II.  Regulation of Domestic Markets

          A.   Technological Advances

          Securities markets serve several basic functions that are critical to

     facilitating investment and, as a result, materially influence the long-

     term financial security of a large segment of the population.<(4)> 

     For example, markets provide the forum for individuals to invest in

     securities and for financial instruments to be readily converted into cash

     when needed.  Securities markets also serve as a fundamental indicator of

     national and international economic health, in part because they reveal

     investors' judgments about the potential earning capacity of

     corporations.<(5)>  They help to raise and efficiently allocate
                              

               <(4)>     See generally SEC, Report  of the Special Study of
                         the  Securities  Markets  of  the  Securities  and
                         Exchange Commission, H.R. Doc. No. 95, 88th Cong.,
                         1st Sess. Pt. 1,  at 9 (1963) (hereinafter Special
                         Study).

               <(5)>     Essentially,    securities   markets    centralize
                         information  about  buying  and selling  interest,
                                                             (continued...)

                              ======END OF PAGE 16======





     capital by providing a reliable means of valuing assets and facilitating

     the flow of capital into private enterprise.  They also allocate capital

     toward productive uses by providing a forum where stocks can compete for

     investment dollars.<(6)>  U.S. securities markets have been highly

     successful at fulfilling these functions and are consistently the world's

     largest, most liquid, efficient, and fair.<(7)>  Moreover, U.S.
                              

               <(5)>(...continued)
                         either    by    physically    or    electronically
                         centralizing order interaction, or by centralizing
                         quote and  trading information.   Because  of this
                         interaction of supply and demand, a stock price is
                         considered  by many  to  be the  best estimate  by
                         investors  of  the  present value  of  a company's
                         future  earnings.   As a  result of  such beliefs,
                         stock  prices  influence investment  calculations,
                         the  allocation  of  resources,  company  business
                         decisions, and  economic planning.   See  2 Thomas
                         Lee Hazen,  Treatise  on  the  Law  of  Securities
                         Regulation,  10.1,  at  4  (3d   ed.  1995);  U.S.
                         Congress,  Office  of Technology  Assessment, Pub.
                         No.  OTA-CIT-469, Electronic Bulls  & Bears:  U.S.
                         Securities Markets &  Information Technology at 3,
                         26 (1990) (hereinafter Electronic Bulls  & Bears).
                         See  generally  Jack  Clark   Francis,  Investment
                         Analysis and Management 57, 196-97 (4th ed. 1986).

               <(6)>     See generally Electronic Bulls & Bears, supra note
                         5, at ch. 2; Francis, supra note 5, at 57.

               <(7)>     As  of   December  31,  1996,   there  were  3,530
                         securities trading on  the NYSE, representing 2907
                         NYSE-listed companies.   Market Records  Shattered
                         in 1996, The  Exchange (NYSE), Jan./Feb. 1997,  at
                         1-2.   In addition, as  of December 31,  1996, the
                         Nasdaq  Stock Market  ("Nasdaq") listed  over 6300
                         stocks  of 5556  companies, and  dollar volume  on
                         that market has grown to  almost equal that of the
                         NYSE.    Conversation  with  staff   of  Corporate
                         Communications, National Association of Securities
                         Dealers, Inc. ("NASD") (Feb.  21, 1997).  In 1996,
                         the  average daily  share  volume  on  Nasdaq  was
                         543,839,000 shares and the total dollar volume was
                         $3,301.8 billion.   During  that same  period, the
                         NYSE's average daily share volume  was 409,893,000
                                                             (continued...)

                              ======END OF PAGE 17======





     markets have continued to attract foreign listings and investors even as

     other markets become more competitive.<(8)>  This success has come

     about, in part, because the strength and stability of U.S. markets have

     allowed people throughout the world to feel confident investing a large

     percentage of their personal wealth in the future of companies trading on

     those markets.  

          The ability of U.S. markets to use technology to increase efficiency,

     reduce the costs of trading, and respond to changing investor demands has

     also contributed significantly to the success of our markets.  Over the

     past three decades, technology has transformed U.S. markets.  Investors,

     particularly the growing institutional investor base, now have numerous

     alternatives to traditional exchange trading and the OTC market. 

     Similarly, market participants (including broker-dealers, issuers, and

     service providers) have integrated technological advancements into their

     trading and marketing activities.<(9)>  For example, some broker-
                              

               <(7)>(...continued)
                         shares and its  total dollar  volume was  $4,063.7
                         billion.   See Market  Records Shattered in  1996,
                         The Exchange (NYSE), Jan./Feb. 1997, at 1-2. 

               <(8)>     Both   the  NYSE   and  Nasdaq   have  experienced
                         significant  growth  in foreign  company listings.
                         Foreign company  listings  on the  NYSE  increased
                         from 106  in 1991 to  290 as of  the end of  1996.
                         Similarly,  foreign  listings on  Nasdaq increased
                         from 185  in 1991 to  320 as  of the end  of 1996.
                         Conversation with  staff of NYSE (Feb.  21, 1997);
                         Conversation     with    staff     of    Corporate
                         Communications, NASD  (Feb.  21, 1997);  New  York
                         Stock Exchange, Inc., 1995 Annual Report 3 (1995);
                         National Association of Securities  dealers, Inc.,
                         1996 Nasdaq Fact Book 37 (1996).

               <(9)>     See,  e.g., Letter  from Catherine  McGuire, Chief
                         Counsel,  Division of  Market Regulation,  SEC, to
                                                             (continued...)

                              ======END OF PAGE 18======





     dealers have made communications with retail customers more efficient by

     offering various services through the Internet.<(10)>  

          As technology has broadened the services that can be delivered by both

     markets and market intermediaries, market services have become unbundled

     from traditional brokerage or exchange services.  While some entities that

     perform brokerage services have also begun to perform some of the

     traditional functions of a stock exchange, other entities (including

     information vendors, service bureaus, and routing services) now provide

     many of the services historically provided by exchanges and broker-dealers. 

     One significant example of this has been the development and growing

     popularity of alternative trading systems, such as the Real-Time Trading

     Service operated by Instinet Corporation ("Instinet"), The Island System

     ("Island"),<(11)> Portfolio System for Institutional Trading
                              

               <(9)>(...continued)
                         Jere W.  Glover, Chief Counsel for  Advocacy, U.S.
                         Small  Business  Administration,  and  Gregory  J.
                         Dean, Jr., Assistant Chief Counsel for Banking and
                         Finance, U.S. Small Business  Administration (Oct.
                         26, 1996);   Letter from Catherine McGuire,  Chief
                         Counsel,  Division of  Market Regulation,  SEC, to
                         Bruce D.  Stuart, Esq. (Aug. 5,  1996); and Letter
                         from Catherine McGuire, Chief Counsel, Division of
                         Market Regulation, SEC, to Barry Reder, Esq. (June
                         24, 1996).

               <(10)>    See Arthur M. Louis, Schwab Plays Catchup:  Broker
                         Faces  Tough  Internet  Competition, S.F.  Chron.,
                         Nov.  26,  1996, at  C1.    See  also Letter  from
                         Richard R. Lindsey,  Director, Division of  Market
                         Regulation,  SEC,  to   Scott  W.  Campbell,  Vice
                         President and Associate  General Counsel,  Charles
                         E. Schwab & Co. (Nov. 27, 1996).

               <(11)>    Island is  operated by  Datek Securities Corp.,  a
                         registered broker-dealer.   Island, Instinet,  and
                         other "matching" systems (such as Tradebook, which
                         is  operated  by  Bloomberg  Tradebook  LLC) allow
                                                             (continued...)

                              ======END OF PAGE 19======





     ("POSIT"),<(12)> and the Arizona Stock Exchange ("AZX"),<(13)>

     which allow institutions and other market participants to electronically

     execute trades in a variety of ways.<(14)>  These and other

     alternative trading systems have grown to account for a significant

     percentage of the trading volume of the U.S. securities markets,

     particularly within the last five years.  In 1994, the Commission's

     Division of Market Regulation reported that alternative trading systems

     accounted for 13 percent of the volume in Nasdaq securities and 1.4 percent

                              

               <(11)>(...continued)
                         participants  to display  firm,  priced orders  to
                         other  participants  and to  execute automatically
                         against other orders in the system.

               <(12)>    POSIT  is  operated  by  ITG  Inc.,  a  registered
                         broker-dealer.  POSIT and other "crossing" systems
                         allow participants to enter unpriced orders, which
                         are  then  executed  with matching  interest  at a
                         single price, typically  derived from the  primary
                         public market for each crossed security.  

               <(13)>    AZX and other "single-price auction" systems allow
                         participants  to enter  priced  orders, which  the
                         system then compares to determine the single price
                         at  which  the largest  volume  of  orders can  be
                         executed.    All  orders  are  then   matched  and
                         executed at that price.  

               <(14)>    In  addition  to  these  systems,  more  than  140
                         broker-dealers have notified  the Commission  that
                         they  operate some  type  of  alternative  trading
                         system, either internally for their own traders or
                         for their customers and other market participants.
                         Registered   broker-dealers    that   operate   or
                         otherwise sponsor alternative trading  systems are
                         required to  comply  with periodic  reporting  and
                         recordkeeping requirements pursuant to Rule 17a-23
                         under the Exchange Act.   17 CFR 240.17a-23.   See
                         generally  Division  of Market  Regulation, Market
                         2000:  An Examination  of  Current  Equity  Market
                         Developments  app.  IV (1994)  (hereinafter Market
                         2000  Study)  (general description  of proprietary
                         trading systems).

                              ======END OF PAGE 20======





     of the trading volume in NYSE-listed securities.<(15)>  In

     comparison, the Commission estimates that alternative trading systems

     currently handle almost 20 percent of the orders in Nasdaq securities and

     almost 4 percent of orders in NYSE-listed stocks.  

          Technology has also significantly altered the operation of exchange

     and OTC markets.  For example, most exchanges have designed systems that

     allow members to route orders electronically to the exchange for

     execution.<(16)>  The NYSE has also established after-hours crossing

     systems that automate the execution of single stock orders and baskets of

     securities,<(17)> and the Cincinnati Stock Exchange ("CSE") is now a

     fully automated exchange where members effect transactions through

                              

               <(15)>    See Market 2000 Study, supra note 14, at Study II-
                         13.

               <(16)>    The NYSE's SuperDOT (Designated  Order Turnaround)
                         system enables firms to  transmit market and limit
                         orders  in all NYSE-listed  securities directly to
                         the  specialist post  for  execution.   Some  NYSE
                         members   also    allow   selected   institutional
                         customers  to  route  their  orders   through  the
                         members'  connection to SuperDOT.  Similar systems
                         are  operated  by  the  following  exchanges:  the
                         American Stock Exchange  ("Amex") (Automated  Post
                         Execution  Reporting  System,  or  AutoPERS),  the
                         Boston  Stock  Exchange  ("BSE")   (BSE  Automated
                         Communication  and  Order   Routing  Network,   or
                         BEACON),  the  Chicago   Board  Options   Exchange
                         ("CBOE")  (the  RAES  system), the  Chicago  Stock
                         Exchange  ("CHX")   (Midwest  Automatic  Execution
                         System,  or MAX),  the  Pacific  Exchange  ("PCX")
                         (Pacific  Computerized  Order  Access  System,  or
                         P/COAST),  and  the  Philadelphia  Stock  Exchange
                         ("Phlx")   (Phlx   Automated   Communication   and
                         Execution System, or PACE).

               <(17)>    See Securities Exchange Act Release No. 29237 (May
                         24, 1991), 56 FR  24853 (May 31, 1991); Securities
                         Exchange Act Release No.  32368 (May 25, 1993), 58
                         FR 31565 (June 3, 1993).

                              ======END OF PAGE 21======





     computers located in their own offices.<(18)>  Dealer markets have

     been similarly transformed.  Dealer markets traditionally consisted of

     loosely organized groups of individual dealers that traded securities OTC,

     without formal consolidation of orders or trading.  As individual dealers

     and associations of dealers have employed technology to make OTC markets

     more efficient, however, dealer markets in certain instruments have become

     organized to such an extent that they have assumed many of the

     characteristics of exchange markets.  This is particularly true in markets

     that trade instruments that are also listed on registered exchanges.  For

     example, the Nasdaq market, operated by the National Association of

     Securities Dealers, Inc. ("NASD"), consolidates trading interest of

     multiple dealers on a computer screen that is displayed in real-time to its

     members and provides a mechanism for dealers to update displayed

     quotations.<(19)>  Additional services, such as SelectNet, allow

     dealers in the Nasdaq market to trade electronically.  Through this

     technology, the NASD has been able to coordinate the dealer market more

     efficiently.
                              

               <(18)>    First   organized  in  1884,   the  CSE  initially
                         operated with  a physical trading  floor which  it
                         began  phasing out  in 1976.   SEC, Report  on the
                         Practice  of  Preferencing  Pursuant   to  Section
                         510(c)   of   the   National  Securities   Markets
                         Improvement  Act of  1996, 24  (1997) (hereinafter
                         Preferencing Report). 

               <(19)>    Like   exchange   markets,   the    NASD   imposes
                         obligations   on  market   makers  to   provide  a
                         continuous source of  liquidity for  Nasdaq-traded
                         securities,  establishes   minimum  qualifications
                         that  issuers  must  meet   in  order  for   their
                         securities   to  be  quoted  on  the  consolidated
                         computer screen,  and sets enforceable  rules that
                         govern the priorities dealers must give to certain
                         orders.  

                              ======END OF PAGE 22======





          Overall, these developments have benefited investors by increasing

     efficiency and competition, reducing costs, and spurring further

     technological advancement of the entire market.  In particular, for those

     market participants that have access to alternative trading systems, these

     systems have provided opportunities for the direct execution of orders

     without the active participation of an intermediary.  Alternative markets

     are likely to grow as technology continues to drive the evolution of the

     equity markets.

          B.   Market Regulation

          Whether trading electronically or through human intervention,

     investors are more likely to trade on a market when prices are current and

     reflect the value of securities, when they are confident that they will be

     able to buy and sell securities easily and inexpensively, and when they

     believe that they can trade on a market without being defrauded or without

     other investors having an unfair advantage.  The competition for global

     investment capital among the world's exchanges and the many opportunities

     available to U.S. and foreign investors make it more important than ever

     for U.S. exchanges to protect these investor interests in order to attract

     order flow.  Appropriate regulation is often necessary to protect these

     interests, by helping to ensure fair and orderly markets, to prevent fraud

     and manipulation, and to promote market coordination and competition for

     the benefit of all investors.<(20)>
                              

               <(20)>    Experience in  both the  United  States and  world
                         markets  has  repeatedly  shown   that  commercial
                         incentives  alone  are  insufficient   to  protect
                         investors adequately and ensure fair markets.   In
                         adopting  the Exchange  Act, Congress  noted that,
                         however   zealously   exchange   authorities   may
                                                             (continued...)

                              ======END OF PAGE 23======





          In the United States, Congress decided that these goals should be

     achieved primarily through the regulation of exchanges and through

     authority it granted to the Commission in 1975 ("1975

     Amendments")<(21)> to adopt rules that promote (1) economically

     efficient execution of securities transactions, (2) fair competition, (3)

     transparency, (4) investor access to the best markets, and (5) the

     opportunity for investors' orders to be executed without the participation

     of a dealer.<(22)>  In promulgating the Exchange Act, Congress gave

     the Commission means to achieve these and other goals of

     regulation,<(23)> by requiring every market that meets the definition
                              

               <(20)>(...continued)
                         supervise the  business conduct of  their members,
                         the  interests  with  which  they   are  connected
                         frequently conflict with the public interest. H.R.
                         Rep. No. 1383,  73rd Cong., 2d Sess.  at 4 (1934);
                         S. Rep. No. 792, 73rd Cong., 2d Sess. (1934).  See
                         also SEC, Statement of the Securities and Exchange
                         Commission   on  the   Future  Structure   of  the
                         Securities  Markets (Feb.  2,  1972), 37  FR  5286
                         (Feb.  4,  1972)  (hereinafter   Future  Structure
                         Statement).   Legislative history to  key Exchange
                         Act amendments adopted in  1975 also points to the
                         need for regulation. See, e.g., S. Rep. No. 75 and
                         H.R. Rep. No. 229,  infra note 22.  See  also SEC,
                         Report Pursuant to Section 21(a) of the Securities
                         Exchange Act  of 1934  Regarding the NASD  and the
                         Nasdaq  Market  (1996)  (hereinafter   NASD  21(a)
                         Report).

               <(21)>    Pub. L. No. 29, 89 Stat. 97 (1975).

               <(22)>    See S.  Rep.  No.  75, 94th  Cong.,  1st  Sess.  8
                         (1975); H.R. Rep. No. 229, 94th Cong., 1st Sess 92
                         (1975).    See  also Exchange  Act  11A(a)(1),  15
                         U.S.C. 78k-1(a)(1).

               <(23)>    Congress also  directed the Commission in the 1975
                         Amendments  to  advance   the  concept  of   equal
                         regulation  so  that   persons  enjoying   similar
                         privileges,  performing   similar  functions,  and
                                                             (continued...)

                              ======END OF PAGE 24======





     of "exchange" under the Exchange Act to either register as a national

     securities exchange or be exempted from registration on the basis of

     limited transaction volume.<(24)>  Congress also gave the exchanges

     authority to enforce their members' compliance with the goals of the

     securities laws and, in 1983, required every broker-dealer to become a

     member of an exchange<(25)> or securities association.<(26)> 

     As SROs, every registered exchange and securities association is required

     to assist the Commission in assuring fair and honest markets, to have

     effective mechanisms for enforcing the goals of regulation, and to submit

                              

               <(23)>(...continued)
                         having similar potential  to affect markets  would
                         be  treated equally.  The  Commission was  charged
                         with ensuring  that no member or  class of members
                         had an  unfair advantage  over other members  as a
                         result of a disparity in  regulation not necessary
                         or appropriate  to further  the objectives of  the
                         Exchange Act.   See H.R. Rep. No.  229, supra note
                         22.

               <(24)>    There  are  currently  eight  registered  national
                         securities  exchanges  and one  exempted exchange.
                         AZX (formerly known as Wunsch Auction Systems) was
                         exempted  from  the  registration requirements  of
                         Sections 5  and 6 of  the Exchange Act,  15 U.S.C.
                         78e  and 78f,  based  on  the exchange's  expected
                         limited  volume in  trading  of securities.    See
                         Securities  Exchange Act  Release No.  28899 (Feb.
                         20, 1991), 56 FR 8377 (Feb. 29, 1991) (hereinafter
                         AZX  Exemptive  Order).     See  also   Securities
                         Exchange Act Release No.  37271 (June 3, 1996), 61
                         FR 29145 (June 7, 1996).

               <(25)>    Markets   operated    by   registered   securities
                         associations serve  many of the same  functions as
                         exchanges.  Registered securities associations are
                         regulated under Section  15A of the Exchange  Act,
                         15 U.S.C. 78o-1, and  are subject to  requirements
                         that are virtually  identical to those  applicable
                         to registered exchanges under the Exchange Act.

               <(26)>    See Pub. L. No. 38, 97 Stat. 205 (1983).

                              ======END OF PAGE 25======





     their rules for Commission review.  This statutory structure has given the

     Commission ample authority to oversee securities markets and ensure

     compliance with the Exchange Act.  Although regulation cannot prevent all

     manipulation, fraud, or collusion, it has proven effective in ridding

     markets of the most egregious of these practices and consequently in

     inspiring a high degree of investor confidence.

          As a result of the technologically-driven developments discussed

     above, however, the distinctions among market service providers have become

     blurred, making it more difficult to determine whether any particular

     entity operates as an exchange, OTC market, broker, or dealer.  For

     example, alternative trading systems incorporate features of both

     traditional markets and broker-dealers.  Like traditional exchanges,

     alternative trading systems centralize orders and give participants control

     over the interaction of their orders.  Like traditional broker-dealers,

     alternative trading systems are proprietary and, in some cases, maintain

     trading desks that facilitate participant trading.  Because the activities

     of alternative trading systems include both traditional exchange and

     broker-dealer functions, it is often unclear whether such systems should

     register as exchanges, broker-dealers, or both.  Under the existing

     statutory structure enacted by Congress, however, exchanges and broker-

     dealers are subject to significantly different obligations and

     responsibilities.  

          To date, the Commission has regulated many alternative markets as

     broker-dealers, rather than as exchanges, in order to foster the

     development of innovative trading mechanisms within the existing statutory




                              ======END OF PAGE 26======





     framework.<(27)>  The determination as to whether any particular

     alternative trading system should be regulated as an exchange or broker-

     dealer has been decided on a case-by-case basis.<(28)>  This

     regulatory approach has had two significant, unintended effects:  (1) it

     has subjected alternative trading systems to a regulatory scheme that is

     not particularly suited to their market activities; and (2) it has impeded

     effective integration, surveillance, enforcement, and regulation of the

     U.S. markets as a whole.

               1.   The Current Regulatory Approach Applies Inappropriate

                    Regulation to Alternative Trading Systems

          As broker-dealers, alternative trading systems are subject to

     regulation designed primarily to address traditional brokerage activities

     rather than market activities.<(29)>  For example, broker-dealers are
                              

               <(27)>    See infra notes 120 to 124 and accompanying text.

               <(28)>    Since   1991,  the  Commission   staff  has  given
                         operators  of trading  systems assurances  that it
                         would  not recommend  enforcement action  if those
                         systems operated without registering as exchanges.
                         As  a result,  to  date,  many  automated  trading
                         markets have  not  been required  to  register  as
                         exchanges  and  have  instead  been  regulated  as
                         broker-dealers.   For a list  of no-action letters
                         issued to  system sponsors  until the end  of 1993
                         and  a short history of the Commission's oversight
                         of  such  systems,  see  Securities  Exchange  Act
                         Release No.  33605, 59 FR 8368,  8369-71 (Feb. 18,
                         1994) ("Rule 17a-23 Proposing Release").  See also
                         Letters from the Division of Market Regulation to:
                         Tradebook (Dec. 31,  1996); The Institutional Real
                         Estate  Clearinghouse  System   (May  28,   1996);
                         Chicago   Board   Brokerage,  Inc.   and  Clearing
                         Corporation for  Options and Securities  (Dec. 13,
                         1995).

               <(29)>    Broker-dealers  have  a  responsibility under  the
                         Exchange  Act for  ensuring  their own  (and their
                                                             (continued...)

                              ======END OF PAGE 27======





     required to become members of the Securities Investor Protection

     Corporation ("SIPC").  While this membership is designed to protect

     customer funds and securities held by brokers, few alternative trading

     systems hold customer funds or securities.<(30)>  In addition,

     broker-dealers are required to be members of an SRO.  Thus, alternative

     trading systems are subject to oversight by exchanges and the NASD, which

     operate their own markets.  Because these markets often compete with

     alternative trading systems for order flow, there is an inherent conflict
                              

               <(29)>(...continued)
                         employees') compliance with the federal securities
                         laws  and with  the  rules of  all relevant  SROs.
                         Broker-dealer  requirements   generally  focus  on
                         ensuring adequate  employee supervision, financial
                         responsibility  and  sufficient capital,  and fair
                         dealing  with  customers, including  protection of
                         customers'  securities  and funds,  and monitoring
                         sales practices.

               <(30)>    Rather than hold customer funds or securities,
                         most alternative trading systems require their
                         customers to arrange for trades executed on the
                         system to be cleared through another broker-
                         dealer.  See, e.g., Letter from Brandon Becker,
                         Director, Division of Market Regulation, SEC, to
                         Lloyd H. Feller, Esq., Morgan, Lewis & Bockius
                         (Sep. 9, 1993) (Lattice trading system to have
                         trades cleared and settled by a registered broker-
                         dealer designated by respective system
                         participants); Letter from Larry E. Bergmann,
                         Associate Director, Division of Market Regulation,
                         SEC, to Larry E. Fondren, Intervest Financial
                         Services, Inc. (Nov. 24, 1992) (CrossCom Trading
                         Network to use WFS Clearing Services, Inc.);
                         Letter from William H. Heyman, Director, Division
                         of Market Regulation, SEC, to Daniel T. Brooks,
                         Cadwalader, Wickersham & Taft (Nov. 25, 1991)
                         (LIMITrader to use Mabon Securities Corp. as its
                         initial clearing broker); and Letter from William
                         H. Heyman, (then) Deputy Director, Division of
                         Market Regulation, SEC, to Richard S. Soroko,
                         Esq., Lippenberger, Thompson & Welch (May 16,
                         1991) (Portfolio Trading Services, Inc. to use
                         Ernst & Company as its clearing broker).

                              ======END OF PAGE 28======





     between SROs' competitive concerns as markets and their regulatory

     obligations to oversee alternative trading systems.  

          Regulating alternative trading systems as traditional broker-dealers,

     therefore, requires compliance by these systems with obligations that, in

     many cases, are not pertinent to their principal activities.  As discussed

     below, traditional broker-dealer regulation also fails to address concerns

     raised by alternative trading systems' market activities.

               2.   The Current Regulatory Approach Impedes Effective Regulation



          The Commission has repeatedly evaluated whether the case-by-case no-

     action approach has permitted adequate Commission oversight of secondary

     trading markets, particularly in light of the growth and evolving market

     significance of such systems.  Prior to 1993, the low volume and relatively

     small number of alternative trading systems appeared to justify such an

     approach.  In 1993, for example, in an attempt to evaluate the effects of

     regulating alternative trading systems as broker-dealers, the Commission's

     Division of Market Regulation conducted a study of the U.S. equity

     markets.<(31)>  This study concluded that, at that time, the

     Commission did not have sufficient regular information to evaluate the

     effects of alternative trading systems on the U.S. securities markets. 

     Therefore, the Division of Market Regulation recommended that the

     Commission closely monitor the impact of the proliferation of such systems. 

     In response to this recommendation, the Commission adopted a recordkeeping

     and reporting rule, Rule 17a-23, specifically for broker-dealers that


                              

               <(31)>    See Market 2000 Study, supra note 14.

                              ======END OF PAGE 29======





     operate alternative trading systems.<(32)> 

          Because traditional broker-dealer regulation is not designed to apply

     to markets such as alternative trading systems, gaps have developed in the

     structures designed to ensure marketwide fairness, transparency, integrity,

     and stability.  As discussed in greater detail below, the regulation of the

     most significant alternative trading systems under traditional broker-

     dealer regulation calls into question the accuracy of public quotation and

     trade information, and the fairness of the public secondary

     markets.<(33)>  In addition, such regulation may impair the detection
                              

               <(32)>    Rule  17a-23  under  the  Exchange  Act  generally
                         requires U.S. broker-dealers that  sponsor broker-
                         dealer trading systems to provide a description of
                         their  systems   to  the  Commission   and  report
                         transaction  volume  and  other  activity  to  the
                         Commission on  a quarterly basis.   This rule also
                         requires  that  such  broker-dealers keep  records
                         regarding system activity and to make such records
                         available  to the Commission.   17 CFR 240.17a-23.
                         See also Securities Exchange Act Release No. 35124
                         (Dec. 20, 1994), 59 FR 66702 (Dec. 28, 1994). 

               <(33)>    Commenters  have  repeatedly  suggested  that  the
                         regulatory disparity between exchanges and broker-
                         dealers   gives   a   competitive   advantage   to
                         alternative trading  systems.  Concern  about this
                         regulatory  dichotomy  has  been  voiced  by  many
                         commenters.  Industry and congressional commenters
                         at  various  times   since  1991  have  questioned
                         whether  regulating  alternative  trading  systems
                         differently  from exchanges  is  advisable.    The
                         NYSE, for example, has stated that:

                    [R]egulation  of  participants  in our  securities
                    markets  should be  governed  by the  principle of
                    "functional  regulation":   entities  that perform
                    similar  functions  should be  subject  to similar
                    regulation  . .  . firms  that establish  a market
                    place  for providing execution  of transactions in
                    securities  pursuant  to their  own  trading rules
                    should  be  regulated  in   a  manner  similar  to
                    exchanges, regardless  of  whether they  are  also
                                                             (continued...)

                              ======END OF PAGE 30======





     and elimination of fraudulent and manipulative trading, and the mechanisms

     to ensure fair and equitable oversight and competition among markets.

                    a.   Market Access and Fairness 

          While institutional investors are now the dominant players in U.S.

     financial markets,<(34)> the United States still has the highest

     percentage of direct individual participation in the stock

     markets.<(35)>  Because the needs and interests of small individual

     investors, money managers, wealthy speculators, and large pension plans are

     not always the same,<(36)> market regulation is intended to ensure

     that these diverse investors are treated fairly and have fair access to

     investment opportunities.  

                              

               <(33)>(...continued)
                    brokers  and dealers.   The  name given  an entity
                    should  not  control the  manner  in  which it  is
                    regulated. 

               Testimony of Edward A.  Kwalwasser, Exec. V.P., NYSE, before
               the Telecommunications and  Finance Subcommittee,  Committee
               on Energy and Commerce, U.S. House of Representatives, at 5-
               6  (May  26,  1993)  (hereinafter  Testimony  of  Edward  A.
               Kwalwasser).

               <(34)>    In 1960,  institutions owned only 14.2  percent of
                         the  total  $425 billion  outstanding  U.S. equity
                         securities.   By the end  of the third  quarter of
                         1996,  the percentage  had grown  to 52.3%  of the
                         total  $9,387 billion  of outstanding  U.S. equity
                         securities.    Conversation   with  staff  of  the
                         Securities Industry Association (Feb. 21, 1997).

               <(35)>    From  1989   to  1995,  the   percentage  of  U.S.
                         households   having   direct  or   indirect  stock
                         holdings  jumped  from 31.7%  to  over  41%.   See
                         Arthur B. Kennickell and Annika  E. Sunden, Family
                         Finances in  the U.S.:   Recent Evidence  from the
                         Study  of Consumer  Finances, Fed.  Reserve Bull.,
                         Jan. 1997, at 1.  

               <(36)>    Electronic Bulls & Bears, supra note 5, at 29.

                              ======END OF PAGE 31======





          Specifically, the Exchange Act requires registered exchanges and

     securities associations to consider the public interest in administering

     their markets, to allocate reasonable fees equitably,<(37)> and to

     establish rules designed to admit members fairly.<(38)>  While these

     provisions are based on the principle that qualified market participants

     should have fair access to the nation's securities markets, they are not

     intended to limit exchanges from having reasonable standards for

     access.<(39)>  Rather, fair access requirements are intended to

     prohibit unreasonably discriminatory denials of access.  A denial of access

     would be reasonable, for example, if it were based on unbiased standards,

     such as capital and credit requirements, and if these standards were

     applied fairly. 

          The Exchange Act also requires registered exchanges and securities

     associations to establish rules that assure fair representation of members

     and investors in selecting directors and administering their

     organizations.<(40)>  The purpose of this requirement is to protect

     the rights and interests of the diverse members of registered exchanges and

                              

               <(37)>    Exchange   Act   6(b)(4),  15   U.S.C.  78f(b)(4);
                         Exchange Act 15A(b)(5), 15 U.S.C. 78o-3(b)(5).

               <(38)>    Exchange Act 6(b)(2) and 6(c), 15 U.S.C. 78f(b)(2)
                         and (c);  Exchange Act  15A(b)(8); 15 U.S.C.  78o-
                         3(b)(8).

               <(39)>    "[R]estraints on membership cannot be justified as
                         achieving   a   valid   regulatory  purpose   and,
                         therefore,  constitute  an  unnecessary burden  on
                         competition and  an impediment to  the development
                         of a national market system."   H.R. Rep. No. 123,
                         94th Cong., 1st Sess. 53 (1975).

               <(40)>    Exchange   Act   6(b)(3),  15   U.S.C.  78f(b)(3);
                         Exchange Act 15A(b)(4), 15 U.S.C. 78o-3(b)(4).

                              ======END OF PAGE 32======





     securities associations.  In addition, because registered exchanges and

     securities associations are also SROs, they exercise governmental powers,

     such as the imposition of disciplinary sanctions on their members.  Fair

     representation on the body responsible for disciplining members is,

     therefore, critical to the impartial enforcement of SRO rules.

          Market regulation is also designed to remove barriers to fair

     competition, by prohibiting the rules of registered exchanges and

     securities associations from being anticompetitive,<(41)> and by

     providing for Commission review of the rules of registered exchanges and

     securities associations.<(42)>  To further emphasize the goal of

     vigorous competition, Congress required the Commission to consider the

     competitive effects of exchange rules,<(43)> as well as the

     Commission's own rules.<(44)>

          The Commission's authority to review the actions of registered

     exchanges and securities associations has prevented the implementation of

     numerous rules that would have been anticompetitive or otherwise

     detrimental to the market.  For example, in December 1990, the American

     Stock Exchange ("Amex") submitted a rule proposal to the Commission that

     would have excluded the orders of competing dealers (i.e., regional

                              

               <(41)>    Exchange   Act   6(b)(8),  15   U.S.C.  78f(b)(8);
                         Exchange Act 15A(b)(9), 15 U.S.C. 78o-3(b)(9).

               <(42)>    Exchange Act  19(b)(1), 15 U.S.C.  78s(b)(1).  See
                         infra  notes  188  to 205  and  accompanying  text
                         (discussion  of  obligations   of  exchanges   and
                         securities  associations to  file  rules and  rule
                         changes with the Commission). 

               <(43)>    Exchange Act 6(b)(6), 15 U.S.C. 78f(b)(6).

               <(44)>    Exchange Act 23(a), 15 U.S.C. 78w(a)(2).

                              ======END OF PAGE 33======





     exchange specialists and third market makers) from its order routing system

     and would have imposed trading restrictions on competing dealers in Amex

     securities.  Because the exclusions and restrictions applied only to

     competing dealers and not to other off-floor broker-dealers trading for

     their own accounts, the proposal raised market access and competitive

     concerns.<(45)>  After receiving numerous negative public comments

     regarding the Amex's proposal, the Commission staff recommended that the

     Amex either amend or withdraw the proposal.<(46)>  Similarly, several

     exchanges have proposed prohibiting customer orders from being executed

     through the exchanges' automated systems for guaranteed execution of small

     customer orders, if those customers used computer and communications

     technology to generate and transmit those orders.  Such a proposal, if

     implemented, would have had the effect of discouraging the use of new,

     innovative technology.  The tendency to try to discourage innovation in

     order to protect existing practices is not new.  In 1987, for example, the

     Commission set aside the NYSE's denial of the requests of two of its

     members for permission to install telephone connections on the floor to



                              

               <(45)>    Securities Exchange Act Release No. 28741 (Jan. 3,
                         1991), 56 FR 1038  (Jan. 10, 1991).   The proposal
                         would have required that orders for the account of
                         competing  dealers: (1) yield  priority and parity
                         to all  other off-floor orders; (2)  accept parity
                         with orders for an  account of an Amex specialist;
                         and (3) be excluded  from the Amex's order routing
                         system, the Post Executions Reporting system.  The
                         Amex    subsequently    amended   its    proposal.
                         Securities Exchange Act Release No. 30161 (Jan. 7,
                         1992), 57 FR 1502 (Jan. 14, 1992).  

               <(46)>    See Market 2000 Study, supra note 14, at app. III,
                         at 11.  In 1994, the Amex withdrew its proposal.

                              ======END OF PAGE 34======





     enable the members to communicate with their customers.<(47)>

          The fair access and treatment requirements in the Exchange Act are

     intended to ensure that exchanges and securities associations operating

     markets treat investors and their participants fairly.  Under the current

     regulatory approach, however, there is no regulatory redress for unfair

     denials or limitations of access by alternative trading systems, or for

     unreasonably discriminatory actions taken against, or retaliatory fees

     imposed upon, participants in these systems.  The availability of redress

     for such discriminatory actions may not be critical when alternative

     trading systems disclose any discriminatory practices to their participants

     and when market participants are able to substitute the services of one

     alternative trading system with those of another.  However, when an

     alternative trading system has no other serious competitor, such as when it

     has a significantly large percentage of the volume of trading,

     discriminatory actions may be anticompetitive because market participants

     must use such trading system to remain competitive.  Similarly, significant

     changes in the operations of alternative trading systems are not subject to

     either Commission or SRO review -- even those changes that may be

     anticompetitive, unfair to a particular group of market participants, or

     that have significant effects on the primary public markets.

                    b.   Market Transparency and Coordination

          Securities markets have become increasingly interdependent because of

     the opportunities technology provides to link products, implement complex

                              

               <(47)>    See In the Matter of the Application of William J.
                         Higgins and  Michael D. Robbins, Admin.  Proc. No.
                         3-6609, Securities Exchange Act Release  No. 24429
                         (May 6, 1987).

                              ======END OF PAGE 35======





     hedging strategies across markets, and trade on multiple markets

     simultaneously.  While these opportunities benefit many investors, they can

     also create misallocations of capital, widespread inefficiency, and trading

     fragmentation if markets do not coordinate.  Moreover, a lack of

     coordination among markets can increase system-wide risks.  Congress

     adopted the 1975 Amendments, in part, to address these potential negative

     effects of a proliferation of markets.<(48)>  In the 1975 Amendments,

     Congress specifically endorsed the development of a national market system,

     and sought to clarify and strengthen the Commission's authority to promote

     the achievement of such a system.  Because of uncertainty as to how

     technological and economic changes would affect the securities markets,

     Congress explicitly rejected mandating specific components of a national

     market system.<(49)>  Instead, Congress granted the Commission

     "maximum flexibility in working out the specific details" and "broad

     discretionary powers" to implement the development of a national market

     system in accordance with the goals of the 1975 Amendments.<(50)> 

                              

               <(48)>    See generally  S. Rep.  No. 75  and H.R.  Rep. No.
                         229, 94th Cong., supra note 22.

               <(49)>    S. Rep. No. 75, supra note 22, at  2, 8; H.R. Rep.
                         No.  229, supra  note 22. "[T]he  increasing tempo
                         and magnitude of the changes that are occurring in
                         our  domestic and  international  economy make  it
                         clear that  the securities  markets are due  to be
                         tested  as   never  before,"  and  that   it  was,
                         therefore,   important   to   assure   "that   the
                         securities  markets  and  the  regulations  of the
                         securities industry remain  strong and capable  of
                         fostering [the] fundamental goals [of the Exchange
                         Act]  under  changing  economic and  technological
                         conditions." S. Rep. No. 75, supra note 22, at 3.

               <(50)>    S. Rep. No. 75  and H.R. Rep. No. 229,  supra note
                         22.

                              ======END OF PAGE 36======





     The SROs and the Commission have worked hard to achieve these

     goals.<(51)>  

          Recent evidence suggests that the failure of the current regulatory

     approach to fully coordinate trading on alternative trading systems into

     national market systems mechanisms has impaired the quality and pricing

     efficiency of secondary equity markets, particularly in light of the

     explosive growth in trading volume on such alternative trading systems. 

     Although these systems are available to some institutions, orders on these

     systems frequently are not available to the general investing public.  The

     ability of market makers and specialists to display different and

     potentially superior prices on these alternative trading systems than those

     displayed to the general public created, in the past, the potential for a

     two-tiered market.<(52)>  

          For example, during the Commission's recent investigation of Nasdaq
                              

               <(51)>    For example, the Intermarket  Communications Group
                         links  the  Commission,   the  Commodity   Futures
                         Trading Commission,  and the  SROs  for the  major
                         securities and futures markets.  During periods of
                         market  stress  this  interagency and  intermarket
                         coordination  helps  to  minimize uncertainty  and
                         improve communication for the benefit of investors
                         trading in all U.S. markets.  In addition, market-
                         wide  trading  halts  imposed by  circuit  breaker
                         procedures  limit credit risk by providing a brief
                         respite amid frenetic trading, which allows market
                         participants  to  ensure  the  solvency  of  their
                         counterparties.      These  planned,   coordinated
                         trading halts also  facilitate price discovery  by
                         providing  an  opportunity   to  publicize   order
                         imbalances in order to  attract value traders, and
                         cushion  the impact of market movements that would
                         otherwise damage a market's infrastructure.

               <(52)>    See  Securities Exchange  Act  Release  No.  36310
                         (Sept.  29, 1995),  60  FR 52792  (Oct. 10,  1995)
                         (hereinafter   Order   Handling  Rules   Proposing
                         Release).

                              ======END OF PAGE 37======





     trading,<(53)> analyses of trading in the two most significant

     trading systems for Nasdaq securities (Instinet and SelectNet) revealed

     that the majority of bids and offers displayed by market makers in these

     systems were better than those posted publicly on Nasdaq.<(54)> 

     Moreover, the Commission found that, because they could trade with other

     market professionals through non-public alternative trading systems, market

     makers did not have a sufficient economic incentive to adjust their public

     quotations to reflect more competitive prices.<(55)>  Ultimately, the

     wider spreads quoted publicly by market makers increased the transaction

     costs paid by public customers, impaired the ability of some institutional

                              

               <(53)>    Following  the  filing  of  several  class  action
                         lawsuits  alleging  collusion among  Nasdaq market
                         makers and public  allegations that Nasdaq  market
                         makers  routinely   refused  to  trade   at  their
                         published    quotes,     intentionally    reported
                         transactions late  in  order to  hide trades  from
                         other  market participants,  and engaged  in other
                         market   practices   detrimental   to   individual
                         investors,  the Commission opened a formal inquiry
                         to  investigate  the  functioning  of  the  Nasdaq
                         market  and  to  determine  whether the  NASD  was
                         complying fully  with its  obligations as an  SRO.
                         In  1996, as  a result  of the  investigation, the
                         Commission   instituted  enforcement   proceedings
                         against the NASD pursuant  to Section 19(h) of the
                         Exchange  Act and  issued a  report under  Section
                         21(a)   of   the   Exchange   Act   detailing  the
                         Commission's  findings.   See  NASD  21(a) Report,
                         supra note 20.

               <(54)>    These   conclusions  are  based  on  Instinet  and
                         SelectNet data  for the months  April through June
                         1994.   See NASD  21(a) Report, supra  note 20, at
                         notes 48 to 52 and accompanying text.

               <(55)>    The Commission found that  "the ability of  market
                         makers   to   attract  trading   interest  through
                         Instinet allowed them to  trade without using odd-
                         eighth  quotes and  narrowing the  Nasdaq spread."
                         NASD 21(a) Report, supra note 20, at 20.

                              ======END OF PAGE 38======





     investors to obtain favorable prices in those securities, and placed

     institutions at a potential disadvantage in price negotiations.<(56)>

          In response to these findings, the Commission recently took steps to

     bring greater transparency into the trading environment of certain

     alternative trading systems.  In September 1996, the Commission adopted

     rules that require a market maker or specialist to make publicly available

     any superior prices that it privately offers through certain types of

     alternative trading systems known as electronic communications networks, or

     ECNs.<(57)>  The new rules permit an ECN to fulfill these obligations

     on behalf of market makers using its system, by submitting its best market

     maker bid/ask quotations to an SRO for inclusion into public quotation

     displays ("ECN Display Alternative").

          These rules, however, were not intended to fully coordinate trading on

     alternative trading systems with public market trading.  While these rules

     will help integrate orders on certain trading systems into the public

     quotation system, they only affect trading that is conducted by market

     makers and specialists; activity of other participants on alternative

     trading systems remains undisclosed to the public market unless the system


                              

               <(56)>    NASD 21(a) Report, supra note 20, at 18.

               <(57)>    ECNs include any automated trading  mechanism that
                         widely disseminates market  maker orders to  third
                         parties  and permits  such  orders to  be executed
                         through  the system, other  than crossing systems.
                         See  Securities  Exchange Act  Release  No. 37619A
                         (Sept.  6, 1996),  61  FR 48290  (Sept. 12,  1996)
                         (hereinafter   Order   Handling   Rules   Adopting
                         Release).  Currently,  all ECNs are  broker-dealer
                         trading systems,  as defined in Exchange  Act Rule
                         17a-23,  and  are  sponsored   through  registered
                         broker-dealers.

                              ======END OF PAGE 39======





     voluntarily undertakes to disclose all of its best bid/ask

     prices.<(58)>  Moreover, whether an ECN reflects the best bid/ask

     quotations on behalf of market makers and specialists that participate in

     its system is wholly voluntary.<(59)>  Specifically, ECNs are under

     no obligation to integrate orders submitted into their systems into the

     public quotation system, and the central quotation system is not currently
                              

               <(58)>    Because such trading interest remains undisclosed,
                         within  certain  alternative trading  systems non-
                         market  maker participants  are  able  to  display
                         prices that lock and  cross the public quotations.
                         If the  quotes  of  such  participants  were  also
                         disclosed  to  the  public,  it  could  result  in
                         improved price opportunities for public investors.
                         There is  already  divergence among  ECNs  in  the
                         extent to which they have chosen to integrate non-
                         market maker  orders into the  prices they display
                         to  the  public.    Of  the  four  ECNs  that  are
                         currently  linked to  Nasdaq, two ECNs  display to
                         the public  the best prices of  any orders entered
                         into  their systems (including  both market makers
                         and institutions).  One ECN displays to the public
                         the best  price of any visible  order entered into
                         its system  by market makers  or institutions, but
                         does not display any orders that are designated as
                         "reserve orders"  (which may interact  with orders
                         entered  into  the  ECN's  system,   but  are  not
                         generally displayed to  participants in the  ECN).
                         The fourth ECN displays  to the public only orders
                         of market makers and those institutional customers
                         that affirmatively choose to have their orders  so
                         displayed. 

               <(59)>    To  date,  four trading  systems  have  elected to
                         display  quotes under  the ECN  alternative.   See
                         Letters dated  January  17, 1997  from Richard  R.
                         Lindsey, Director, SEC to: Charles R. Hood, Senior
                         V.P.  and  General  Counsel, Instinet  Corporation
                         (recognizing  Instinet as  an ECN);  Joshua Levine
                         and   Jeffrey   Citron,   Smith  Wall   Associates
                         (recognizing the Island System as  an ECN); Gerald
                         D.  Putnam,  President,  Terra  Nova  Trading, LLC
                         (recognizing   the  TONTO  System,  now  known  as
                         Archipelago,  as  an  ECN); and  Roger  D.  Blanc,
                         Wilkie Farr  &  Gallagher (counsel  to  Bloomberg)
                         (recognizing Bloomberg Tradebook as an ECN).

                              ======END OF PAGE 40======





     required to accept ECNs as participants.

          Because a majority of trading interest on alternative trading systems

     is not integrated into the national market system, price transparency is

     impaired and dissemination of quotation information is incomplete.  These

     developments are contrary to the goals the Commission enunciated over

     twenty years ago when it noted that an essential purpose of a national

     market system 

          is to make information on prices, volume, and quotes for securities in

          all markets available to all investors, so that buyers and sellers of

          securities, wherever located, can make informed investment decisions

          and not pay more than the lowest price at which someone is willing to

          sell, and not sell for less than the highest price a buyer is prepared

          to offer.<(60)>  

     This development also thwarts congressional goals for a national market

     system, where the best trading opportunities are to be made accessible to

     all customers, not just those customers who, due to their size or

     sophistication, may avail themselves of prices in alternative trading

     systems not currently available in the public quotation system.

                    c.   Market Surveillance

          Market regulation critically enhances the Commission's ability to

     surveil market activity as a whole in order to prevent fraud and

     manipulation, which can jeopardize market integrity and stability. 

     Exchanges and securities associations such as the NASD act as SROs and, as

                              

               <(60)>    Future Structure Statement, supra note 20, at 9-10
                         (emphasis added).  See also, SEC, Policy Statement
                         of the  Securities and Exchange  Commission on the
                         Structure of a CentralMarket System 25-28 (1973). 

                              ======END OF PAGE 41======





     such, are responsible not only for complying with the Exchange Act, but

     also for carrying out the purposes of the Exchange Act, principally by

     enforcing member compliance with the provisions of the Exchange Act and the

     rules promulgated thereunder, as well as the exchanges' or associations'

     own rules.<(61)>  This requires exchanges and securities associations

     to establish rules and procedures to prevent fraud and manipulation and

     promote just and equitable principles of trade, typically by establishing

     audit trails, surveillance, and disciplinary programs.  It also requires

     exchanges and securities associations to enforce the antifraud provisions

     of the federal securities laws.<(62)>  These requirements are

     essential to ensure that SROs implement the goals established by Congress

     vigilantly and effectively.  In addition, exchanges and securities

     associations serve a critical regulatory function by establishing and

     enforcing just and equitable principles of trade, and by providing a

     mechanism for preventing inappropriate behavior that damages market

     integrity, even if such behavior does not rise to the level of fraud under

     the Exchange Act.  As a result of these requirements, exchanges and

     securities associations carry out much of the day-to-day surveillance for,

     and initial investigation of, trading improprieties, rule violations, and

     fraud.

           Although the broker-dealers that operate many of the alternative

     trading systems have certain obligations to individual customers, because

     these systems are not SROs, they do not have the same market-wide
                              

               <(61)>    Exchange  Act  6(b)(1),  (5), and  (6),  15 U.S.C.
                         78f(b)(1), (5), and  (6); Exchange Act  15A(b)(2),
                         15 U.S.C. 78o-3(b)(2).

               <(62)>    Id.

                              ======END OF PAGE 42======





     enforcement and surveillance obligations as registered exchanges and the

     NASD.  Moreover, SROs' current programs to surveil their own markets for

     fraud, insider trading, and market manipulation do not extend to observing

     quote activity on alternative trading systems.  Specifically, although

     trades executed through certain alternative trading systems are reported to

     the NASD by either broker-dealer participants in such systems or by the

     broker-dealer operating the market,<(63)> the NASD may not receive a

     consolidated picture of trading activity on alternative trading systems. 

     Because activity on alternative trading systems is only reported to an SRO

     after a trade has been executed, SROs cannot fully supervise SROs' members'

     activities on those systems.<(64)>  In addition, because alternative

     trading systems are often reported as the counterparty to all trades

     between institutions executed through their systems, SRO surveillance

     mechanisms may not be able to identify the true counterparties of those

     trades.  As a result, fraudulent or manipulative activity that an

     institution is carrying on through an alternative trading system may be

     masked by the overall activities of the system's other participants, and go

     uninvestigated.  As more institutions use alternative trading systems to

     trade with each other, rather than with intermediaries, this could result

     in significant volume that is not integrated into SRO surveillance
                              

               <(63)>    Broker-dealers that operate  trading systems  have
                         the  same reporting  obligations as  other broker-
                         dealers.   For trades executed  on an  alternative
                         trading system, this means  that, depending on the
                         circumstances,  market  makers and  broker-dealers
                         trading  on  the  system  will  report  their  own
                         trades, and  that the broker-dealer sponsor of the
                         system  will  undertake to  report  trades between
                         non-broker-dealers.

               <(64)>    See NASD 21(a) Report, supra note 20.

                              ======END OF PAGE 43======





     operations.  Finally, alternative trading systems that compete with systems

     operated by SROs have repeatedly questioned whether particular SRO actions

     were driven by competitive, rather than regulatory motives.  Thus, adequate

     oversight of alternative trading systems by SROs may be hindered by

     competitive concerns.

                    d.   Market Stability and Systemic Risks  

          SROs have substantial, ongoing commitments to maintain sufficient

     system capacity, integrity, and security.  The Commission has instituted a

     program to monitor capacity planning at SROs, so that it can take

     preemptive action if necessary, and meets with the SROs on a regular basis

     and reviews various aspects of their computer operations.  In contrast, the

     Division of Market Regulation's experience in administering the Order

     Handling Rules and other broker-dealer rules has revealed that, in many

     cases, ECNs and other alternative trading systems may have serious capacity

     problems.<(65)>  Even though they have significant trading volume,

     under the current regulatory scheme ECNs and other alternative trading

     systems are not required to have sufficient computer capacity to meet

     ongoing trading demand or to withstand periods of extreme market volatility

     or other short-term surges in trading volume.  Failure to integrate

     alternative trading systems into the Commission's programs to review and

                              

               <(65)>    The Commission  is aware  of several  occasions on
                         which significant alternative trading  systems had
                         to  stop disseminating market  maker quotations in
                         order to  keep  from  closing  altogether  due  to
                         insufficient  system  capacity.    In  one  recent
                         occurrence, an interruption in  service at an  ECN
                         immediately  following  a key  market announcement
                         appears to have  seriously affected options market
                         makers'  ability to trade  the equities underlying
                         their options.  

                              ======END OF PAGE 44======





     enhance the capacity of alternative trading systems jeopardizes efforts to

     ensure that all trade execution centers will remain operational during

     periods of market stress.  

          C.   Conclusion

          In sum, the current regulation of alternative trading systems does not

     address the market activities performed by such systems.  As a result, such

     regulation may not have effectively met the congressional goals of

     protecting market participants from fraud and manipulation, promoting

     market coordination and stability, and ensuring regulatory fairness and

     fair competition. 

          Question 1:  The Commission seeks comment on the concerns identified

          above and invites commenters to identify other issues raised by the

          current approach to regulating alternative trading systems.

          Question 2:  Are the concerns raised in this release with regard to

          the operation of alternative trading systems under the current

          regulatory approach unique to such systems?  To what extent could

          these concerns be raised by broker-dealers that do not operate

          alternative trading systems, such as a broker-dealer that matches

          customer  orders internally and routes them to an exchange for

                    execution or a broker-dealer that arranges for other broker-

                    dealers to route their customer orders to it for automated

                    execution?

     III. Approaches to Market Oversight

          The Commission recognizes that, in order to promote efficiency,

     competition, and capital formation in the securities industry, creation of

     new markets or the evolution of existing ones must not be inhibited.  At


                              ======END OF PAGE 45======





     the same time, the Commission continues to believe that fair and measured

     market oversight is valuable to protect investors, ensure the integrity and

     fairness of markets, and otherwise promote the goals reflected in the

     Exchange Act.  

          As the problems discussed above illustrate, the current approach for

     regulating alternative trading systems may not effectively accomplish these

     objectives.  New technologies are continually facilitating innovative means

     of trading securities, resulting in qualitatively different market

     structures.  In the next decade, the continued growth of the Internet will

     present even more opportunity for change in financial services.  This

     release solicits comment on whether the current statutory and regulatory

     framework is appropriate in light of these myriad developments and new

     means of trading securities made possible by emerging technologies.  The

     release then seeks comment on specific alternatives for addressing these

     objectives within the existing securities law framework.  

          A.   Regulatory Structure

          As technology continues to drive the evolution of markets, the variety

     and combinations of services offered by markets and intermediaries will

     continue to blur the distinctions among these entities.  Under the Exchange

     Act, such distinctions determine the obligations and responsibilities of

     each entity towards customers and the market as a whole.  In particular,

     the Exchange Act categorizes market participants based on their primary

     activities, such as an "exchange" function or a "broker-dealer" function. 

     Although Congress defined the terms "exchange," "broker," and "dealer"

     broadly enough to accommodate changes in how these entities carry out their

     business, they could not anticipate the variety of entities that would


                              ======END OF PAGE 46======





     develop.  The Commission invites commenters to analyze whether, in light of

     technological advances, market participants might be appropriately

     regulated without reference to distinctions between markets and

     intermediaries.  In the alternative, the Commission solicits comment on

     whether new regulatory categories are needed for entities that combine both

     market and intermediary functions.  The Commission also solicits comment on

     what oversight should apply to these categories.  

            In addition, as explained above, exchanges and broker-dealer

     intermediaries each play critical roles in supervising securities

     activities.  The Commission solicits comment on how any changes to the

     regulatory approach would affect these roles.

          Finally, the Commission solicits comment on how any changes to the

     current statutory and regulatory structure made to accommodate market

     innovations could be accomplished without undue cost to existing market

     participants, which have invested significantly to comply with the existing

     structure.

          Question 3:  What regulatory approaches would best address the

          concerns raised by the growth of alternative trading systems and the

          needs of the market?  Is the current approach the most appropriate

          one?

          Question 4:  What should be the objectives of market regulation?  Are

          the goals and regulatory structure incorporated by Congress in the

          Exchange Act appropriate in light of technological changes?  Are

          business incentives adequate to accomplish these goals?

          Question 5:  Are the regulatory categories defined in the Exchange Act

          sufficiently flexible to accommodate changes in market structure?  If


                              ======END OF PAGE 47======





          not, what other categories would be appropriate?  How should such

          categories be defined?

          B.   Regulatory Tools

          Technological changes also have significant implications for the tools

     the Commission relies on to achieve the goals incorporated by Congress into

     the Exchange Act.  As discussed in greater detail in Sections IV and V

     below, the Commission currently regulates markets largely through its

     registration, rule filing, examination, and enforcement programs.  In light

     of the changes discussed above, the Commission solicits comment on whether

     these are effective means of accomplishing congressional goals, and, if

     not, what other means might be more appropriate.

          For example, many Commission regulations require market participants

     to deliver written documents.  In order to give broker-dealers and

     investment advisers the flexibility to comply with these requirements in

     the most cost-effective and efficient manner, the Commission has issued

     interpretative guidance regarding the use of electronic communications to

     fulfill the delivery requirements of the federal securities

     laws.<(66)>  Rather than specifying acceptable types of electronic

     delivery, the Commission specified the standards that entities had to

     achieve in meeting their delivery requirements electronically, leaving it

     to each entity to determine the best way to meet each standard.  This

     approach allows broker-dealers and investment advisers to avail themselves

     of technological innovations without first obtaining regulatory approval. 
                              

               <(66)>    See Securities  Exchange Act Release No. 36345, 60
                         FR  53458 (Oct. 6,  1995); Securities Exchange Act
                         Release  No. 36346,  60 FR  53468 (Oct.  6, 1995);
                         Securities Exchange Act Release No. 37183 (May  9,
                         1996), 61 FR 24652 (May 15, 1996).

                              ======END OF PAGE 48======





     The Commission solicits comment on whether such a standard-oriented

     approach would be appropriate for the regulation of markets, and, if so,

     what these standards should be.  

          Question 6:  Can the Commission regulate markets effectively through

          standard-oriented regulation of the type described above?

          Question 7:  How could the Commission enforce compliance with the

          Exchange Act under such a standard-oriented approach?

          Question 8:  Is the current regulatory framework an effective form of

          oversight, in light of technological changes?  Are there other

          regulatory techniques that would be comparably effective?  If so,

          would the implementation of such techniques be consistent with

          congressional goals reflected in the Exchange Act?

     IV.  Proposals Under Consideration to Integrate Alternative Trading Systems

          into the Existing Regulatory Structure for Market Oversight

          Within the existing regulatory framework, the issues currently

     associated with alternative trading systems could be addressed in large

     part by integrating alternative trading systems more effectively into

     national market system mechanisms. Discussed below are two alternative

     means of effecting such integration.  First, the Commission could continue

     to regulate alternative trading systems as broker-dealers and attempt to

     integrate these systems more effectively into market regulation mechanisms

     through a series of rules applicable to broker-dealers operating such

     systems and to SROs overseeing such systems.  Second, the Commission could

     regulate alternative trading systems as exchanges by expanding the

     interpretation of the term "exchange" to cover those alternative trading

     systems that engage in many of the same activities as currently registered


                              ======END OF PAGE 49======





     exchanges, such as operating an electronic limit order book, or matching or

     crossing participant orders.  The Commission could then follow a tiered

     approach to regulating those alternative trading systems classified as

     exchanges.  The first tier under this approach would consist of those

     alternative trading systems that have low volume or a passive pricing

     structure.  These trading systems would not be required to register as

     national securities exchanges (or as broker-dealers, to the extent that

     such trading systems do not also perform customary brokerage

     functions),<(67)> but would be subject to limited requirements.  The

     second tier under this approach would consist of those alternative trading

     systems with a large volume of trading and active price discovery, but that

     do not have membership structures.  The Commission could require these

     trading systems to register as exchanges, but would use its new exemptive

     authority to eliminate unnecessary or inappropriate

     requirements.<(68)>  Finally, the third tier under this approach
                              

               <(67)>    See infra notes 183 to 184 and accompanying text.

               <(68)>    The National Securities Markets Improvement Act of
                         1996 (hereinafter  1996 Amendments), Pub.  L. 104-
                         290,  added Section  36  to the  Exchange Act,  15
                         U.S.C.  78mm, which  authorizes the  Commission to
                         conditionally   or   unconditionally  exempt   any
                         person, security,  or  transaction, or  any  class
                         thereof, from any provision of the Exchange Act or
                         rule  thereunder, so  long  as  the  exemption  is
                         necessary  or appropriate  in the  public interest
                         and   is   consistent  with   the   protection  of
                         investors.   Section 36  of the Exchange  Act does
                         not  authorize the  Commission to  exempt persons,
                         securities, transactions, or classes  thereof from
                         Section  15C  of the  Exchange  Act  or rules  and
                         regulations  issued under  that section.   Section
                         15C  establishes   registration  requirements  for
                         government   securities  brokers   and  government
                         securities  dealers and gives  the U.S. Department
                                                             (continued...)

                              ======END OF PAGE 50======





     would consist of those traditional exchanges that have membership

     governance structures.

          Any new regulatory approach to oversight of alternative trading

     systems should promote efficiency, competition, and capital formation in

     the securities industry, without inhibiting the development of new markets. 

     At the same time, it is critical to address the problems discussed above. 

     The Commission solicits comment on the two alternatives for addressing

     these issues discussed below, and on whether there are other alternatives

     that may address the Commission's concerns.

          Question 9:  Are there viable alternatives within the existing

          Exchange Act structure, other than those discussed below, that would

          address the concerns raised by the growth of alternative trading

          systems and congressional goals in adopting the Exchange Act?

          A.   Integrating Alternative Trading Systems into the National Market

               System Through Broker-Dealer Regulation

          In order to rectify the shortcomings discussed in Section II of this

     release, the Commission could build upon its current regulation of

     alternative trading systems as broker-dealers.  In particular, alternative

     trading systems could be overseen and integrated into the NMS through a

     combination of broker-dealer regulation and regulation of the SROs that

                              

               <(68)>(...continued)
                         of  the  Treasury  authority to  promulgate  rules
                         governing the  activities of these entities.   All
                         of the  exemptions pursuant  to Section 36  of the
                         Exchange Act that the Commission is considering in
                         this concept  release could be granted  by rule or
                         regulation.   If the Commission determined instead
                         to issue orders  granting exemptive  applications,
                         it  would need  to adopt  procedures for  doing so
                         pursuant to Section 36. 

                              ======END OF PAGE 51======





     supervise these systems.  The Commission took a similar approach in its

     recent adoption of the Order Handling Rules (which are designed to

     integrate a portion of the trading on ECNs into market transparency

     mechanisms) and in its adoption of Rule 17a-23 (which established

     recordkeeping and reporting requirements specifically tailored to broker-

     dealers operating trading systems).

          As discussed below, these broker-dealer regulations could include

     requiring those broker-dealers that operate alternative trading systems to

     make all orders of participants in those systems available to the public

     quotation system.  The Commission could also require alternative trading

     systems to provide the public with access to such systems in order to

     interact with the orders posted by participants of such systems.  In

     addition, the Commission could impose additional requirements on both the

     broker-dealers that operate alternative trading systems and their SROs in

     order to more effectively integrate these systems into SRO surveillance

     mechanisms.  For example, the Commission could require broker-dealers that

     operate alternative trading systems to provide more audit trail information

     to their SROs, which would help SROs execute their oversight functions, and

     could require SROs to use this additional information to integrate these

     systems into their surveillance programs.  Finally, the Commission could

     adopt measures that would help to ensure that alternative trading systems

     have adequate systems capacity.

          Question 10:  What types of alternative trading systems would it be

          appropriate to regulate in this manner?

               1.   Fully Integrating the Orders of All Market Participants into

                    the Public Quotation System and Facilitating Public Access


                              ======END OF PAGE 52======





                    to Such Orders 

          In its efforts to increase competition and transparency in the market,

     the Commission has encouraged the development of NMS mechanisms, such as

     the Consolidated Tape Association ("CTA"), the Consolidated Quotation

     System ("CQS") and the Intermarket Trading System ("ITS").  These

     mechanisms make information about trading interest, prices, and volume

     widely available to market participants.  The Commission has worked to

     continuously update and improve the NMS to reflect technological advances. 

     For example, the new Order Handling Rules require market makers and

     specialists to make available publicly any superior prices they privately

     offer through ECNs.  As an alternative, the new rules permit, but do not

     require, an ECN to fulfill these obligations on behalf of the market maker

     or specialist by submitting the ECN's best bid and offer to an SRO for

     inclusion into the public quotation system.  

          As discussed above,<(69)> however, these rules were not intended

     to integrate all trading on alternative trading systems into the NMS. 

     These rules focus only on ensuring that market maker and specialist

     activity on alternative trading systems is reflected in their public

     quotations.  As a result, institutional orders on ECNs remain largely

     undisclosed to the public, thus hiding the aggregate trading interest on

     alternative trading systems from public view.  Therefore, it might be

     appropriate to require broker-dealers that operate alternative trading

     systems to report all orders<(70)> submitted by participants,
                              

               <(69)>    See supra notes 57 to 60 and accompanying text.

               <(70)>    Firm  prices  for  securities, whether  such  firm
                         prices  are  labeled  as  "orders,"  "quotes,"  or
                                                             (continued...)

                              ======END OF PAGE 53======





     including those of non-broker-dealer participants, for integration into the

     public quotation system.  

          If alternative trading systems are required in some manner to publicly

     display the orders of all participants, they could also be required to

     provide the public with the ability to execute against those orders.  Under

     the Order Handling Rules, an ECN that voluntarily displays market makers'

     and specialists' quotations to the public must also provide an equal

     opportunity for participants and non-participants to execute their orders

     against such quotations.  Non-participants, however, may only access market

     maker and specialist quotations on those ECNs.  Alternative trading systems

     could be required to provide non-participants with the ability to execute

     against all orders in their system, including those of institutions, in a

     manner equivalent to that offered participants of the systems.  Non-

     participants would be granted access on a real-time basis under this

     approach and could be charged reasonable fees for such access.

          Question 11:  If the Commission decided to further integrate

          alternative trading systems into the NMS through broker-dealer

          regulation, should it require alternative trading systems to submit

          all orders displayed in their systems into the public quotation

          system?  If not, how should the Commission ensure adequate

          transparency? 
                              

               <(70)>(...continued)
                         otherwise,   could  be  included   in  the  public
                         quotation  system.   Priced  orders  entered  into
                         alternative trading  systems where the  orders are
                         widely disseminated and executable could be viewed
                         as  the functional  equivalent of  quotations, and
                         like  quotations, would  play  a key  role in  the
                         price discovery process.  See also Order  Handling
                         Rules Adopting Release, supra note 57, at 116.

                              ======END OF PAGE 54======





          Question 12:  If the Commission requires alternative trading systems

          to submit all orders displayed in their systems into the public

          quotation system, how can duplicate reporting by alternative trading

          systems and their participant broker-dealers be prevented?

          Question 13:  Are there other methods for integrating all orders

          submitted into alternative trading systems into the public quotation

          system?

          Question 14:  Are there any reasons that orders available in

          alternative trading systems should not be available to the public?

          Question 15:  If the Commission requires alternative trading systems

          to allow non-participants to execute against orders of system

          participants, how should it ensure that non-participants are granted

          equivalent access?  

          Question 16:  If the Commission requires alternative trading systems

          to allow non-participants to execute against orders of system

          participants, how should it determine whether the fees charged to non-

          participants by such systems are reasonable and do not have the effect

          of denying access to orders? 

          Question 17:  Are there any reasons that non-participants should not

          be able to execute against orders of participants in alternative

          trading systems?

               2.   Improving the Surveillance of Trading Conducted on

                    Alternative Trading Systems

          As discussed below, alternative trading systems may not be subject to

     real-time surveillance for market manipulation and fraud.  Broker-dealers

     that operate these systems are not required to actively surveil the conduct


                              ======END OF PAGE 55======





     of system participants to ensure against fraud and manipulation.  Instead,

     as discussed above, these surveillance responsibilities lie with the SROs. 

     SROs, however, do not actively incorporate alternative trading systems into

     their real-time surveillance programs, and broker-dealer trade reporting

     conventions restrict SRO surveillance capabilities.  

          Trading by institutions on alternative trading systems is effectively

     hidden from SRO programs designed to detect fraud and manipulation.  SRO

     surveillance systems generate "alerts" that, in their most basic form,

     indicate when trading in a particular security is outside of normal trading

     patterns, such as when a previously inactive entity suddenly begins

     actively trading.  Broker-dealers operating alternative trading systems,

     however, are not required to report the identities of the counterparties to

     a trade to their supervising SRO.  Instead, the broker-dealer may report

     the trade to the SRO as its own trade.  Therefore, SRO surveillance

     programs do not "look through" the alternative trading system to the actual

     counterparties conducting the trading on such systems.  Because the SRO

     system views the broker-dealer operating the system as the counterparty to

     trades, unusual trading activity of a participant in an alternative trading

     system may not trigger an alert.  While the anonymity provided by the

     broker-dealer trading system reporting the trade may be desirable to some

     because it allows traders to hide their trading strategies from other

     market participants, it also represents an opportunity for market

     manipulation that is increasingly difficult for SROs to detect.  

          In addition, SRO surveillance programs typically are constructed

     around activity in particular securities.  Several alternative trading

     systems are designed to provide a liquid market in securities that are not


                              ======END OF PAGE 56======





     traded on exchanges or Nasdaq, such as limited partnerships and certain

     derivatives.  Because SRO surveillance currently focuses primarily on

     trading in securities listed or approved for trading on the market operated

     by that SRO, activity on systems trading other securities (particularly

     non-equity securities) may not receive adequate surveillance for fraud and

     market manipulation.

          Finally, although a broker-dealer is generally obligated to report a

     trade executed on an alternative trading system to its SRO,<(71)> the

     SRO does not receive a composite picture of orders available on that

     alternative trading system on a real-time basis.  Consequently, the SRO is

     not able to integrate the activity on an alternative trading system into

     its information about activity in that security on its own market.

          For these reasons, if alternative trading systems continue to be

     regulated as broker-dealers, it may be appropriate to require such systems

     to provide their SRO, on an automated basis, with real-time information

     about trading on the systems (including, where appropriate, parties to a

     trade), in order to enable the SRO to improve its surveillance of such

     trading.  The Commission notes that the identities of the counterparties to

     a trade would not be made publicly available, but would be provided solely

     to the market surveillance department of an SRO.  In addition, in order for

     SROs to incorporate the trading on alternative trading systems into their

     real-time surveillance programs, SROs would have to understand in much

     greater detail than they do today the manner in which prices are

     established on alternative trading systems.  This would probably require

     SROs, for example, to examine the trading algorithms, including the
                              

               <(71)>    See, e.g., NASD Manual Rules 4630-32.  

                              ======END OF PAGE 57======





     programming code, of alternative trading systems.  Alternative trading

     systems would also have to notify SROs of changes to their system. 

     Further, because alternative trading systems that trade non-NMS securities

     are not currently included within SROs' primary surveillance programs, SROs

     may have to broaden the scope of their surveillance activities to include

     more active surveillance of trading in securities not listed or quoted on

     the market operated by the SRO.

          Under this approach, the surveilling SRO would integrate the

     additional data provided by the alternative trading systems into the SRO's

     audit trail and real-time surveillance function.  The SROs could use this

     data to enhance their ongoing, real-time surveillance of these alternative

     systems by developing specifically tailored surveillance and examination

     procedures to detect fraud and manipulation on particular systems and among

     systems.

          Question 18:  Should the Commission require alternative trading

          systems to provide additional information (such as identifying

          counterparties) to their SRO in order to enhance the SRO's audit trail

          and surveillance capabilities?

          Question 19:  What other methods could the Commission use to enhance

          market surveillance of activities on alternative trading systems?

          Question 20:  Should SROs be required to surveil trading by their

          members in securities that are not listed or quoted on the market

          operated by that SRO?

               3.   Ensuring Adequate Capacity of Alternative Trading Systems

          As alternative trading systems play an increasingly important role in

     the securities markets, their ability to continue to operate during periods


                              ======END OF PAGE 58======





     of high volume or volatility becomes critical.  Existing standards

     regarding the review of the capacities and other operational requirements

     of markets could apply to alternative trading systems if they continue to

     be regulated as broker-dealers.<(72)>   

          The Commission currently receives limited information regarding the

     operational procedures of alternative trading systems under Rule 17a-

     23.<(73)>  Although that Rule requires system operators to provide

     the Commission with a brief description of their trading systems, including

     significant systems changes and procedures for reviewing systems capacity,

     security, and contingency planning, it does not require alternative trading

     systems to adopt such procedures.  The Commission in the past has issued

     guidance to SROs on developing and implementing policies for assessing the

     capacity, security, and contingency planning of their systems.<(74)> 
                              

               <(72)>    In  particular,  the  Commission   is  considering
                         adopting  certain additional  procedures, pursuant
                         to  Section   15(b)(7)  of  the   Act,  15  U.S.C.
                         78o(b)(7),  to  ensure  that  alternative  trading
                         systems have adequate  facilities and  operational
                         capabilities for the services they provide. 

               <(73)>    See Item 5, Part I of Form 17A-23, 17 CFR 249.636.

               <(74)>    See Securities Exchange Act Release No. 29185 (May
                         9, 1991),  56 FR 22490 (May  15, 1991); Securities
                         Exchange Act Release No. 27445 (Nov. 16, 1989), 54
                         FR  48703  (Nov.   24,  1989).    These   releases
                         encourage SROs to establish comprehensive planning
                         and  assessment  programs  that  accomplish  three
                         objectives:  (1) each SRO should establish current
                         and future capacity estimates; (2) each SRO should
                         conduct  capacity  stress tests  periodically; and
                         (3) each SRO  should obtain an  annual independent
                         assessment  of whether  the  affected systems  can
                         perform adequately in light of  estimated capacity
                         levels and  possible threats  to the systems.   An
                         "independent  review" might  be  performed by  any
                         qualified party that has the organizational status
                                                             (continued...)

                              ======END OF PAGE 59======





     To ensure that alternative trading systems have adequate capacity for order

     execution and other services they provide, the Commission could consider

     whether broker-dealers that operate such systems should be required to

     follow similar guidelines.  For example, alternative trading systems could

     be required to arrange for independent systems reviews, including an

     assessment of anticipated capacity requirements, contingency protocols, and

     processes for preventing, detecting, and controlling threats to their

     systems.  In addition, alternative trading systems could be required to

     report significant systems outages to the Commission and their SRO on a

     real-time basis.

          Question 21:  Should alternative trading systems be required to follow

          guidelines regarding the capacity and integrity of their systems?  If

          not, how should the Commission address systemic risk concerns

          associated with potentially inadequate capacity of alternative trading

          systems, particularly those systems with significant volume?

                              

               <(74)>(...continued)
                         and objectivity such  that it operates  separately
                         from and is not controlled by the SRO's technology
                         staff.    The  Commission  recommended  that these
                         independent reviews evaluate the  following areas:
                         computer  operations; telecommunications;  systems
                         development  methodology;  capacity  planning  and
                         testing; and contingency planning.  The Commission
                         also  presented  the   SROs  with  guidelines  for
                         additional means for providing the Commission with
                         information  regarding automation  developments or
                         enhancements and system outages, specifically: (1)
                         annual  reports through which  SRO technical staff
                         would  describe for  Division  staff  the  current
                         automated system operations  and planned  changes;
                         (2)   SRO   notification   of   the   Division  of
                         significant  changes to automated systems; and (3)
                         real-time     notification      of     significant
                         interruptions of service in SRO  automated trading
                         systems.

                              ======END OF PAGE 60======





          Question 22:  With what types of standards regarding computer

          security, capacity, and auditing of systems, should alternative

          trading systems be required to comply?

          Question 23:  To what extent would complying with systems guidelines

          similar to those implemented by exchanges and other SROs require

          modification to the current procedures of alternative trading systems? 

          What costs would be associated with such modifications?  How much time

          would be required to implement the necessary modifications and systems

          enhancements?  Please provide a basis for these estimates.

                    4.   Potential Problems with Regulating Alternative Trading

                         Systems Under the Broker-Dealer Regulatory Scheme

          Although broker-dealer regulation provides a framework for integrating

     alternative trading systems into the most significant aspects of the NMS,

     such an approach may not address certain of the regulatory gaps discussed

     above in Section II.  First, the broker-dealer approach may not ensure the

     fair treatment of investors by alternative trading systems.  Second, as

     broker-dealers, these systems would continue to be required to comply with

     regulations designed for more traditional brokerage activities.  For

     example, the operators of alternative trading systems would be subject to

     oversight and heightened surveillance by SROs, which may operate competing

     trading systems.  Third, alternative trading systems, even those with a

     significant share of trading volume, would not be subject to provisions

     designed to address anticompetitive activities.

                    a.   Alternative Trading Systems Would Not Be Subject to

                         Requirements Designed to Assure Fair Treatment of

                         Investors 


                              ======END OF PAGE 61======





          In contrast to  national securities exchanges, no regulatory redress

     exists for unreasonably discriminatory action taken by a broker-dealer

     operating an alternative trading system against a system participant or an

     applicant.<(75)>  As discussed above,<(76)> the ability of

     these systems to unreasonably discriminate can have adverse ramifications

     for market participants.  For example, if a significant percentage of

     institutional orders are entered into an alternative trading system,

     broker-dealers denied access to that system would lose the opportunity to

     interact with that institutional trading interest.  They may also be denied

     the opportunity to display customer limit orders in a forum where they are

     most likely to be executed.  Similarly, an alternative trading system that

     trades illiquid securities, such as limited partnerships or real estate

     derivatives, may provide the only efficient means of locating

     counterparties with which to trade in those securities.  Investors denied

     access to such a system may have limited opportunity to trade those

     securities, particularly if other participants in the market primarily

     trade those securities through the alternative trading system.

          Fair treatment of potential and actual participants becomes more

     important as alternative trading systems capture a larger percentage of

     overall trading volume and display consistently superior prices,

     particularly if there are no viable alternatives to trading on such

                              

               <(75)>    Rule 17a-23 requires a  sponsor of a broker-dealer
                         trading  system to  provide the Commission  with a
                         description of the sponsor's criteria for granting
                         access to the system.   The Rule does not directly
                         require  meaningful  disclosure of  the underlying
                         reasons for particular denials of access.

               <(76)>    See supra Section II.B.2.a.

                              ======END OF PAGE 62======





     systems.  The importance of fair treatment by such systems is heightened

     during periods of significant market activity.  Broker-dealer regulation

     may not provide meaningful redress for unfairly discriminatory acts taken

     by the operators of these systems.  Even if the Commission were to require

     reporting of denials of access to a system or its services, investors might

     continue to be without regulatory redress for discriminatory actions.

          Question 24:  Is access to alternative trading systems an important

          goal that the Commission should consider in regulating such systems? 

          If so, are there circumstances in which alternative trading systems

          should be able to limit access to their systems (for example, should

          the Commission be concerned about access to an alternative trading

          system that has arranged for its quotes to be displayed as part of the

          public quotation system)?

          Question 25:  If alternative trading systems were to continue to be

          regulated as broker-dealers and were subject to a fair access

          requirement, should the Commission consider denial of access claims

          brought by participants and non-participants in alternative trading

          systems?  If not, are there other methods that could adequately

          address such claims?  

          Question 26:  Are commenters aware of any unfair denials of access by

          broker-dealers operating alternative trading systems, where there were

          no alternative trading venues available to the entities denied access?

                    b.   Broker-Dealers that Operate Alternative Trading Systems

                         Will Still Be Required to Comply with Potentially

                         Inapplicable Regulation and Be Subject to Oversight by

                         SROs


                              ======END OF PAGE 63======





          Alternative trading systems are currently required to comply with

     regulation intended for traditional broker-dealer activities (e.g.,

     recommending investment strategies and holding customer funds and

     securities).<(77)>  Moreover, they are subject to surveillance by

     SROs that operate their own trading systems that may compete with

     alternative trading systems.  In the past, broker-dealers that operated

     alternative trading systems have been reluctant to comply with SRO requests

     for compliance data because of their concern that the SRO will use this

     confidential business data for purposes unrelated to regulatory oversight.  



          The broker-dealer approach described above contemplates enhancement of

     SRO oversight to integrate these systems into the mechanisms of the NMS,

     provide for adequate market surveillance of trading activity on these

     systems, and prevent fraud and manipulation.  SROs may have concerns about

     the resources that would have to be dedicated to enhance surveillance of

     alternative trading systems.  In addition, alternative trading systems may

     object to surveillance by the regulatory arm of those entities with which

     they compete for order flow.  For example, alternative trading systems may

     be reluctant to fully disclose information about the operation of their

     trading systems to SROs that operate competing markets.  Strict separation

     of market and regulatory functions within an SRO (which some SROs have

     already undertaken) may help alleviate concerns over whether information

     provided to the regulatory arm of an SRO could be used for competitive

     purposes.  

          It may be more desirable for alternative trading systems to be
                              

               <(77)>    See supra Section II.B.1.

                              ======END OF PAGE 64======





     surveilled by an SRO not under the control of an entity that also operates

     a competing market.  For example, under Section 15A of the Exchange Act, an

     association of brokers and dealers could establish an SRO that does not

     operate a market.  Such an SRO could be established solely for purposes of

     overseeing the activities of unaffiliated markets.  The Commission seeks

     comment on the advisability and feasibility of such an approach.

          Question 27:  Would enhanced surveillance of alternative trading

          systems by their SROs raise competitive concerns that could not be

          addressed through separation of the market and regulatory functions of

          the SROs?

          Question 28:  If alternative trading systems continue to be regulated

          as broker-dealers, are there other ways to integrate the surveillance

          of trading on alternative trading systems? 

          Question 29:  What is the feasibility of establishing an SRO solely

          for the purpose of surveilling the trading activities of broker-dealer

          operated alternative trading systems, that does not also operate a

          competing market?

                    c.   Alternative Trading Systems Will Be Free to Engage in

                         Anticompetitive Activities

          Broker-dealer regulation is not designed to address anticompetitive

     activities.  If a traditional broker-dealer acts in an anticompetitive

     manner, investors and other market participants always have the option of

     dealing with another broker-dealer.  If an alternative trading system

     operated by a broker-dealer captures a large market share and is a major

     forum for price discovery in a particular security, however, other trading

     venues may not be comparable.  As a result, anticompetitive activities by


                              ======END OF PAGE 65======





     that system may have significant effects on investors and other

     markets.<(78)>  

          Because broker-dealers, unlike SROs, are not subject to non-

     discriminatory standards for access or fees, or prevented under the

     Exchange Act from using their market position to impose anticompetitive

     conditions, alternative trading systems that are regulated as broker-

     dealers would not be restricted from engaging in anticompetitive activities

     that have a negative impact on investors and other markets.<(79)>

          Question 30:  If alternative trading systems continue to be regulated

          as broker-dealers, how can the Commission address anticompetitive

          practices by such systems?

               5.   Conclusion

                              

               <(78)>    For  example,  following  adoption  of   the  1975
                         Amendments, the Commission  reviewed SRO rules  to
                         confirm  that they  were  in  compliance with  the
                         Exchange Act as amended.   Among other things, the
                         Commission  identified  several   rules  that   it
                         considered to  be anticompetitive in  violation of
                         the Exchange Act,  such as  rules that  restricted
                         the  types of  entities with  which  their members
                         could trade.  See Securities Exchange  Act Release
                         No.  13027 (Dec. 1,  1976), 41  FR 53557  (Dec. 7,
                         1976).

               <(79)>    Exchange    regulation    addresses    potentially
                         anticompetitive     activities     through     the
                         Commission's  oversight of  SROs  and through  the
                         rule  filing  process.    For  example, a  primary
                         registered market could  institute an  after-hours
                         trading halt  for purposes of  news dissemination,
                         but fail to remove  that halt until the re-opening
                         of its own  facilities the following  trading day,
                         even if  sufficient time has passed  to permit the
                         dissemination of the news.  In that situation, the
                         Commission could act to ensure that the registered
                         market  was  not  instituting a  trading  halt  to
                         prevent competitors from  engaging in  after-hours
                         trading in its securities. 

                              ======END OF PAGE 66======





          The approach to regulating alternative trading systems discussed

     above, which would continue to regulate alternative trading systems as

     broker-dealers, appears to address some of the Commission's concerns

     regarding transparency, surveillance, and capacity of alternative trading

     systems, while balancing business needs of the alternative trading systems. 

     In addition, regulation of the operators of alternative trading systems as

     broker-dealers has in the past been supported by sponsors of such systems

     as an appropriate way to regulate, and as a means of fostering the

     development of, these systems.<(80)>  Similarly, some SROs have

     expressed their support for basing the regulation of alternative trading

     systems on the regulation of their sponsors as broker-dealers.<(81)>

          Question 31:  Would this approach be an effective means of addressing

          the issues raised by the growth of alternative trading systems?  What

          would be the benefits of such an approach?  What would be the

          drawbacks of such an approach?

          B.   Integrating Alternative Trading Systems into Market Regulation

               Through Exchange Regulation
                              

               <(80)>    See,  e.g.,   Letter   from  Daniel   T.   Brooks,
                         Cadwalader,   Wickersham   &   Taft  (counsel   to
                         Instinet), to Jonathan G. Katz, SEC (Aug. 2, 1989)
                         at  29  ("When  properly  analyzed .  .  .  market
                         structure  concerns  dictate   that  Instinet   be
                         regulated as a broker.")

               <(81)>    See,  e.g.,  Memorandum  accompanying Letter  from
                         James  E. Buck,  Senior  V.P., NYSE,  to  Jonathan
                         Katz, SEC (Aug. 2, 1989) at 2 (stating that a rule
                         based approach to  regulating alternative  trading
                         systems  "strikes  a  near  optimal balance.    It
                         represents a significant improvement over the 'no-
                         action' approach, and is significantly superior to
                         the  'no-filing'  approach,  in retaining  minimal
                         regulatory 'costs' and yet maximizing  the benefit
                         to the markets.").

                              ======END OF PAGE 67======





          As discussed above, regulation of alternative trading systems as

     broker-dealers may not address all of the issues raised by the activities

     of such systems.  A second approach might integrate such systems more fully

     into market regulation:  rather than continuing to regulate alternative

     trading systems as broker-dealers, the Commission could use the exemptive

     authority granted under the 1996 Amendments<(82)> to explore new

     approaches to the regulation of exchanges.<(83)>  In particular,

     under this approach, the interpretation of the term "exchange" could be

     broadened to include any organization that both: (1) consolidates orders of

     multiple parties; and (2) provides a facility through which, or sets

     material conditions under which, participants entering such orders may

     agree to the terms of a trade.  This expanded interpretation would

     significantly broaden the entities that are considered to be exchanges to
                              

               <(82)>    See supra note 68.  

               <(83)>    In  adopting  the   general  exemptive   authority
                         included in the 1996 Amendments, the Report of the
                         Senate  Committee on  Banking,  Housing and  Urban
                         Affairs  made  specific  reference to  alternative
                         trading systems:

                    The Committee recognizes that the rapidly changing
                    marketplace  dictates  that  effective  regulation
                    requires   a   certain   amount  of   flexibility.
                    Accordingly,  the  bill  grants  the  SEC  general
                    exemptive  authority under both the Securities Act
                    and the Securities Exchange  Act.  This  exemptive
                    authority   will   allow   the    Commission   the
                    flexibility to explore and adopt new approaches to
                    registration and disclosure.  It will also  enable
                    the Commission  to address  issues related  to the
                    securities  market more  generally.   For example,
                    the SEC could  deal with  the regulatory  concerns
                    raised  by the recent  proliferation of electronic
                    trading systems, which do  not fit neatly into the
                    existing regulatory framework.  

               S. Rep. No. 293, 104th Cong., 2d Sess. 15 (1996).

                              ======END OF PAGE 68======





     include currently registered exchanges, certain broker-dealer trading

     systems (including matching and crossing systems), currently exempted

     exchanges, certain dealer markets, and other alternative trading systems. 

     For example, this interpretation would capture systems such as Instinet,

     Tradebook, Island, and Terra Nova's Archipelago system, that operate as

     electronic limit order books, allowing participants to display buy and sell

     offers in particular securities and to obtain execution against matching

     offers contemporaneously entered or stored in the system.  In addition,

     systems that consolidate orders internally for crossing or matching with

     display to participants such as POSIT, and organized dealer markets (unless

     operated by a registered securities association) that consolidate orders

     and set material conditions under which orders can be executed, would also

     be encompassed by such an interpretation.  While interdealer brokers in

     municipal and government securities could be exempted from any revised

     interpretation of "exchange," fully automated interdealer brokers would be

     covered by this interpretation.<(84)>  Any such reinterpretation of

     "exchange" presumably would not be intended to include customary brokerage

     activities or the activities of information vendors.  

          The Commission could then use its exemptive authority under Section 36

     of the Exchange Act<(85)>, as described below, to create a new

     category of exchanges that are exempt from most statutory exchange

     registration requirements and are subject only to limited obligations
                              

               <(84)>    A  more detailed  discussion of  the effects  of a
                         revised interpretation of  "exchange" is  provided
                         in Section IV.B.3 infra.

               <(85)>    See  supra  note  68   for  a  discussion  of  the
                         Commission's exemptive authority under  Section 36
                         of the Exchange Act.

                              ======END OF PAGE 69======





     designed to address specific concerns related to their market activities. 

     More significant alternative trading systems could be integrated into the

     exchange regulatory scheme, with exemptions for such systems from those

     exchange requirements that are unnecessary or inappropriate for

     proprietary, automated systems.

          At the same time, this type of an approach could potentially open the

     door for competing exchanges to use national market systems as a vehicle to

     inhibit innovation by alternative trading systems.  For example, it is

     possible that existing exchanges could try to use participation in joint

     national market system mechanisms to set marketwide operational standards

     (as conditions of participation in the national market system plans) that

     have the effect of inhibiting innovation by alternative trading

     systems.<(86)>  As discussed below,<(87)> the Commission would

     anticipate working with existing exchanges and Nasdaq to integrate

     alternative trading systems into the national market system without

     stifling their innovation.

          Question 32:  If the Commission reinterpreted the term "exchange," are

                              

               <(86)>    For   example,   as   discussed  below,   national
                         securities   exchanges  participate   in  national
                         market  systems plans,  which are  jointly drafted
                         and operated, and the terms of these plans must be
                         approved  by  all of  the  markets  that are  plan
                         participants.    See  infra  Section  IV.B.4.   By
                         specifying  operational   requirements  that  each
                         exchange must meet in  order to participate in the
                         national market system mechanisms, these plans can
                         have the effect  of setting marketwide  standards.
                         As a  result, these plans could be used to require
                         newly   registered   exchanges   to  comply   with
                         particular trading  increments, reporting methods,
                         and fee arrangements, for example.

               <(87)>    See infra notes 163 to 169 and accompanying text.

                              ======END OF PAGE 70======





          the factors described above (i.e., (1) consolidating orders of

          multiple parties and (2) providing a facility through which, or

          setting conditions under which, participants entering such orders may

          agree to the terms of a trade) sufficient to include the alternative

          trading systems described above?

          Question 33:  Is broadening the Commission's interpretation of

          "exchange" to cover diverse markets, and then exempting all but the

          most significant of these new exchanges from registration, the most

          appropriate way to address the regulatory gaps discussed above and

          provide the Commission with sufficient flexibility to oversee changing

          market structures?

               1.   Creating a New Category Called "Exempted Exchanges" for

                    Smaller and Passive Alternative Trading Systems

          The Commission could create a new tier of exchange regulation for most

     alternative trading systems by expanding its interpretation of the term

     "exchange," as discussed in greater detail in Section IV.B.3. below, and by

     exempting from registration alternative trading systems that, although

     captured within a broader interpretation of "exchange," do not need to be

     subject to full exchange regulation ("exempted exchanges").  The Commission

     could then establish limited and narrowly tailored requirements for these

     exempted exchanges.  Regulation as exempted exchanges could be appropriate

     for two types of alternative trading systems:  (1) systems that are small,

     start-up entities; and (2) systems that match or cross orders at a price

     that is primarily or wholly derived from trading on another market

     ("passive markets").  To the extent that these types of alternative trading

     systems have a sufficiently low impact on the market or do not establish


                              ======END OF PAGE 71======





     the price of securities, they should have an insignificant effect on the

     market as a whole, which would not warrant exchange regulation.<(88)> 

     At this time, all except the most significant alternative trading systems

     would appear to fall within one of these two categories.

          These exempted exchanges could then be subject to limited requirements

     that are more appropriate than current broker-dealer regulation for the

     market activities of such systems, as discussed in Section IV.B.1.c. below. 

     This approach also could address concerns regarding system capacity,

     confidentiality, integrity, and would clarify the regulatory treatment of

     alternative trading systems that fall within such a structure.  Moreover,

     treating smaller alternative trading systems and systems with passive

     pricing mechanisms as exempted exchanges would provide an environment

     conducive to innovation, which could, in turn, reduce the cost of

     experimenting with innovative trading techniques.  

          Question 34:  Are there any other categories of alternative trading

          systems that have sufficiently minimal effects on the public secondary

          market that they should be treated as exempted exchanges?

                    a.   Low Impact Markets

          Small alternative trading systems could be regulated as exempted

     exchanges under this approach.  If the Commission expands its

                              

               <(88)>    The integration of  trading on exempted  exchanges
                         with public  trade and quote  reporting mechanisms
                         could be  accomplished  by continuing  to  require
                         broker-dealer  participants in  exempted exchanges
                         to report  trades to the primary market on which a
                         security   trades   and   to   comply   with   the
                         Commission's rules.  Similarly, as a  condition of
                         exemption,  these exchanges  could be  required to
                         report trades between non-SRO  member participants
                         to an SRO designated by the Commission.

                              ======END OF PAGE 72======





     interpretation of "exchange" to include alternative trading systems, it

     would be able to exempt small markets from all exchange registration

     requirements under either Section 5 or Section 36 of the Exchange Act.  

          Under Section 5 of the Exchange Act, the Commission has the authority

     to exempt any exchange with a limited volume of transactions from

     registration as a national securities exchange, provided that it is not

     practicable and not necessary or appropriate in the public interest or for

     the protection of investors to require registration.<(89)>  As noted

     in the Commission's 1991 order granting an exemption to AZX under this

     provision, the Exchange Act does not provide specific guidance as to the

     standard to use in determining whether an exchange has a limited volume of

     transactions.  In considering the limited volume test, the Commission

     looked to anticipated transaction volume on AZX and compared this to the

     transaction volume of fully regulated national securities

     exchanges.<(90)>  While the Commission's AZX order provides useful

     guidance, the Commission also is considering other ways of assessing

     whether an exchange has a limited impact on the overall market.  In many

     circumstances, the impact that a particular volume has on the market will

     depend upon a number of factors, including the size and liquidity of the

     market for the type of security traded.  For example, the Commission could

     use its authority under the 1996 Amendments to exempt small exchanges based

     on a market's limited share of the relevant market as a whole, rather than

                              

               <(89)>    15  U.S.C. 78(e).   In  1991, the  Commission used
                         this authority  to exempt AZX from the requirement
                         to  register as  an exchange.   See  AZX Exemptive
                         Order, supra note 24.

               <(90)>    Id.

                              ======END OF PAGE 73======





     the number of its transactions.  Similarly, the Commission could base an

     exemption determination on the dollar value of transactions effected on an

     exchange, or on other factors.  

          While an exemption would allow a new market to develop without

     unnecessary and costly regulatory burdens, if that market achieved a

     greater market presence, its exemption would no longer apply.  Once a

     market has attained more than a significant level of business, such that it

     no longer can be considered to have a low impact on the securities market,

     it would no longer be eligible for treatment as an exempted exchange. 

     Instead, it would be required to register as a national securities exchange

     and be subject to greater regulatory responsibilities and oversight.  In

     order to give exempted exchanges that attain significant volume sufficient

     time to prepare for registration as a national securities exchange, it

     might be appropriate to allow exempted exchanges to delay registration as

     an exchange for up to one year after they consistently attain more than de

     minimis volume.  Treatment of low impact markets as exempted exchanges

     could also allow existing exchanges that consistently fall below minimum

     volume levels for an extended period of time to deregister and instead

     comply with any requirements applicable to exempted exchanges.

          Question 35:  Should low impact markets be regulated as exempted

          exchanges, rather than as broker-dealers? 

          Question 36:  What measure or measures should be used in determining

          whether a market has a low impact?  What is the level above which an

          alternative trading system should not be considered to have a low

          impact on the market?  At what level should an already registered

          exchange be able to deregister?


                              ======END OF PAGE 74======





          Question 37:  Should an alternative trading system be considered to

          have a low impact on the market and be treated as an exempted exchange

          if it trades a significant portion of the volume of one security, even

          if the trading system's overall volume is low in comparison to the

          market as a whole? 

          Question 38:  In determining whether an alternative trading system has

          a low impact, what factors other than volume should the Commission

          consider?  Should this determination be affected if the operator of an

          alternative trading system was the issuer of securities traded on that

          system?   

                    b.   Passive Markets

          The Commission also could treat passive markets as exempted exchanges. 

     Passive markets are alternative trading systems that match or cross orders

     at a price that is primarily or wholly derived from trading on another

     market.  For example, the POSIT system allows participants to enter

     unpriced orders, which other participants cannot view, and periodically

     crosses the orders.  Any orders that match other trading interest in this

     periodic cross are executed at the mid-point of the bid/ask spread on the

     primary market for the security.  Like traditional exchanges, these systems

     centralize orders and set the conditions under which participants agree to

     trade.  Unlike active pricing markets, however, passive pricing systems do

     not establish the price at which securities trade on the system through the

     interaction of priced orders of sellers with priced orders of buyers, or

     through participant dissemination of quotes.

          Question 39:  Should passive markets be regulated as exempted

          exchanges, rather than as broker-dealers?


                              ======END OF PAGE 75======





                    c.   Requirements for Exempted Exchanges

          As a general matter, regardless of their regulatory status, markets

     should comply with certain minimum requirements designed to clarify their

     obligations as markets and to prevent harm to investors or overall market

     integrity.<(91)>  These requirements could be less burdensome than

     the broker-dealer regulation to which these markets are currently subject. 

     This would continue to encourage the robust development of U.S. markets. 

     In cases in which alternative trading systems do not also conduct customary

     brokerage activities, these conditions could replace the broker-dealer

     regulation to which alternative trading systems are now

     subject.<(92)>

          Specifically, alternative trading systems seeking an exemption from

     exchange registration could file an application for exemption (including a

     system description) with the Commission prior to operation.  The Commission

     could establish a time period in which an alternative trading system's

     application would automatically become effective, unless disapproved by the
                              

               <(91)>    The  only currently  exempted  exchange,  AZX,  is
                         subject  to  a  number  of  exemption  conditions.
                         Among other things, it  is required to provide the
                         Commission  with  regular activity  reports, adopt
                         and implement procedures  to surveil for potential
                         insider   trading   or   manipulative  abuses   by
                         participants,  and  cooperate with  the registered
                         SROs.  See AZX Exemptive Order, supra note  24, 56
                         FR at 8383. 

               <(92)>    Based  on  the  information  that  the  Commission
                         currently   has   regarding   the  activities   of
                         alternative trading systems, it believes that only
                         a  few  of  the  systems that  would  be  exempted
                         exchanges   also   conduct   customary   brokerage
                         functions.  Regulation of broker-dealer activities
                         and market activities being  conducted by the same
                         alternative  trading  system could  be integrated.
                         See infra Section IV.B.4.d.

                              ======END OF PAGE 76======





     Commission.  Under this procedure, disapproval of a system's exemptive

     application would probably be rare and limited to specific circumstances,

     such as where a controlling person of the system is subject to a statutory

     disqualification or where the system fails to meet one of the requirements

     to be an exempted exchange.  In addition to an initial application, an

     exempted exchange could also be required to:  (1) notify the Commission in

     the event of a material change in operations or control; (2) maintain a

     record of trading through the system and make such information available to

     the Commission upon request; (3) implement procedures for surveillance of

     employees' trading comparable to those adopted by existing SROs to ensure

     that employees do not misuse confidential customer information for insider

     or manipulative trading; (4) cooperate with registered SRO investigations

     and examinations of the exempted exchange's participants; (5) report trades

     to one or more designated SROs, unless a trade is reported by a trade

     participant pursuant to its SRO membership obligations; and (6) require

     participants to make adequate clearance and settlement arrangements prior

     to participation in trading on the exempted exchange.<(93)>  

          Question 40:  Are the requirements described above appropriate to

          ensure the integrity of secondary market oversight?  

          Question 41:  Should any other requirements be imposed upon exempted

          exchanges, such as requirements that an exempted exchange provide fair

          access or establish procedures to ensure adequate system capacity,

          integrity, and confidentiality?  

          Question 42:  Should requirements vary with the type of alternative

          trading system (e.g., should passive systems be subject to different
                              

               <(93)>    15 U.S.C. 78l.

                              ======END OF PAGE 77======





          conditions than systems exempted on the basis of low impact)?

          Question 43:  Should the Commission require that securities traded on

          exempted exchanges be registered under Section 12 of the Exchange Act? 

          Should different disclosure standards be applicable to such securities

          if they are only traded on such exchanges?

               2.   The Application of Exchange Regulation to Alternative

                    Trading Systems That Are Not Exempted Exchanges

          If the term "exchange" is expanded to include alternative trading

     systems, alternative trading systems that have active pricing mechanisms

     and significant volume could be required to register as national securities

     exchanges.

          In the past, the Commission avoided requiring alternative trading

     systems to register as exchanges because it had limited authority to tailor

     exchange regulation to diverse market structures and because the volume and

     number of alternative trading systems was relatively small.<(94)>  In

                              

               <(94)>    Throughout the past  60 years, the Commission  has
                         attempted to accommodate market innovations within
                         the  existing statutory  framework  to the  extent
                         possible in light of investor protection concerns,
                         without imposing regulation  that would stifle  or
                         threaten   the   commercial   viability  of   such
                         innovations.   For example, at various times prior
                         to   1991,   the    Commission   considered    the
                         implications  of  evolving  market  conditions  on
                         exchange regulation.  See Securities  Exchange Act
                         Release  No.  8661 (Aug.  4,  1969),  34 FR  12952
                         (initially  proposing  Rule  15c2-10);  Securities
                         Exchange Act Release No. 11673 (Sep. 23, 1975), 40
                         FR 45422 (withdrawing  then-proposed Rule  15c2-10
                         and  providing  for  registration   of  securities
                         information  processors); Securities  Exchange Act
                         Release  No. 26708  (Apr. 13,  1989), 54  FR 15429
                         (reproposing   Rule   15c2-10);   and   Securities
                         Exchange Act Release No. 33621 (Feb. 14, 1994), 59
                         FR 8379 (withdrawing proposed Rule 15c2-10).

                              ======END OF PAGE 78======





     particular, prior to the adoption of the 1996 Amendments, the Commission

     had limited authority to reduce or eliminate the consequences of exchange

     registration for innovative systems.<(95)>  In light of these

     limitations, the Commission believed that regulating alternative trading

     systems as exchanges would stifle the development of such systems.  

          The 1996 Amendments, however, provide the Commission with considerable

     authority to exempt markets from provisions of the Exchange Act.  Given

     this expanded authority, the Commission's past concerns that classification

     as an exchange would stifle innovation may no longer outweigh competing
                              

               <(95)>    Prior  to  adoption  of the  1996  Amendments, the
                         Commission's  authority under the  Exchange Act to
                         reduce  or  eliminate  negative   consequences  of
                         exchange registration  was limited.   For example,
                         the Commission could only  exempt an exchange from
                         registration   if   the   exchange   had   limited
                         transaction volume.  See Exchange Act 5, 15 U.S.C.
                         78e.     Once  an  exchange  was  registered,  the
                         Commission  only  had   authority  to  exempt   an
                         exchange  from a  limited  number of  requirements
                         relating to  an exchange's obligations  as an SRO.
                         Although  the  Commission   has  authority   under
                         various  sections of  the Exchange  Act (including
                         Sections  17  and  19)  to   exempt  a  registered
                         exchange from specific  provisions, its  exemptive
                         authority under these sections relates only  to an
                         exchange's obligations  as an  SRO to  oversee its
                         members.     These  sections  do   not  give   the
                         Commission  flexibility  with  respect   to  other
                         requirements,   such  as  the   obligation  of  an
                         exchange to file rule changes  with the Commission
                         for approval.  The Exchange Act also did  not give
                         the Commission  the  flexibility or  authority  to
                         tailor  regulation  to  reflect technological  and
                         economic differences among  markets.  For example,
                         although  Congress  gave  the  Commission  greater
                         flexibility to address rapidly changing market and
                         technological conditions when it added Section 11A
                         to the  Exchange Act in the  1975 Amendments, that
                         section  does  not  provide  the  Commission  with
                         authority to reduce or eliminate existing exchange
                         requirements  for  innovative trading  structures.
                         S. Rep. No. 75, supra note 23, at 3. 

                              ======END OF PAGE 79======





     concerns regarding the need to establish a consistent, long-term approach

     to the regulation of alternative trading systems and to better integrate

     the most significant of these systems into the NMS.

                    a.   Using the Commission's Exemptive Authority to Encourage

                         Innovation and to Eliminate Barriers to Non-Traditional

                         Exchanges

          Alternative trading systems encompassed by a revised interpretation of

     the term "exchange" and not eligible for treatment as an exempted exchange

     could be subject to fundamental statutory requirements applicable to

     national securities exchanges, in order to ensure that the goals of market

     regulation are met.  These non-traditional exchanges could be required, for

     example, to file an application for registration,<(96)> be organized

     and have the capacity to carry out the purposes of, and comply and enforce

     compliance with, the Exchange Act, the rules thereunder, and their own

     rules.  These non-traditional exchanges may also need to ensure that they

     have rules designed to prevent fraudulent and manipulative acts and

     practices, to promote just and equitable principles of trade, and to

     refrain from imposing any unnecessary or inappropriate burden on

     competition.  In addition, they could be required to assure regulatory

                              

               <(96)>    Pursuant to  Section 19(a)(1) of the Exchange Act,
                         when  an  applicant  submits  an   application  to
                         register as a  national securities exchange  under
                         Section 6 of the Exchange Act, the Commission must
                         publish a  notice of the filing  and within ninety
                         days  must  either   grant  the  registration   or
                         institute  proceedings  to  determine whether  the
                         registration should  be denied.  Proceedings for a
                         denial  of registration  must be  concluded within
                         one hundred eighty days,  with an extension period
                         available of up to another ninety days.  15 U.S.C.
                         78s(a)(1).

                              ======END OF PAGE 80======





     oversight of their participants, participate in national market systems,

     and take the public interest into account in administering their markets.

          The Commission recognizes that these responsibilities would have

     significant consequences for non-traditional markets.  For example,

     imposing SRO oversight obligations on existing proprietary systems would

     change the relationship between such systems and their participants

     significantly, and could raise transaction costs for participants. 

     Alternative trading systems have adopted different corporate structures

     than the traditional non-profit, membership exchanges and generally have

     entered into primarily commercial relationships with their

     participants.<(97)>  While expanding the common understanding of how

     exchanges operate and the functions that they perform, these developing

     market structures do not fit easily into the current regulatory scheme,

     which has been designed and applied primarily to non-profit, membership

                              

               <(97)>    This  effect   has  not   been  limited   to  U.S.
                         alternative trading systems.   In the  seven years
                         since the  Delta Decision,  see infra note  124, a
                         growing number of  stock exchanges throughout  the
                         world  have  adopted  fully  automated  structures
                         similar  to those  of alternative  trading systems
                         and appear to conduct trading without a specialist
                         or  market   maker  structure.     The  Commission
                         determined  in the  Delta Release, see  infra note
                         121, that  the definition of the  term exchange in
                         Section 3(a)(1) of the  Exchange Act requires  the
                         Commission to  view an entity as  an exchange only
                         if, in "bringing together purchasers and sellers,"
                         the   entity   performs  the   functions  commonly
                         understood  to be  performed by  exchanges.   This
                         reading  is  based  on  the view  that  the  words
                         "bringing together purchasers  and sellers" in the
                         definition cannot be read in a vacuum, but must be
                         read in  the  context of  how  exchanges  commonly
                         operate.   At the time that  the Delta Release was
                         issued,  few  exchanges  had   adopted  structures
                         similar to alternative trading systems.

                              ======END OF PAGE 81======





     exchanges.  

          Prior to adoption of the 1996 Amendments, it was difficult to

     reconcile the private, commercial structure of these markets with the

     membership structure and public obligations traditionally assigned to

     national securities exchanges under the Exchange Act.  For example, one

     reason the Commission has been hesitant to adopt an expansive

     interpretation of the term "exchange" is that it would impose a

     participant-controlled board of directors on these markets.<(98)> 

     Applying exchange regulation to new markets could dictate their structure

     and could prevent them from adopting innovative means of carrying out

     exchange obligations.

          There does not appear to be an overriding regulatory reason to require

     markets to adopt homogenous structures.  To the contrary, Congress clearly

     intended the 1975 Amendments to encourage innovation by exchanges and

     recognized that future exchanges may adopt diverse structures.<(99)> 

     Accordingly, the Commission could use its exemptive authority to relieve

                              

               <(98)>    See Delta Release,  infra note 121, at  1900.  The
                         court in the Delta Decision stated that:

                    The  Delta  system   cannot  register  as  an
                    exchange because the statute requires that an
                    exchange be controlled  by its  participants,
                    who  in turn  must be  registered  brokers or
                    individuals associated with such brokers.  So
                    all  the  financial  institutions that  trade
                    through  the  Delta   system  would  have  to
                    register   as   brokers,   and  [the   system
                    sponsors]  would  have   to  turn  over   the
                    ownership and control  of the  system to  the
                    institutions.  The system would be kaput.

               Delta Decision, infra note 124, at 1272-73.

               <(99)>    See S. Rep. No. 75, supra note 22, at 7-9.

                              ======END OF PAGE 82======





     alternative markets from requirements it does not believe are critical to

     achieving the objectives of the Exchange Act.  In particular, the

     Commission could permit institutions to access registered exchange

     facilities directly.  In addition, the Commission could consider ways in

     which exchanges that are not participant-owned can meet fair representation

     requirements.

                         (i)  The Commission Could Consider Permitting

                              Institutional Access to Exchanges

          Without exemptive relief, exchange registration would prevent

     alternative trading systems from serving their institutional customers. 

     Historically, exchange members were individuals (and broker-dealers and

     other organizations affiliated with those individuals) that traded directly

     on the exchange floor and had an ownership interest in the

     exchange.<(100)>  In keeping with this structure, many requirements

     applicable to registered exchanges pertain to their relationship with their

     "members."<(101)>  In addition, in order to give the Commission
                              

               <(100)>   See Special Study, supra note 4, at 11-13.

               <(101)>   The Exchange Act defines an exchange "member" as:

                    The  term "member"  when  used with  respect to  a
                    national securities exchange means (i) any natural
                    person  permitted  to effect  transactions  on the
                    floor  of  the  exchange without  the  services of
                    another   person  acting   as  broker,   (ii)  any
                    registered  broker or  dealer  with  which such  a
                    natural person is associated, (iii) any registered
                    broker  or  dealer  permitted to  designate  as  a
                    representative such a natural person, and (iv) any
                    other registered broker or dealer  which agrees to
                    be regulated by such  exchange and with respect to
                    which   the   exchange   undertakes   to   enforce
                    compliance with the provisions  of this title, the
                    rules  and  regulations  thereunder,  and  its own
                                                             (continued...)

                              ======END OF PAGE 83======





     adequate authority over persons trading on exchanges under Section 6(c)(1)

     of the Exchange Act, Congress prohibited exchanges from granting membership

     to any person that is not, or is not associated with, a registered broker-

     dealer.<(102)>  Taken together, these statutory provisions have

     traditionally been interpreted to mean that all persons trading on an

     exchange would be members of that exchange, and would be registered as, or

     associated with, broker-dealers.<(103)>

          Alternative trading systems do not fit neatly into this structure for

     several reasons.  Unlike traditional exchanges that restrict membership to

     broker-dealers, most alternative trading systems give comparable access and

                              

               <(101)>(...continued)
                    rules.

               15  U.S.C. 78c(a)(3)(A).    The Commission  notes that  this
               definition does not require an entity to  participate in the
               ownership  of  an  exchange  in  order  to  be  considered a
               statutory "member" of that exchange.

               <(102)>   Section  6(c)(1),  15 U.S.C.  78f(c)(1), prohibits
                         exchanges  from granting  new memberships  to non-
                         broker-dealers.    At the  time  this  Section was
                         adopted in 1975, one  non-broker-dealer maintained
                         membership on an exchange.  This non-broker-dealer
                         was not affected by  the prohibition and continues
                         to maintain its membership.   Section 15(e) of the
                         Exchange   Act,  15   U.S.C.  78o(e),   gives  the
                         Commission  authority to  require any member  of a
                         registered   exchange  that  is  not  required  to
                         register with the Commission as a broker-dealer to
                         comply with  any  provision of  the  Exchange  Act
                         (other  than Section  15(a)) and  rules thereunder
                         that  regulate  or  prohibit  any  practice  by  a
                         broker-dealer.

               <(103)>   As   discussed   below,   however,  despite   this
                         prohibition  on  non-broker-dealer  membership  in
                         exchanges,  Section 6(f) of  the Exchange  Act, 15
                         U.S.C. 78f(f), grants  the Commission authority to
                         require  non-broker-dealers  to  comply  with  the
                         rules of the exchange.

                              ======END OF PAGE 84======





     trading privileges to both institutions and broker-dealers.<(104)> 

     If all entities that have access to an alternative trading system are

     treated as "members" under the Exchange Act, Section 6(c)(1) would prevent

     these systems from continuing to provide direct access to their

     institutional participants.  On the other hand, if institutional entities

     that have access to an alternative trading system are not treated as

     members, the system's statutory obligations that pertain expressly to its

     "members" under the Exchange Act would not apply to those institutions, and

     provisions of the Exchange Act that apply primarily to exchange members,

     such as prohibitions regarding the trading of unlisted securities under

     Section 12, would no longer apply to all participants on an exchange.  This

     could result in neither the Commission nor the market having sufficient

     authority to enforce trading rules against those participants.  It could

     also lessen the effectiveness of oversight of trading on those markets.  In

     either case, if such systems were registered as exchanges, the statute's

     reliance on the term "member" and the prohibition against exchange members

     that are not affiliated with a broker-dealer would make it difficult for

     alternative trading systems to continue meeting the trading needs of

     institutional investors.  The Commission also notes that, as markets

     evolve, exchanges may ultimately wish to not only allow institutions to

     access their trading facilities along with broker-dealers, they may wish to
                              

               <(104)>   Alternative markets also do not have "members"  as
                         that  term has  been traditionally  understood and
                         interpreted by existing exchanges.  In particular,
                         most  alternative   markets  do  not   give  their
                         participants  voting  rights  or  other  ownership
                         interests.   The  Commission does  not consider  a
                         non-profit membership structure  to be an inherent
                         requirement for performing  the trading  functions
                         of an exchange.

                              ======END OF PAGE 85======





     provide trading facilities exclusively to institutions or other non-broker-

     dealer participants (such as retail investors).

          There is no direct evidence that Congress intended these provisions to

     prohibit institutional investors from accessing the facilities of an

     exchange.  On the contrary, in the course of adopting the 1975 Amendments,

     Congress saw no overriding regulatory reason to prohibit non-broker-dealers

     from obtaining direct access to the execution facilities of

     exchanges.<(105)>  There also does not appear to be a regulatory

     need to require entities to register as broker-dealers in order to obtain

     direct access to exchanges.<(106)>  Because institutions primarily
                              

               <(105)>   In the legislative history of the 1975 Amendments,
                         Congress   expressly   noted   that  advances   in
                         communication technologies could permit  an entity
                         to trade on  an exchange without the services of a
                         member  acting  as a  broker,  and  without itself
                         becoming a  member of  that exchange.   Reports by
                         both  the  House of  Representatives  Committee on
                         Interstate  and Foreign  Commerce  and the  Senate
                         Committee  on Banking,  Housing and  Urban Affairs
                         noted the potential for  technology to permit non-
                         members (both broker-dealers and  institutions) to
                         effect  transactions  on  exchanges   without  the
                         intermediation  of a broker.   See S. Rep. No. 75,
                         supra  note  22,  at  99  (1975)  ("The  Committee
                         recognizes that  it is impossible at  this time to
                         define  precisely the  manner in  which investors,
                         particularly large institutional investors will or
                         should  have access  to execution facilities  in a
                         national  market system.");  H.R.  Rep.  No.  123,
                         supra note  39, at 66 ("[I]t  is conceivable, that
                         the   regulatory  reach   could  be   extended  to
                         investors or money managers who are not themselves
                         brokers or dealers but who have been permitted the
                         means   of   making   direct   executions   on  an
                         exchange").

               <(106)>   See, e.g.,  Securities  Exchange Act  Release  No.
                         35030 (Nov. 30, 1994), 59 FR  63141 (Dec. 7, 1994)
                         (order  approving  Chicago  Match,  an  electronic
                         matching   system  operated  by   the  CHX,  which
                                                             (continued...)

                              ======END OF PAGE 86======





     trade for their own account, do not execute orders for unaffiliated

     customers, and do not undertake to maintain orderly markets for the

     exchange, institutional trading on an exchange does not necessarily raise

     the type of concerns that broker-dealer regulation was designed to

     address.<(107)>  

          Congress did, however, provide the Commission and exchanges with

     sufficient authority in such circumstances to oversee the trading of non-

                              

               <(106)>(...continued)
                         provided for the crossing of orders entered by CHX
                         members  and non-members,  including institutional
                         customers).

               <(107)>   For    example,    expanding   the    Commission's
                         interpretation of what  constitutes an exchange to
                         include    alternative   trading    systems   with
                         institutional  participants   could  subject  such
                         institutions to  the constraints of  Section 11(a)
                         of  the  Exchange  Act.   Section  11(a) generally
                         prohibits   exchange    members   from   effecting
                         transactions  on  such  exchanges  for  their  own
                         accounts  or  the  accounts  of  their  associated
                         persons, or for their  own managed accounts or the
                         managed  accounts of their associated persons.  15
                         U.S.C.  78k(a).   Section  11(a)  was  intended to
                         encourage  fair  dealing  and fair  access  in the
                         exchange markets by restricting  exchange members'
                         proprietary   trading,  which   Congress  believed
                         created a conflict between a member's interests as
                         a principal and the member's fiduciary obligations
                         when representing customer trades.   Both Congress
                         and the Commission provided exceptions to the rule
                         to  accommodate principal  trading  that does  not
                         conflict with the public interest. 

               Section 11(a) also granted the Commission broad authority to
               regulate exchange members' trading.  Congress explained that
               it gave  the Commission broad authority  under Section 11(a)
               for two  reasons.  First, Congress recognized that it lacked
               expertise in  this area, and  thus believed that  any doubts
               should be resolved in  favor of maintaining present business
               practices.   Second, Congress wanted the  Commission to have
               sufficient  flexibility to  accomplish  the purposes  of the
               Exchange Act.  See S. Rep. No. 75, supra note 22, at 68.

                              ======END OF PAGE 87======





     members on exchanges.  Section 6(f) of the Exchange Act authorizes the

     Commission to require any non-member that is effecting transactions on an

     exchange without the services of another person acting as broker to comply

     with the rules of such exchange.<(108)>  In addition, any person

     required by the Commission to comply with an exchange's rules pursuant to

     Section 6(f) would be deemed a "member" of such exchange for most relevant

     provisions of the Exchange Act.<(109)>  Congress therefore
                              

               <(108)>   15 U.S.C. 78f(f)(1).  

               <(109)>   Section  3(a)(3)(A) of  the Exchange  Act provides
                         that:  "For purposes of sections 6(b)(1), 6(b)(4),
                         6(b)(6),  6(b)(7),  6(d),  17(d),   19(d),  19(e),
                         19(g),  19(h),  and 21  of  this  title, the  term
                         'member'  when used  with  respect  to a  national
                         securities exchange  also means, to  the extent of
                         the  rules  of  the   exchange  specified  by  the
                         Commission,  any person required by the Commission
                         to comply with such rules pursuant to section 6(f)
                         of  this title."   15  U.S.C. 78c(a)(3)(A).   This
                         would require a registered exchange that permitted
                         institutions  to  effect transactions  without the
                         services of a broker, among other things, to:  (1)
                         enforce compliance by  such institutions with  the
                         provisions  of  the Exchange  Act,  the rules  and
                         regulations  thereunder,  and  the  rules  of  the
                         exchange; (2) allocate  equitably its dues,  fees,
                         and other charges among its members,  issuers, and
                         such institutions; and (3) provide fair procedures
                         for   the   disciplining  of   such  institutions.
                         Exchange  Act  6(b)(1),  (4), (7)  and  19(g),  15
                         U.S.C. 78f(b)(1), (4),  (7), and 19(g).   Further,
                         an exchange imposing any disciplinary sanction on,
                         denying  participation  to,   or  prohibiting   or
                         limiting  access  to  any  institution   would  be
                         required to  file notice  of such action  with the
                         Commission.   The Commission would  have authority
                         to review any such action.  Exchange Act 19(d) and
                         19(e),   15  U.S.C.   78s(d)  and  78s(e).     The
                         Commission  would  have   the  same  authority  to
                         allocate  among  SROs regulatory  responsibilities
                         with    respect    to    institutions    effecting
                         transactions on  an exchange without  the services
                         of a broker  as it currently does with  respect to
                                                             (continued...)

                              ======END OF PAGE 88======





     envisioned that it would be possible to allow entities to have electronic

     access to an exchange without becoming a member, and at the same time, to

     ensure through Section 6(f) that the exchange and the Commission have

     adequate authority to regulate such electronic access participants.

          The development of fully automated markets has revealed an

     inconsistency in this scheme, however.  Both the Commission and Congress

     have recognized that the "floor" of an exchange could include a non-

     physical trading system operated by such exchange.<(110)>  As a

     result, any natural person with direct access to an exchange's alternative

     trading system would appear to be effecting transactions on the "floor" of

     such exchange and, therefore, would be a "member" of that exchange under

     the statute.  Despite congressional intent not to unnecessarily restrict

     non-member access to exchanges under this interpretation, there would

     appear to be no circumstances in which institutions could electronically

     access an automated exchange without being considered "members" of that

                              

               <(109)>(...continued)
                         exchange members.  Exchange  Act 17(d), 15  U.S.C.
                         78q(d).    The  Commission  would  also  have  the
                         authority to  sanction an exchange for  failure to
                         enforce  compliance with  the  Exchange  Act,  the
                         rules  thereunder,  or  the  exchange's  rules  by
                         institutions   that   were  permitted   to  effect
                         transactions on the  exchange, and to commence  an
                         investigation  under  Section   21  to   determine
                         whether  any  such  institution  has  violated the
                         Exchange Act.  Exchange Act 21, 15 U.S.C. 78u.

               <(110)>   See  Committee on Interstate  and Foreign Commerce
                         Report, H.R. Rep.  No. 123, supra  note 39, at  66
                         (1975) ("As the market systems make greater use of
                         communications and data processing techniques, the
                         concept of a physical  'floor' of an exchange will
                         disappear.  Instead we  will have a communications
                         network  which will  serve as  the 'floor'  of the
                         future marketplace").  

                              ======END OF PAGE 89======





     exchange.  

          In order to make it possible for alternative markets to register as

     exchanges, therefore, congressional intent to allow entities to have access

     to exchanges without becoming traditional members must be reconciled with

     the existence of non-physical "floors."  Any method of doing so must also

     ensure that, as Congress intended, exchanges and the Commission have

     sufficient authority to supervise and oversee all persons accessing an

     exchange's facilities.

          There are at least two ways in which the Commission could achieve

     this.  First, the Commission could interpret the term "member" narrowly, to

     apply only to natural persons who are permitted to effect transactions on a

     physical exchange floor.<(111)>  Under this interpretation, no

     entity that accesses a fully automated exchange would be deemed a "member"

     of that exchange.  In addition, both broker-dealers and institutions could

     electronically access exchanges that maintain physical floors without being

     deemed members of those exchanges.  With respect to any such non-member

     participants on an exchange, the Commission could exercise its authority

     under Section 6(f) of the Exchange Act to require the non-member

     participants of an exchange to comply with that exchange's rules to the

     extent appropriate.  In addition, these non-member participants could be

     deemed members of such exchanges for certain purposes of the Exchange Act. 

     Depending upon the extent to which the Commission exercised its authority

     under Section 6(f), therefore, there may be little practical difference in

                              

               <(111)>   Persons  trading  on  the  physical  floor  of  an
                         exchange, such  as floor brokers  and specialists,
                         would continue  to be "members"  of that  exchange
                         under any construction of the Exchange Act.

                              ======END OF PAGE 90======





     an exchange's obligations to surveil traditional members and its obligation

     to surveil entities that are members by virtue of a Commission order

     pursuant to Section 6(f).<(112)>

          In the alternative, the Commission could interpret the term "member"

     broadly, to apply to any natural persons that are permitted to effect

     transactions through an exchange's facilities and any persons associated

     with such natural persons.  Under this interpretation, the Commission could

     then use the exemptive authority granted by the 1996 Amendments to exempt

     exchanges from the prohibition on non-broker-dealer membership in Section

     6(c)(1) of the Exchange Act.  The Commission could then allow exchanges to

     revise any rules that would not appropriately apply to non-broker-dealer

     members.  Using this approach, the Commission would not be called upon to

     exercise its authority under Section 6(f).

          Question 44:  Should the Commission allow institutions to be

          participants on registered exchanges to the same extent as registered

          broker-dealers?  If so, should the Commission adopt rules allowing

          registered exchanges to have institutional participants, or should the

          Commission issue exemptive orders on a case-by-case basis, upon

          application for relief by registered exchanges?  

          Question 45:  Should the Commission allow exchanges to provide

          services exclusively to institutions?

          Question 46:  If the Commission allows institutions to participate in
                              

               <(112)>   In  these  circumstances,  it  is  not  clear  how
                         provisions of  the Exchange Act that  are by their
                         terms  applicable  only  to  exchange  members  or
                         broker-dealers  would apply  to non-broker-dealers
                         that  access exchange  facilities.   For  example,
                         Sections 11(a) and 9(b)  would not appear to apply
                         directly to non-member participants in exchanges.

                              ======END OF PAGE 91======





          exchange trading, should the Commission view all entities that have

          electronic access to exchange facilities as "members" under the

          Exchange Act and then exempt exchanges from Section 6(c)(1)?

          Question 47:  Is it foreseeable that exchanges will wish to permit

          retail investors to be participants in their markets?  If so, should

          the Commission allow retail participation on registered exchanges to

          the same extent as registered broker-dealers?  

          Question 48:  Should the Commission allow registered exchanges to

          provide services exclusively to retail investors?

          Question 49:  Could exchanges have various classes of participants, as

          long as admission criteria and means of access are applied and

          allocated fairly?  Would it be in the public interest if new or

          existing exchanges sought to operate primarily or exclusively on a

          retail basis?  What would be the advantages and disadvantages if new

          or existing exchanges were to admit as participants only highly

          capitalized institutions or only highly capitalized institutions and

          broker-dealers?

                         (ii) The Commission Could Consider Ways in Which

                              Alternative Exchanges Can Meet Fair Representation

                              Requirements

          An exchange's obligation to establish fair representation of investors

     and participants in its decisionmaking process could also significantly

     affect the structure of proprietary systems.  Section 6(b)(3) of the

     Exchange Act compels an exchange to have rules that:  (1) provide that one

     or more directors is representative of issuers and investors, and not

     associated with a member of the exchange, or with any broker-dealer; and


                              ======END OF PAGE 92======





     (2) "assure a fair representation of its members in the selection of its

     directors and administration of its affairs."<(113)>  Securities

     associations have identical fair representation requirements.<(114)> 

     Because many alternative trading systems are operated as for-profit, non-

     membership corporations, complying with these representation obligations

     would potentially change the nature of their operations and relationship

     with their participants.

          With respect to the first requirement, the public's interest in

     ensuring the fairness and stability of significant markets was of paramount

     importance to Congress, which adopted a structure that seeks to ensure this

     through public representation on an exchange's board of directors.  Under

     this structure, fair representation of the public on an oversight body that

     has substantive authority and decisionmaking ability therefore may be

     critical to ensure that an exchange actively works to protect the public

     interest and that no single group of investors has the ability to

     systematically disadvantage other market participants through use of the

     exchange governance process.<(115)>  

          The second requirement, that of fair representation of an exchange's

     members, also serves to ensure that an exchange is administered in a way

     that is equitable to all market members and participants.  Because a

     registered exchange is not solely a commercial enterprise, but also has

     significant regulatory powers with respect to its members,<(116)>
                              

               <(113)>   Exchange Act 6(b)(3), 15 U.S.C. 78f(b)(3).

               <(114)>   Exchange Act 15A(b)(4), 15 U.S.C. 78o-3(b)(4).

               <(115)>   See NASD 21a Report, supra note 20.

               <(116)>   See supra Section II.B.1.

                              ======END OF PAGE 93======





     competition between exchanges may not be sufficient to ensure that an

     exchange carries out its regulatory responsibilities in an equitable

     manner.  The fair application of an exchange's authority to bring and

     adjudicate disciplinary procedures may be particularly important in this

     respect, because these actions can have significant and far-reaching

     ramifications for broker-dealers.  Accordingly, under the Exchange Act

     structure, it may be essential to give exchange participants equitable and

     enforceable input into disciplinary and other key processes to prevent them

     from being conducted in an inequitable, discriminatory, or otherwise

     inappropriate fashion.  

          The Commission has not, however, interpreted an exchange's obligation

     to provide fair representation of its members to mean that all members must

     have equal rights.  Instead, the Commission has allowed registered SROs a

     degree of flexibility in complying with this requirement.  For example,

     Pacific Exchange "electronic access members" ("ASAP Members") do not have

     voting rights, and therefore are not represented on the board of that

     exchange.<(117)>  In addition, with respect to clearing agencies,

     the Commission has stated that registered clearing agencies may employ

     several methods to comply with the fair representation

     standard.<(118)>  Other structures may also provide independent,
                              

               <(117)>   See  Securities  Exchange  Act  Release  No. 28335
                         (Aug.  13,  1990), 55  FR  34106  (Aug. 21,  1990)
                         (order   approving    rule   change   establishing
                         electronic  access memberships  on the  PSE, since
                         renamed PCX).

               <(118)>   These  methods include: (1)  solicitation of board
                         of  directors  nominations from  all participants;
                         (2) selection  of candidates  for election  to the
                         board of directors by a nominating committee which
                                                             (continued...)

                              ======END OF PAGE 94======





     fair representation for an exchange's constituencies in its material

     decisionmaking processes, for exchanges that are not owned by their

     participants.  For example, an alternative trading system that registers as

     an exchange might be able to fulfill this requirement by establishing an

     independent subsidiary that has final, binding responsibility for bringing

     and adjudicating disciplinary proceedings and rule making processes for the

     exchange, and ensuring that the governance of such subsidiary equitably

     represents the exchange's participants.<(119)>

          Question 50:  Should non-membership exchanges (including alternative

          trading systems that may register as exchanges) be exempt from fair

          representation requirements?

          Question 51:  Should all exchanges be required to comply with Section

          6(b)(3) by having a board of directors that includes participant

          representation?  

          Question 52:  If not, are there alternative structures that would

                              

               <(118)>(...continued)
                         would  be   composed  of,  and  selected  by,  the
                         participants   or    representatives   chosen   by
                         participants;   (3)    direct   participation   by
                         participants  in the election of directors through
                         the allocation of voting stock to all participants
                         based on  their usage  of the clearing  agency; or
                         (4)  selection  by  participants  of  a  slate  of
                         nominees  for which  stockholders of  the clearing
                         agency would be required to vote their share.  See
                         Securities Exchange  Act Release  No. 14531  at 24
                         (March  6, 1978),  43 FR  10288 (March  10, 1978).
                         See also Securities Exchange Act Release No. 16900
                         (June 17, 1980), 45 FR 41920 (June 23, 1980).

               <(119)>   The Commission notes that the proprietary exchange
                         Easdaq,  a recognized secondary market in Belgium,
                         has established a  "regulatory authority" that has
                         a degree  of independence from  Easdaq's board  of
                         directors.

                              ======END OF PAGE 95======





          provide independent, fair representation for all of an exchange's

          constituencies (including the public)?

               3.   Expanding the Commission's Interpretation of "Exchange"

          To create a new category of exempted exchanges and to apply exchange

     registration requirements to the most significant alternative trading

     systems, the Commission would have to expand its current interpretation of

     "exchange" to encompass many more trading systems than are currently

     considered "exchanges."  Although the Exchange Act definition of "exchange"

     is potentially quite broad,<(120)> the Commission currently

     interprets this definition to include only those organizations that are

     "designed, whether through trading rules, operational procedures or

     business incentives, to centralize trading and provide buy and sell

     quotations on a regular or continuous basis so that purchasers and sellers

     have a reasonable expectation that they can regularly execute their orders

     at those price quotations."<(121)>  The Commission analyzed how the

     definition of exchange applies to alternative trading systems in a 1991

     release, explaining its decision not to register a government options

                              

               <(120)>   The Exchange Act defines an "exchange" as:

                    any organization,  association,  or group  of  persons,
                    whether    incorporated   or    unincorporated,   which
                    constitutes, maintains, or provides  a market place  or
                    facilities for bringing together purchasers and sellers
                    of securities or for  otherwise performing with respect
                    to  securities the  functions  commonly performed  by a
                    stock exchange  as that  term is  generally understood,
                    and includes the market place and the market facilities
                    maintained by such exchange.

               U.S.C. 78c(a)(1).

               <(121)>   See  Securities  Exchange  Act  Release  No. 27611
                         (Jan. 12, 1990), 55 FR 1890, 1900 (Jan. 19, 1990).

                              ======END OF PAGE 96======





     trading system as an exchange ("Delta Release").<(122)>  The

     Commission concluded that, in light of congressional emphasis on the

     "generally understood" meaning of stock exchange and the Exchange Act as a

     whole, the definition of exchange should be applied narrowly, to include

     only those entities that enhanced liquidity in traditional ways through

     market makers, specialists, or a single price auction

     structure.<(123)>  Because most alternative trading systems do not
                              

               <(122)>   Id.    In  1988,  the  Commission  granted   Delta
                         Government Options Corporation ("Delta") temporary
                         registration as  a clearing agency to  allow it to
                         issue,  clear, and settle options executed through
                         a  trading  system   operated  by  RMJ  Securities
                         ("RMJ").  Concurrently, the  Commission's Division
                         of Market Regulation issued  a letter stating that
                         the  Division  would  not   recommend  enforcement
                         action against RMJ if  its system did not register
                         as  a national securities exchange.  Subsequently,
                         the  Board of Trade of the City of Chicago and the
                         Chicago  Mercantile  Exchange petitioned  the U.S.
                         Court  of  Appeals  for  the  Seventh Circuit  for
                         review   of  the   Commission's  actions.     Both
                         challenges were  premised on the  view that  RMJ's
                         system  unlawfully  failed   to  register  as   an
                         exchange or obtain an exemption from registration.
                         The  Seventh  Circuit  vacated  Delta's  temporary
                         registration   as   a  clearing   agency,  pending
                         publication of  a reasoned Commission  analysis of
                         whether or not RMJ's system was an exchange within
                         the meaning  of the Exchange Act.   Board of Trade
                         v.  SEC, 883 F.2d 525  (7th Cir. 1989).   In 1989,
                         the Commission solicited comment on the issue, and
                         in 1990 published  its interpretation of the  term
                         "exchange" and its determination that RMJ's system
                         did  not  meet  that  interpretation.   See  Delta
                         Release, supra note 121.

               <(123)>   See Delta Release, supra note  121, at 1900.   The
                         Commission stated:

                    In summary, employing an  expansive interpretation
                    of  Section 3(a)(1) results in potential conflicts
                    with  other  central regulatory  definitions under
                    the [Exchange]  Act as well as  adverse effects on
                                                             (continued...)

                              ======END OF PAGE 97======





     have these features, this narrow interpretation effectively excluded most

     alternative trading systems from exchange regulation.<(124)>  Thus,
                              

               <(123)>(...continued)
                    innovation and competition.   Rather, each  system
                    must  be  analyzed  in   light  of  the  statutory
                    objectives   and   the   particular    facts   and
                    circumstances of that system.   In conducting such
                    an analysis, the central focus of the Commission's
                    inquiry should be whether the  system is designed,
                    whether   through   trading   rules,   operational
                    procedures or business  incentives, to  centralize
                    trading and  provide buy and sell  quotations on a
                    regular or continuous basis so that purchasers and
                    sellers  have a  reasonable expectation  that they
                    can  regularly execute their orders at those price
                    quotations.    The means  employed may  be varied,
                    ranging from  a physical  floor or trading  system
                    (where orders can be centralized and  executed) to
                    other means  of intermediation  (such as  a formal
                    market making  system or systemic  procedures such
                    as  a consolidated  limit  order  book or  regular
                    single price auction).

               Id.

               <(124)>   The  Commission's authority  to adopt  this narrow
                         interpretation was subsequently upheld by the U.S.
                         Court of  Appeals for the Seventh  Circuit.  Board
                         of Trade of the  City of Chicago v. SEC,  923 F.2d
                         1270 (7th  Cir. 1991), reh'g en  banc, den'd, (7th
                         Cir.  1991) (hereinafter  Delta  Decision).    The
                         court noted that "the Delta system differs only in
                         degree and detail from an  exchange . . .  Section
                         3(a)(1) [of  the Exchange Act]  is broadly worded.
                         No doubt . . . this was to give the Securities and
                         Exchange  Commission  maximum  control   over  the
                         securities industry.  So the Commission could have
                         interpreted  the  section  to  embrace  the  Delta
                         system.  But we  do not think it was  compelled to
                         do  so."  Id. at  1273 (quoting Chevron v. Natural
                         Resources  Defense Council,  467 U.S.  837, 844-45
                         (1984)).  In reaching its decision, the court gave
                         weight to the Commission's belief that classifying
                         the  Delta  system  as  an   exchange  would  have
                         destroyed its  commercial  viability.   The  court
                         also  relied in part  on the Commission's position
                         that,  because  Delta  would be  registered  as  a
                         clearing agency and the  system sponsor would be a
                                                             (continued...)

                              ======END OF PAGE 98======





     many alternative trading systems have not been required to register as

     exchanges to date and have instead been regulated as broker-dealers.

          There are, however, several alternative ways in which the definition

     of "exchange" could be applied more broadly.<(125)>  For example, a
                              

               <(124)>(...continued)
                         registered broker-dealer, there  did not appear to
                         be any overriding regulatory need  to regulate the
                         system as  an exchange.  Delta  Decision, supra at
                         1273.   The court stated that  the Commission "can
                         determine  .   .  .  whether  the   protection  of
                         investors and other interests within the range  of
                         the statute  is advanced, or retarded,  by placing
                         the Delta  system in  a  classification that  will
                         destroy  a promising competitive innovation in the
                         trading  of securities."    Id.   Since 1991,  the
                         Commission  staff has  given operators  of trading
                         systems  assurances,  based on  the interpretation
                         upheld by  the court in  Delta, that it  would not
                         recommend  enforcement  action  if  those  systems
                         operated  without registering as exchanges.  For a
                         list  of   no-action  letters  issued   to  system
                         sponsors until the end of 1993 and a short history
                         of the Commission's oversight of such systems, see
                         Securities  Exchange Act  Release No.  33605 (Feb.
                         14,  1994), 59  FR 8368,  8369-71 (Feb.  18, 1994)
                         (hereinafter  Rule 17a-23 Proposing Release).  See
                         also   Letters  from   the   Division  of   Market
                         Regulation to:  Niphix Investments  Inc. (Dec. 19,
                         1996); Tradebook (Dec. 3, 1996); The Institutional
                         Real Estate  Clearinghouse System (May  28, 1996);
                         Chicago   Board   Brokerage,  Inc.   and  Clearing
                         Corporation for Options  and Securities (Dec.  13,
                         1995).  

               <(125)>   The   Exchange   Act,   coupled    with   relevant
                         legislative  history,  appears   to  provide   the
                         Commission  with  ample  authority  to  revise its
                         interpretation   of  an  exchange.    Courts  have
                         consistently  upheld  an  agency's  discretion  to
                         revise earlier interpretations when a  revision is
                         reasonably  warranted  by  changed  circumstances.
                         See,  e.g., Rust  v. Sullivan,  500 U.S.  173, 186
                         (1991).    In  Rust,  the Court  stated  that  "an
                         initial  agency  interpretation  is not  instantly
                         carved  in stone,  and  the agency,  to engage  in
                         informed   rulemaking,   must   consider   varying
                                                             (continued...)

                              ======END OF PAGE 99======





     large variety of services performed by existing markets and intermediaries

     could be considered to be functions that are commonly understood to be

     performed by exchanges within the meaning of Section 3(a)(1) of the

     Exchange Act.  Those services include: (1) centralizing trading interest;

     (2) providing the opportunity for multiple parties to participate in

     trading; (3) specifying time, price, size, or other priorities governing

     the sequence or interaction of orders; (4) providing an opportunity for

     active price formation (either through interaction of buy and sell interest

     or through competing dealer quotes); (5) specifying material conditions

     under which participants may post quotations or trading interest (such as

     requiring participants to maintain firm, two-sided, or continuous quotes);

     (6) creating mechanisms for enhancing liquidity, such as giving certain

     participants special privileges in exchange for assuming market

     obligations; (7) giving participants control over setting the trading

     rules; and (8) setting qualitative standards for listing instruments or

     otherwise standardizing the material terms of instruments traded.  Various

     commenters have identified these and other functions as central




                              

               <(125)>(...continued)
                         interpretations and the wisdom  of its policy on a
                         continuing basis.  Id.  at 186 (quoting Chevron v.
                         Natural Resources Defense  Council, 467 U.S.  837,
                         844-45 (1984)).   The  Court also stated  that "an
                         agency  is not  required  to  'establish rules  of
                         conduct  to  last forever,'  but  rather 'must  be
                         given  ample  latitude  to  adapt  its  rules  and
                         policies    to    the    demands    of    changing
                         circumstances.'"    Id. at  186-87  (quoting Motor
                         Vehicles  Mfrs. Ass'n  of United  States v.  State
                         Farm  Mut. Automobile  Ins. Co.,  463 U.S.  29, 42
                         (1983)).

                             ======END OF PAGE 100======





     characteristics of exchanges.<(126)>
                              

               <(126)>   See, e.g., Robert A. Schwartz, Technology's Impact
                         on  the   Equity  Markets  (Future   Markets:  How
                         Information  Technology   Shapes  Competition  (C.
                         Kremerer ed., forthcoming 1997)) ("In the U.S., an
                         exchange  is  an  environment where  broker/dealer
                         intermediaries,  not  natural  buyers and  sellers
                         meet.    In contrast,  broker/dealer  member firms
                         provide  the  services  (information analysis  and
                         dissemination, provision of dealer  capital, order
                         handling,  account handling  etc.) that  bring the
                         customer to  the  market to  trade."); Ruben  Lee,
                         What  is  an  Exchange?  (1992)   (available  from
                         author) (regulators should consider  25 attributes
                         when determining  whether a  trading system  is an
                         exchange,  including  price discovery,  liquidity,
                         competition of orders,  price priority,  secondary
                         priorities,  information  access, and  centralized
                         order  execution);  Therese  Maynard,  What  is an
                         "Exchange"?-Proprietary    Electronic   Securities
                         Trading Systems and the Statutory Definition of an
                         Exchange,  49 Wash. &  Lee L. Rev.  833 (1991); J.
                         Harold Mulherin  et al, Prices are  Property:  The
                         Organization   of   Financial  Exchanges   from  a
                         Transaction Cost Perspective, 34 J. of Law & Econ.
                         591  (Oct.  1991) (the  establishment  of property
                         rights to  price quotes  is a central  function of
                         financial  exchanges, although the  authors do not
                         discount the fact  that exchanges accomplish  many
                         other  functions);   Lawrence  Harris,  Liquidity,
                         Trading  Rules,  and  Electronic  Trading  Systems
                         (1990) (available from author)  (exchanges provide
                         services   by   creating   an   environment   that
                         encourages  traders to  offer liquidity,  often by
                         establishing a set of rules that provide liquidity
                         suppliers protection in  proportion to the service
                         that they provide to the market); Jonathan Macey &
                         Hideki Kanda, The Stock  Exchange as a Firm:   The
                         Emergence of  Close Substitutes  for the New  York
                         and Tokyo Stock Exchanges, 75 Cornell L. Rev. 1007
                         (1990)  (in addition to liquidity, organized stock
                         exchanges offer three other  services (monitoring,
                         devising  standard  form  contracts,  and  lending
                         reputational  capital  to   listing  firms)   that
                         listing firms view as valuable);  Ian Domowitz, An
                         Exchange  is   a   Many  Splendored   Thing:   The
                         Classification and Regulation of Automated Trading
                         Systems,  in  The   Industrial  Organization   and
                         Regulation  of the Securities  Industry 93 (Andrew
                                                             (continued...)

                             ======END OF PAGE 101======





          Each of these functions is performed by existing exchanges and could

     be incorporated into the Commission's interpretation of the term

     "exchange."<(127)>  Because alternative trading systems do not

     always offer each of these services, however, if alternative trading

     systems are integrated into market regulation mechanisms through exchange

     regulation, a revised interpretation of the term "exchange" based on

     whether a market offers all, or many, of these functions would continue to

     exclude many alterative trading systems.  For example, the application of

     the term exchange could be broadened to include those entities that provide

     the opportunity for multiple parties to participate in centralized trading. 

     While many alternative trading systems provide a central execution system,

     others organize trading by centralizing the display of participant trading

     interest, and then specifying the sequence or priorities under which

     participants must trade with each other.  Although orders may not directly

                              

               <(126)>(...continued)
                         W. Lo ed., 1996) (the price discovery process with
                         the associated dissemination of price information,
                         and   centralization  for  the  purpose  of  trade
                         execution  are  the  basic  functions  of  trading
                         systems).   See also Ruben Lee  & Ian Domowitz,The
                         Legal    Basis   for   Stock   Exchanges:      The
                         Classification and Regulation of Automated Trading
                         Systems  (1996)  (available  from authors)  (there
                         should  be  no distinction  in  the  regulation of
                         market structure issues  between institutions  now
                         classified  as exchanges and  those now classified
                         as broker-operated trading systems).

               <(127)>   For  example,  as  noted  above,  the Commission's
                         current interpretation captures  the functions  of
                         centralizing   trading  interest,   providing  the
                         opportunity for multiple parties to participate in
                         trading,  and  providing  mechanisms   to  enhance
                         liquidity,  such  as  giving certain  participants
                         special  privileges in return  for assuming market
                         obligations.

                             ======END OF PAGE 102======





     interact on such markets, the order and price at which they are executed is

     determined by the market.  The fairness of this procedure will affect

     participants in those markets no less than the fairness of procedures on an

     exchange that allows orders to interact centrally.

          Similarly, an exchange could be defined as only those entities that

     provide an opportunity for active price formation (either through

     interaction of buy and sell interest or through competing dealer quotes). 

     This criteria would capture automated matching systems, such as Instinet,

     Tradebook, Island and Terra Nova's Archipelago system, but would not

     include crossing systems that establish a price based on the price already

     established in another market, such as POSIT, within the term "exchange." 

     Whether or not a market engages in active price formation, however, is not

     the sole factor that may determine a market's potential to harm investors

     through unfair treatment or vulnerability to manipulation.  Moreover,

     markets without active price discovery still have the potential to affect

     the integrity of trading and surveillance on other markets.  Depending upon

     its configuration, for example, a passive pricing system can provide

     incentives for its participants to manipulate prices in the market from

     which the passive price is derived in order to affect the outcome of a

     cross.  Finally, while there is general consensus that active price

     formation occurs through the interaction of orders, there is little

     consensus on whether the interaction of orders through negotiation, such as

     occurs within a broker-dealer, should also be considered to be price

     formation.<(128)>  As market changes continue to affect how
                              

               <(128)>   Compare Lawrence A.  Cunningham, From Random Walks
                         to Chaotic  Crashes:  The Linear  Genealogy of the
                                                             (continued...)

                             ======END OF PAGE 103======





     securities trade, basing the interpretation of the term "exchange" on

     whether a market engages in price discovery could generate significant

     uncertainties for markets that develop innovative pricing

     mechanisms.<(129)>  Therefore, if the Commission expands its

     interpretation of the term "exchange," it could be appropriate to include

     passive markets in such an interpretation.  Under such an approach, passive

     markets could be integrated into market regulation by regulating such

     systems as exempted exchanges.

          Reinterpreting the term "exchange" based on other traditional exchange

     functions may have similar drawbacks.  For example, unlike existing

     exchanges, few alternative markets give certain participants special

     privileges in return for assuming market obligations, give participants

     control over setting the trading rules, or set listing




                              

               <(128)>(...continued)
                         Efficient Capital Market Hypothesis, 52 Geo. Wash.
                         L.  Rev. 546,  597  (1994)  ("price  discovery  in
                         capital markets  arises  solely as  the result  of
                         traders' orders  meeting in the market");  with M.
                         Perry,A   Challenge   Postponed:     Market   2000
                         Complacency in Response to  Regulatory Competition
                         for  International Equity Markets, 34 Va. J. Int'l
                         L.  701,  740 (1994)  ("It  is  not clear  whether
                         'price discovery' means price  negotiation between
                         the trading parties or price determination  by the
                         market").

               <(129)>   For  example,  one  trading  system  currently  in
                         development,  OptiMark,   allows  participants  to
                         enter entire portfolios  of securities at a  range
                         of prices and sizes at which they would be willing
                         to trade if  a variety of  other factors are  met.
                         It is  not clear  whether this type  of contingent
                         pricing  mechanism  could  be  considered  "active
                         price formation."

                             ======END OF PAGE 104======





     standards.<(130)>  Moreover, while many exchanges currently provide

     the services noted above, it is not certain that exchanges will always do

     so in the future.<(131)>  As a result, if alternative trading

     systems were integrated into market regulation through exchange regulation,

     rather than broker-dealer regulation, basing a revised interpretation of

     "exchange" on these traditional functions could result in the same

     regulatory gaps and lack of flexibility that the current situation has

     created.

          For these reasons, if the Commission were to revise its interpretation

     of "exchange," it would also consider focusing such a reinterpretation

     primarily on those essential functions commonly provided by registered

     exchanges and alternative markets, in order to achieve congressional intent

     to regulate central marketplaces for securities trading.  For example, the

     Commission could revise its interpretation of the term "exchange" to

                              

               <(130)>   Although  many  alternative trading  systems limit
                         trading  to  securities  traded  on  a  registered
                         exchange  or  Nasdaq,  they  do not  establish  or
                         enforce  qualitative  or quantitative  independent
                         listing  standards or  require that  securities be
                         registered under the Exchange Act.

               <(131)>   See,   e.g.,   Gerald    Novak,   A   Failure   of
                         Communications: An Argument for the Closing of the
                         NYSE  Floor,  26 U.  Mich.  J.L.  Reform 485,  503
                         (1993)  (while  specialists   may  create   enough
                         benefit  to  the market  to  allow  them to  exist
                         within  the current  regime, the  benefits do  not
                         seem substantial  enough to maintain  the physical
                         exchanges  solely for the  purpose of perpetuating
                         the role  of the  specialist.) See also  Norman S.
                         Poser, Restructuring the Stock Markets: A Critical
                         Look  at the  SEC's  National  Market  System,  56
                         N.Y.U.L. Rev. 883, 956-57 (1981) (arguing  for the
                         elimination  of the  present specialist  system in
                         favor    of   an    institutionalized   specialist
                         function). 

                             ======END OF PAGE 105======





     include any organization that both: (1) consolidates orders<(132)>

     of multiple parties; and (2) provides a facility through which, or sets

     material conditions under which, participants entering such orders may

     agree to the terms of a trade.  This revised interpretation would closely

     reflect the statutory concept of "bringing together" buying and selling

     interests.  It would also broaden the Commission's concept of what is

     "generally understood" to be an exchange to reflect changes in the U.S. and

     world markets brought about by automated trading.<(133)>   

          Question 53:  Would the revised interpretation of "exchange" being

          considered by the Commission adequately and clearly include

          alternative trading systems that operate open limit order execution

          systems (even those that also provide brokerage functions)?

          Question 54:  In light of the decreasing differentiation between

                              

               <(132)>   As noted above, the  term "orders" in this release
                         is  intended to  be read  broadly, to  include any
                         firm trading  interest.   This would  include both
                         limit orders and market maker quotations.

               <(133)>   See,  e.g., AZX  Exemptive Order,  supra  note 24;
                         Internet  Site of  the Australian  Stock Exchange,
                         address:    http://www.azx.com.au  (Dec. 5,  1996)
                         (orders entered on  the Australian Stock  Exchange
                         are  automatically  matched  and executed  through
                         SEATS,  a screen  based trading  system); Internet
                         Site  of  SIMEX,  address:    http://www.simex.com
                         (Nov.  6,  1996)   (the  Singapore   International
                         Monetary  Exchange  is   a  complete,   integrated
                         electronic  trading  system, which  uses  an order
                         matching system  based upon the use  of a matching
                         algorithm  reflecting  strict price/time  priority
                         for  all  orders entered  into  the  system).   In
                         addition,  Tradepoint,   a  recognized  investment
                         exchange  in the  United Kingdom,  operates  as an
                         order driven, automated system for the  trading of
                         shares of U.K. issuers  listed on the London Stock
                         Exchange  without  the  use  of  market  makers or
                         specialists.

                             ======END OF PAGE 106======





          market maker quotes and customer orders in trading, should the

          Commission consider an "order" to include any firm trading interest,

          including both limit orders and market maker quotes?

          Question 55:  What should the Commission consider to be "material

          conditions" under which participants entering orders may agree to the

          terms of a trade?  For example, should an alternative trading system

          be considered to be setting "material conditions" when it standardizes

          the material terms of instruments traded on the market, such as

          standardizing option terms or requiring participants that display

          quotes to execute orders for a minimum size or to give priority to

          certain types of orders? 

                    a.   Effects of Expanding the Commission's Interpretation of

                         "Exchange" on Selected Types of Alternative Trading

                         Systems

          One of the principal advantages of expanding the Commission's

     interpretation of the term "exchange" would be to provide sufficient

     flexibility within the concept of an exchange to encompass both currently

     registered exchanges and significant existing alternative trading systems,

     as well as unforeseen alternative trading systems that may arise in the

     future.  At the same time, the Commission has consistently maintained that

     the definition of exchange should not be interpreted so broadly as to

     overlap or interfere with other sections of the Exchange Act, such as those

     governing broker-dealer activities or securities associations.  For

     example, at the time of the Delta Release, the Commission sought to avoid

     interpreting the term "exchange" in a way that could unintentionally and




                             ======END OF PAGE 107======





     inappropriately subject many broker-dealers to exchange

     regulation.<(134)>  Therefore, if the Commission decides to broaden

     its interpretation of "exchange" to encompass alternative trading systems,

     it would have to take into account the potential effects of such an

     interpretation on entities regulated under other sections of the Exchange

     Act.  This may include entities that provide traditional brokerage

     activities (e.g., traditional block trading desks or internal programs that

     allow traders within a firm to search and match orders with customer orders

     of other traders within the same firm), information vendors, and markets

     operated by the NASD.  For example, the Commission would not intend any

     revised interpretation of "exchange" to capture traditional brokerage

     activities or the internal automation of traditional brokerage activities. 

     Similarly, it may be inappropriate for a revised interpretation of

     "exchange" to capture certain alternative trading systems, such as

     interdealer brokers in exempted securities, that are regulated under

     separate regulatory schemes.  Discussed below are the possible effects of

     an expanded interpretation of "exchange" on these market participants.

                         (i)  Broker-Dealer Activities  

          In light of the blurring distinctions between the services offered by


                              

               <(134)>   One key factor in the Commission's decision not to
                         regulate the  Delta system as an  exchange was the
                         concern that, absent greater  exemptive authority,
                         doing so would  subject traditional  broker-dealer
                         activities to exchange regulation.  Delta Release,
                         supra note 121.  Although some alternative trading
                         systems  claim   to  be   the  modern  analog   of
                         traditional  brokerage  activity,  the  Commission
                         believes  that,  while  some are,  the  nature  of
                         systems that combine the functions of brokers  and
                         exchanges cannot be so readily simplified. 

                             ======END OF PAGE 108======





     markets and market participants described above,<(135)> the

     differences between modern exchange and broker-dealer activities are not

     easily articulated.  Some firms have integrated technology into their

     activities in ways that appear to have much in common with the trading

     systems used by modern exchanges.  Nonetheless, broker-dealer activities

     can be distinguished from those of an exchange for several reasons.  

          First, unlike organized markets, traditional broker-dealer activities

     do not involve the systematic interaction of customer orders where the

     customers themselves are informed of and have an opportunity to agree to

     the terms of their trades (or agree to the priorities under which the terms

     will be set).  For example, broker-dealers may automate part of their

     intermediary function (such as block trading desk activity) by developing

     internal programs that allow traders within a firm to search and match

     orders with customer orders of other traders within the same firm, or with

     orders and quotes of other traders.  Similarly, technologically

     sophisticated firms may create an internal process for centralizing

     information regarding customer orders.  Such systems, however, generally

     serve as a means of providing information regarding a firm's customer

     orders solely to the employees of the broker-dealer operating the system to

     facilitate the employees' crossing of customer orders on a discretionary

     basis.  In other words, the only participant in such a system is the

     broker-dealer that operates it.  Similarly, while block trading desks

     provide a central location where employees of a single broker-dealer trade

     side-by-side, they do not systematically consolidate the customer orders

     handled by those employees.  Although an employee may ultimately match its
                              

               <(135)>   See supra notes 14 and 14 and accompanying text.

                             ======END OF PAGE 109======





     customer order with a customer order held by a trader sitting across the

     room, this does not operate as an organized mechanism for ensuring that

     customer orders are matched, crossed, or otherwise centralized.  

          Second, a broker-dealer traditionally retains discretion in

     determining how to handle customer orders.  Unlike an exchange, which

     customers access in part to participate in a particular market or market

     structure, a customer that gives its order to a broker-dealer typically

     gives discretion to that broker-dealer regarding which market the order

     will ultimately be executed in, how the order may be split up or "worked,"

     or whether the broker-dealer will choose to execute the order as principal

     or as agent.  Although a broker-dealer may disclose its standard practices

     to customers, ultimately these execution decisions are left to the

     discretion of the broker-dealer, consistent with the responsibilities

     imposed on broker-dealers.  For example, a block positioner may "shop" the

     order around to other traders in his own firm in an attempt to find a

     contra-side order that has been placed with another trader.  In some cases,

     the block positioner may take the other side of the order, keeping the

     block as a proprietary position.  This decision is dictated by market

     conditions and typically lies within the block positioner's discretion.

     Unless otherwise agreed, customers have no rights regarding the system

     other than the expectation that the broker-dealer will handle the order

     according to its broker-dealer obligations.

          Finally, a sophisticated market maker that develops a system to

     broadcast its own quotations to the public, or to allow its customers to

     direct orders for execution solely against that market maker's inventory,

     is conducting broker-dealer activity.  Such systems automate the order


                             ======END OF PAGE 110======





     routing and execution mechanisms of a single market maker and guarantee

     that the market maker will execute orders submitted to it at its own posted

     quotation for the security or, for example, at the inside price quoted on

     Nasdaq.  Single market maker systems merely provide a more efficient means

     of communicating the trading interest of separate customers to one dealer

     and thus would not be considered exchange activities.      

          As noted above, much of this analysis assumes that these activities

     are being engaged in "systematically," or in a "traditional" or "typical"

     fashion.  The Commission recognizes that these concepts are not easily

     defined and that this approach will leave many issues and gray areas to be

     resolved.  The Commission is soliciting comment on how any revised

     interpretation of the term exchange could clearly distinguish between these

     activities and  those of alternative trading systems.

          Question 56:  Is it appropriate for the Commission to consider the

          activities described above as broker-dealer activities?

          Question 57:  How should a revised interpretation of exchange

          adequately and clearly distinguish broker-dealer activities, such as

          block trading and internal execution systems, from market activities?

          Question 58:  Are the distinctions discussed above accurate

          reflections of exchange and broker-dealer activities?  Are there other

          factors that may better distinguish a broker-dealer from an exchange? 

                         (ii) Organized Dealer Markets

          The term "exchange," as articulated above, would encompass organized

     dealer markets that operate systems to consolidate participant orders for

     display, and set material conditions under which orders can be executed




                             ======END OF PAGE 111======





     (including automatically executing orders).<(136)>  As discussed in

     the Delta Release, dealer markets have traditionally consisted of loosely

     organized groups of individual dealers that trade securities OTC, without

     formal consolidation of orders or trading.  Historically, the majority of

     trading in corporate, government, and municipal debt instruments has been

     conducted through such OTC dealers.  Individual dealers in such markets

     generally do not directly "bring together" public purchasers and sellers. 

     The court and the parties in the Delta Decision<(137)> assumed that

     the term "exchange," as that term is generally understood, would not apply

     to such a loosely organized market.  The approaches described above

     continue the notion that the definition of "exchange" should not cover such

     loosely organized traditional dealer markets and that broker-dealer

     regulation should continue to govern individual dealers in those

     markets.<(138)>  As individual dealers and associations of dealers
                              

               <(136)>   The only  dealer market in the  United States that
                         currently appears to both  consolidate participant
                         quotes and  set conditions governing  execution is
                         the  Nasdaq  market, operated  by  the  NASD.   As
                         discussed  below,  because  the  NASD  is  already
                         registered  as  a   securities  association,   the
                         Commission  would  not  intend  for   any  revised
                         interpretation of "exchange" to include the Nasdaq
                         market.   The Commission, however,  could consider
                         whether  other  entities   that  operate   similar
                         markets in the United States  should be considered
                         exchanges   under  any   expanded  interpretation,
                         unless they  were  also operated  by a  registered
                         securities association.

               <(137)>   See Delta Decision, supra note 124.

               <(138)>   For  example,  commercial  paper   trades  through
                         several  large dealers that  disseminate their own
                         quotes to  their  customers and  make a  two-sided
                         market in  the paper of various  issuers.  Trading
                         in  the   commercial   paper  market   is   highly
                                                             (continued...)

                             ======END OF PAGE 112======





     have employed technology to make OTC markets more efficient, however,

     dealer markets in certain instruments have become organized to such an

     extent that they have assumed many of the characteristics of exchange

     markets.  This is particularly true in markets that trade instruments that

     are also listed on registered exchanges, such as equity securities.  For

     example, Nasdaq consolidates trading interest of multiple dealers on a

     screen that is displayed real-time to its members, and provides a mechanism

     for dealers to update displayed quotations.  The NASD also imposes

     obligations on market makers in Nasdaq National Market and SmallCap

     securities to provide a continuous source of liquidity in Nasdaq,

     establishes minimum qualifications that issuers must meet in order for

     their securities to be quoted on the consolidated screen, and sets

     enforceable rules that govern the priorities dealers must give to certain

     orders.  Through additional services, such as SelectNet, Nasdaq also allows

     dealers to trade with orders electronically.  In other words, a group of

     market participants, through Nasdaq, act in concert to centralize and

     disseminate trading interest and establish the basic rules by which

     securities will be traded on Nasdaq.  Because the NASD is already

     registered as a securities association, the Nasdaq market would not need to

     be regulated as an exchange.  The Commission, however, could consider

     whether entities that operate similar markets in the United States should
                              

               <(138)>(...continued)
                         concentrated among  a few  large dealers,  some of
                         which  provide  automated  quotation  screens  for
                         their  customers.    Unlike  an  exchange  market,
                         however,   no   entity   currently   attempts   to
                         centralize trading interest by reflecting multiple
                         dealer  quotes,  or  by setting  conditions  under
                         which  the commercial  paper of  differing issuers
                         may be traded by dealers.

                             ======END OF PAGE 113======





     be considered exchanges under any expanded interpretation if they are not

     operated by a registered securities association. 

          Question 59:  How should a revised interpretation of the term

          "exchange" adequately and clearly distinguish broker-dealer

          activities, such as block trading and internal execution systems, from

          market activities? 

          Question 60:  What factors should the Commission consider in

          determining whether an organization of dealers is sufficiently

          "organized" to require exchange registration?

                         (iii)     Information Vendors and Bulletin Boards  

          The Commission is also concerned that any revised interpretation of

     the term "exchange" not be so broad as to encompass those entities that

     provide information, but do not provide a central facility for executing

     trades or set conditions governing trading.  Information vendors and

     "bulletin boards" often provide a centralized display of general trading

     interest, comments, or other information regarding trading, but they

     generally do not enable customers to communicate directly with each other,

     execute orders, or otherwise agree to the terms of a trade through their

     facilities.  These entities also do not establish the conditions under

     which customers negotiate or trade based on displayed

     information.<(139)>  Because these entities centralize information
                              

               <(139)>   Commission staff has  previously indicated that it
                         would not recommend enforcement action if a system
                         operated  by  an   issuer  that  does   not  allow
                         transactions  to  be executed  on the  system, and
                         that is designed to provide limited information to
                         buyers and sellers of  stock, does not register as
                         an exchange.   See Letter from  Catherine McGuire,
                         Martin Dunn, and Jack Murphy, SEC, to Barry Reder,
                                                             (continued...)

                             ======END OF PAGE 114======





     without standardizing trading based on such information, the approach

     described above would not regulate these entities as exchanges if they do

     not allow for execution through their system or set conditions of trading.

          The Commission recognizes that the difference between an exchange and

     an electronic bulletin board depends on the functions that they make

     available.  For instance, a passive bulletin board that merely provides

     names and addresses of prospective buyers and sellers and the prices at

     which they are willing to buy or sell would not be an exchange because it

     would not set priorities that govern trades, and transactions resulting

     from posted indications of interest, if any, would be executed outside the

     system.  If a system created an electronic link between multiple potential

     buyers (e.g., a "chat room"), however, it could be considered to be

     providing a facility through which participants entering orders may agree

     to the terms of a trade (e.g., an exchange).  The Commission requests

     comment on whether such a system should be considered to be an exchange,

     particularly if the customer orders displayed on the system are firm, or if

     the system specifies the priorities for customer interaction through the

     electronic linkage or "chat room."<(140)>

          Question 61:  Does the revised interpretation of "exchange" described
                              

               <(139)>(...continued)
                         Coblentz, Cahen,  McCabe &  Breyer, LLP (June  24,
                         1996) (counsel to Real Goods Trading Corporation).

               <(140)>   In  addition, it  is  possible for  an information
                         vendor  to provide  its  services  by linking  its
                         screens  to execution facilities provided by other
                         entities with which  the vendor has a  contractual
                         arrangement.      In   these  circumstances,   the
                         information vendor may be captured by the proposed
                         revised  interpretation  of  the term  "exchange,"
                         depending   upon  the   nature  of   the  services
                         provided.

                             ======END OF PAGE 115======





          above clearly exclude information vendors, bulletin boards, and other

          entities whose activities are limited to the provision of trading

          information?  How should the Commission distinguish between

          information vendors, bulletin boards, and exchanges?

                         (iv) Interdealer Brokers

          Certain markets that are not centrally organized by a single entity

     are nonetheless informally organized around interdealer

     brokers,<(141)> which display the bids and offers of other dealers

     anonymously.  The importance and role of these interdealer brokers has

     changed significantly in the past twenty years.  While interdealer brokers

     traditionally had relatively small volume, they are now key players in the

     government and municipal securities markets,<(142)> and have begun

     to operate in other instruments as well.  Today, interdealer brokers

     provide liquidity by providing a central mechanism to display the bids and

                              

               <(141)>   As  used in  this release,  the term  "interdealer
                         brokers" includes entities that are referred to as
                         brokers'  brokers  and  blind  brokers  in certain
                         markets.

               <(142)>   Trading by  interdealer  brokers began  to  become
                         popular in the government securities market, after
                         trading had  moved from the NYSE  to the over-the-
                         counter  market in  the  1920s and  the demise  of
                         trading  agreements  in  the  mid-1950s  that  had
                         previously provided a  foundation for  interdealer
                         business.    See  U.S.  Congress,  Joint  Economic
                         Committee,  A  Study  of  the  Dealer  Market  for
                         Federal Government Securities 21-26, 49-53 (1960);
                         U.S. Department  of the Treasury and  U.S. Federal
                         Reserve,  Treasury-Federal  Reserve  Study of  the
                         Government Securities  Markets 95-100 (1959).   By
                         1972,  interdealer  brokers handled  approximately
                         14% of  the  trading of  government securities  by
                         dealers; by 1990, interdealer brokers handled more
                         than 50% of such business.  See Marcia Stigum, The
                         Money Market 644-56 (3d ed. 1990).  

                             ======END OF PAGE 116======





     offers of multiple dealers and by allowing dealers and investors to trade

     large volumes of securities anonymously and efficiently based on those bids

     and offers.  In the government securities market, for example, interdealer

     brokers compile and display the anonymous bids and offers of other

     government securities dealers and traders on screens located in the

     dealers' offices.  Dealers call an interdealer broker via telephone to

     display their quote information or to execute against a displayed

     quotation.<(143)>  Automated brokers' brokers in the secondary
                              

               <(143)>   Dealers and other customers have  direct telephone
                         lines to the various individual brokers working at
                         an  interdealer broker.    The individual  brokers
                         typically  handle  one  to  three  customers each,
                         depending  upon activity  levels.   When customers
                         wish  to  buy  or   sell  a  security  through  an
                         interdealer  broker,  they  call   the  individual
                         broker   assigned  to  them  at  that  interdealer
                         broker.  Through  their assigned broker, customers
                         can  hit a bid or  take an offer  already shown on
                         the screen, tell the broker to post a new,  better
                         bid  or offer  on the  screen, or give  the broker
                         other  information  about  their   activities  and
                         trading needs.  When customers wish to hit a quote
                         on the  screen or enter  a new  quote, the  broker
                         taking that information  announces the hit or  new
                         bid/offer  to  other   brokers  (who  are   taking
                         information from other  customers), and the broker
                         or other staff enter the information so that it is
                         displayed  on  internal   and  customer   screens.
                         Trading supervisors within the  interdealer broker
                         mediate  disputes, such as which broker called out
                         an order first.   See generally U.S. DEPARTMENT OF
                         THE  TREASURY, REPORT  OF  THE  SECRETARY  OF  THE
                         TREASURY  ON   SPECIALIZED  GOVERNMENT  SECURITIES
                         BROKERS  AND  DEALERS  (1995)   (hereinafter  1995
                         TREASURY  REPORT);  U.S.  SECURITIES AND  EXCHANGE
                         COMMISSION, 1994 ANNUAL REPORT 29-30  (1994); U.S.
                         DEPARTMENT  OF THE  TREASURY, U.S.  SECURITIES AND
                         EXCHANGE COMMISSION, AND BOARD OF GOVERNORS OF THE
                         FEDERAL  RESERVE  SYSTEM,  JOINT  REPORT   ON  THE
                         GOVERNMENT    SECURITIES    MARKET    26    (1992)
                         (hereinafter  1992  JOINT  REPORT); STIGUM,  supra
                         note 142;  U.S.  GENERAL ACCOUNTING  OFFICE,  U.S.
                                                             (continued...)

                             ======END OF PAGE 117======





     market for municipal securities operate in a similar manner, disseminating

     centralized quotation information and executing trades for their customers

     by telephone.<(144)>  

          Operating in this manner, interdealer brokers centralize trading

     interest and provide a mechanism for agreeing to the terms of a trade in

     much the same way as registered exchanges and alternative markets do. 

     Interdealer brokers in these markets may also determine certain trading

     practices.<(145)>  This is a significant change from the way

     interdealer brokers operated just 30 years ago, when they disseminated last

                              

               <(143)>(...continued)
                         GOVERNMENT    SECURITIES:       MORE   TRANSACTION
                         INFORMATION  AND  INVESTOR PROTECTION  ARE NEEDED,
                         19,  97-100  (1990);    U.S.   GENERAL  ACCOUNTING
                         OFFICE,   U.S.   GOVERNMENT   SECURITIES:       AN
                         EXAMINATION  OF VIEWS  EXPRESSED  ABOUT ACCESS  TO
                         BROKERS' SERVICES 28-35 (1987). 

               <(144)>   See Division of Market Regulation, U.S. Securities
                         and  Exchange  Commission,  Staff  Report  on  the
                         Municipal    Securities   Market    17-22   (1993)
                         (hereinafter  Municipal  Securities Report).   See
                         also Securities  Exchange  Act Release  No.  37998
                         (Nov.  29,  1996),  61  FR 64782  (Dec.  6,  1996)
                         (Commission    approval   order    for   Municipal
                         Securities Rulemaking Board proposals  to increase
                         transparency in the municipal  securities market);
                         U.S.  Securities  and  Exchange  Commission,  1995
                         Annual Report 31 (1995).

               <(145)>   Generally,  a broker  considers  a  bid  or  offer
                         placed  with  it  good  until  canceled,  but  the
                         conditions  under  which   they  are  subject   to
                         variation is a matter  left up to each interdealer
                         broker.  For example,  usually, "when the [Federal
                         Reserve] comes  into  the  market,  all  bids  and
                         offers   [become    subject   to   reaffirmation].
                         However,   when  some   key  economic   number  is
                         released, some brokers make the market [subject to
                         reaffirmation], others don't;  in this area, there
                         are  no formal rules."  Stigum, supra note 142, at
                         647. 

                             ======END OF PAGE 118======





     sale information to customers individually, rather than centrally, and

     operated under less formalized procedures.

           Like block trading desks, interdealer brokers now have certain

     elements in common with markets, but have also retained some of their

     traditional characteristics.  For example, although interdealer brokers do

     not give advice, they exercise some discretion in matching and executing

     orders of their dealer customers.<(146)>  Commenters have suggested

     that these features should distinguish traditional interdealer brokers to

     some extent from markets that establish priorities for executing

     participant orders or that otherwise set conditions governing trading

     between participants.  Because interdealer brokers have begun to display

     quotations in real-time to their customers, centralize the negotiation of

     trading, and establish conventions under which trading will occur, the

     issue is whether this difference has become primarily one of

     degree.<(147)>  Individual brokers at an interdealer broker, in many

     respects, perform similar functions to exchange specialists.  Moreover, if

     an interdealer broker automated its activities fully, there would appear to

     be little difference between its activities and those of existing

                              

               <(146)>   See 1992 Joint Report, supra note 143, at A9-A11.

               <(147)>   "The  government brokers  run what  amounts  to an
                         unlicensed exchange.    In the  20-odd years  that
                         governments have  been brokered, the way  in which
                         that exchange operates has slowly changed.  At the
                         outset, brokers  phoned runs  to dealers,  then in
                         1977 to 1978, the era of screens began."   Stigum,
                         supra note  142, at 655.  The following quote from
                         a  dealer  also  supports  the  Commission's view:
                         "Also, dealers  came to  view the brokers  as just
                         one more  place, along  with the Chicago  pits, to
                         trade -- just another place to get business done."
                         Id. at 652.

                             ======END OF PAGE 119======





     alternative trading systems.  Given this evolution, the Commission could

     consider whether interdealer brokers should be considered exchanges under a

     revised interpretation.

          If the Commission determines that the activities of interdealer

     brokers should be encompassed by a revised interpretation of "exchange," it

     could consider whether to use its exemptive authority to exclude those

     interdealer brokers that trade exempted securities<(148)> from

     exchange registration requirements.  As noted in the Delta Release,

     Congress has given no indication that it intended to subject traditional

     interdealer brokers in the government and municipal securities markets to

     exchange regulation.<(149)>  Moreover, regulation of traditional

     interdealer brokers in government and municipal securities as exchanges may

     not be necessary or appropriate in the public interest at this time, in

     light of the specialized oversight structures for these markets.  Both the

     government and municipal securities markets are overseen through special

     regulatory schemes that are tailored to the particular features of those

     debt markets.  Government securities broker-dealers are overseen jointly by

     the U.S. Department of the Treasury ("Treasury"), the Commission, and

     federal banking regulators, under the Exchange Act (particularly the

     provisions of the Government Securities Act of 1986) and the federal





                              

               <(148)>   Exempted   securities   are  defined   in  Section
                         3(a)(12) of the Exchange Act to include government
                         securities and municipal  securities, among  other
                         things.  15 U.S.C. 78c(a)(12).

               <(149)>   See Delta Release, supra note 121, at 1898 n.87.

                             ======END OF PAGE 120======





     banking laws.<(150)>  Municipal securities broker-dealers and

     transactions in municipal securities are overseen by the Commission, the

     Municipal Securities Rulemaking Board ("MSRB"), the NASD, and the federal

     banking regulatory authorities under the Exchange Act (particularly Section

     15B) and the federal banking laws.  Unlike equities and other instruments

     traded primarily on registered exchanges,<(151)> surveillance of

     trading in government and municipal securities is not conducted by entities

     that operate competing markets in those instruments.  Instead, surveillance

     of the government securities market is coordinated among the Treasury, the

                              

               <(150)>   See 1995 Treasury Report, supra note 143.

                    Under  the  regulatory  structure  established  by  the
                    Government Securities Act of  1986, as amended in 1993,
                    the  Treasury was  given rulemaking authority  over all
                    brokers   and   dealers   in   government   securities.
                    Specifically,  the Treasury was  designated by Congress
                    as   the  sole  rulemaker  for  specialized  government
                    securities brokers  and dealers  (33 firms as  of March
                    1995)  and  was  given  rulemaking  authority  for  the
                    government    securities   activities    of   financial
                    institutions that filed notice as government securities
                    brokers and dealers  (approximately 300  as of  January
                    1995).    The Treasury  and  the  SEC have  overlapping
                    rulemaking   responsibilities    for   the   government
                    securities activities conducted  by general  securities
                    brokers and dealers (15(b) firms) which numbered  about
                    2,231  as of  March 1995.   The  [Government Securities
                    Act] granted the  Treasury the authority  to promulgate
                    rules  and  regulations  for  each  of  these  entities
                    concerning  financial   responsibility,  protection  of
                    investor  securities  and   funds,  recordkeeping   and
                    financial reporting, and audits.  

               Id. at 3.

               <(151)>   Although all marketable Treasury notes, bonds, and
                         zero-coupon securities  are  listed on  the  NYSE,
                         exchange trading volume is a small fraction of the
                         total    over-the-counter    volume    in    these
                         instruments.   See 1992 Joint  Report, supra  note
                         143.

                             ======END OF PAGE 121======





     Commission, and the Board of Governors of the Federal Reserve System.  In

     the municipal securities market, Congress established the MSRB as an SRO

     for broker-dealers in municipal securities; unlike SROs in other markets,

     however, the MSRB does not operate a market and was not given inspection or

     enforcement powers.  Surveillance of the municipal securities market for

     fraud and market manipulation is conducted by the Commission and the

     NASD.<(152)> 

          As a result of these specialized oversight structures, regulation of

     particular market participants in the government and municipal securities

     markets as broker-dealers, rather than as exchanges, is not likely to

     weaken coordination of overall market oversight or create competitive

     inequities among differently regulated entities that perform similar

     functions.  For these reasons, if the Commission expands its interpretation

     of "exchange" to cover interdealer brokers generally, it could consider

     expressly exempting traditional government and municipal securities

                              

               <(152)>   Coordinated surveillance of  secondary trading  in
                         municipal  securities  is still  developing.   The
                         MSRB,  under  the  Commission's  supervision,  has
                         authority  to issue  rules governing,  among other
                         things,        professional        qualifications,
                         recordkeeping,  quotations,   and  advertising  of
                         municipal securities  broker-dealers.  Enforcement
                         of   MSRB   rules  is   divided   between  banking
                         regulatory agencies  (for banks) and the NASD (for
                         non-bank  firms),  with   the  Commission   having
                         authority over all  municipal securities  dealers,
                         as well  as non-bank municipal  securities broker-
                         dealers.   See Municipal  Securities Report, supra
                         note   144,  at  37.    Recently,  the  Commission
                         approved an MSRB rule change  designed to increase
                         the   information    available   about   municipal
                         securities  and to  provide  a  centralized  audit
                         trail of  municipal securities transactions.   See
                         Securities  Exchange Act  Release No.  37998 (Nov.
                         29, 1996), 61 FR 64782 (Dec. 6, 1996).

                             ======END OF PAGE 122======





     interdealer brokers that trade exempted securities from exchange

     registration.  

          It should be noted that the above analysis is based on existing

     mechanisms for supervising trading in government and municipal securities

     markets, and on current trading practices of interdealer brokers in such

     markets.  In the event that an interdealer broker automates its services

     more completely, or operates in a manner more similar to an equity market,

     for example, this analysis could be reevaluated.  Similarly, the above

     analysis would not apply to derivatives of government and municipal

     securities.

          Question 62:  If the Commission expands its interpretation of

          "exchange," should the Commission exempt interdealer brokers that deal

          only in exempted securities from the application of exchange

          registration and other requirements?

          Question 63:  How could the Commission define interdealer brokers in a

          way that would implement congressional intent not to regulate

          traditional interdealer brokers as exchanges, without unintentionally

          exempting other alternative trading systems operated by brokers?

               4.   Effect of Broadening the Definition of "Exchange"

          Reinterpreting the definition of "exchange" to apply to a broader

     range of entities would have significant effects, not only on those

     alternative trading systems classified as exchanges, but also on the

     securities trading on those exchanges, currently registered exchanges, the

     NMS, clearance and settlement mechanisms, and market participants.  In

     particular, substantial work would be necessary to ensure that newly

     registered exchanges could be smoothly integrated into existing market


                             ======END OF PAGE 123======





     structures.

                    a.   Regulation of Securities Trading on Alternative Trading

                         Systems

          Classifying alternative trading systems as exchanges could affect the

     trading of securities on these systems, particularly on those systems that

     are required to register as national securities exchanges.  Securities

     traded on a national securities exchange must be registered with the

     Commission and approved for listing on the exchange, or traded pursuant to

     Commission regulations governing trading of securities listed on another

     exchange ("unlisted trading privileges" or "UTP").  These requirements are

     critical to ensuring that securities trading on exchanges provide investors

     with adequate information and that all relevant trading activity in a

     security is reported to, and surveilled by, the exchange on which such

     security is listed.

          Specifically, Section 12(a) of the Exchange Act makes it unlawful for

     any member, broker, or dealer to effect any transaction in any security

     (other than an exempted security) on a national securities exchange unless

     a registration statement is in effect as to such security for such exchange

     in accordance with the provisions of the Exchange Act and the rules and

     regulations thereunder.<(153)>  Under this requirement, upon

     registration as exchanges, alternative trading systems that are currently

     trading unregistered securities could no longer freely trade those




                              

               <(153)>   15  U.S.C.  78l(a).    Section  12(b),  15  U.S.C.
                         78l(b), contains procedures  for the  registration
                         of securities on a national securities exchange.

                             ======END OF PAGE 124======





     securities.<(154)>

          In addition, national securities exchanges are permitted to trade

     securities listed on other exchanges and Nasdaq only pursuant to UTP

     regulations, which limit the range of securities that they may

     trade.<(155)>  Like all exchanges, a newly registered exchange would

     be required to have in place rules for trading the class or type of

     securities it seeks to trade.<(156)>  To trade Nasdaq/National

     Market ("NM") securities, a newly registered exchange would also be

     required to become a signatory to an existing plan governing such

     trading.<(157)>  Moreover, under Section 12(f) of the Exchange Act,

     exchanges cannot trade securities not registered on an exchange or

     classified as NM securities (such as Nasdaq SmallCap or other OTC

     securities) without Commission action.  Section 12(f) of the Exchange Act

     authorizes the Commission to permit the extension of UTP to any security

     registered otherwise than on an exchange.  The OTC-UTP plan,<(158)>

     which permits UTP for Nasdaq/NM securities, is the only extension approved


                              

               <(154)>   Section 12(a) does not apply to exchanges that the
                         Commission  has  exempted  from   registration  as
                         national   securities   exchanges,  although   the
                         Commission  could  consider  whether  it  would be
                         appropriate to limit trading on exempted exchanges
                         to securities registered under  Section 12 of  the
                         Exchange Act.  See AZX Exemptive Order, supra note
                         24.  See also  Securities Exchange Act Release No.
                         37271 (June 3, 1996), 61 FR 29145 (June 7, 1996).

               <(155)>   Exchange Act 12(f), 15 U.S.C. 78l(f).

               <(156)>   Exchange Act Rule 12f-5, 17 CFR 240.12f-5.

               <(157)>   See OTC-UTP plan, infra note 168.

               <(158)>   See infra note 168 and accompanying text.

                             ======END OF PAGE 125======





     to date by the Commission.<(159)>  Thus, exchanges cannot currently

     trade Nasdaq SmallCap, other OTC securities, or exempted securities that

     are not separately listed on the exchange.  This restriction would also

     apply, absent Commission action, to alternative trading systems newly

     registered as exchanges.<(160)>

          These restrictions would have a significant effect on newly registered

     exchanges.  Most alternative trading systems do not independently list

     securities; securities traded on such systems are generally unlisted or

     listed on another market.  As a result, in order to comply with Exchange

     Act requirements applicable to national securities exchanges, such systems

     would need to establish listing procedures and comply with Commission

     regulations governing unlisted trading privileges.  Under the tiered

     approach to regulating alternative trading systems, the ability of such

     systems to trade a wide range of securities would be subject to the same

     UTP conditions as currently registered exchanges.  In order to minimize

     some of these effects, the Commission could consider expanding the category

     of securities that would be available for UTP trading.

          Integrating a broader range of entities into the UTP structure could
                              

               <(159)>   Id.

               <(160)>   National securities exchanges are also prohibited,
                         pursuant   to  Exchange   Act  Rule   12f-2,  from
                         extending UTP to a  security subject to an initial
                         public  offering ("IPO")  until  the  trading  day
                         following  commencement of  the  IPO.   Currently,
                         pursuant to  NASD rules,  participants in  the OTC
                         market, including alternative trading systems, may
                         trade  securities subject  to  an IPO  immediately
                         after trading  has opened on the listing exchange.
                         NASD Manual Section 6440(j).   If registered as an
                         exchange, such  entities would  be subject  to the
                         one-day waiting period prior to trading securities
                         subject to an IPO.

                             ======END OF PAGE 126======





     also affect existing exchange rules, such as NYSE Rule 390 and similar

     offboard trading restrictions, designed to limit members from effecting OTC

     transactions in exchange-listed stocks.<(161)>  For example,

     transactions that are executed through alternative trading systems

     currently may be considered to be OTC transactions.  If significant

     alternative trading systems were to register as exchanges, activity on

     those systems could no longer be considered to be OTC.  Consequently, rules

     that expressly prohibit OTC transactions in listed securities by their

     terms would no longer apply to activity on those alternative trading

     systems and, as a result, the number of transactions subject to the

     prohibition of such rules would decrease.  The Commission is soliciting

     comment on whether there would be any customer protection or competitive

     reasons to preserve these offboard trading restrictions if the

     interpretation of "exchange" is broadened to include alternative trading

     systems and highly organized dealer markets.

          Question 64:  How could the Commission foster the continued trading of

          all securities currently traded on alternative trading systems if

          these systems are classified as exchanges under the interpretation

          described above and some of these systems are required to register as

          national securities exchanges?  For example, what would be the effect

                              

               <(161)>   For example, NYSE Rule  390 prohibits NYSE members
                         from effecting certain transactions in NYSE-listed
                         stocks in the OTC market.  Exchange  Act Rule 19c-
                         1, however, prohibits the application of off-board
                         trading  restrictions  to  trades  effected  by  a
                         member  as agent.   17  CFR 240.19c-1.   Moreover,
                         Exchange  Act Rule 19c-3 prohibits the application
                         of  off-board  trading restrictions  to securities
                         listed on an exchange after April 26, 1979. 17 CFR
                         240.19c-3.

                             ======END OF PAGE 127======





          on alternative trading systems that wish to trade securities exempted

          from registration under Rule 144A if those systems are required to

          register as national securities exchanges? 

          Question 65:  How would the requirement to have rules in place for

          trading unlisted securities affect the viability of alternative

          trading systems that are required to register as national securities

          exchanges?

          Question 66:  Would the specifications in the OTC-UTP plan relating to

          the trading of Nasdaq/NM securities pose particular problems for

          systems that are required to register as national securities

          exchanges?

          Question 67: Should the Commission extend UTP to securities other than

          NM securities, such as Nasdaq SmallCap securities?  What effect would

          an inability to trade Nasdaq SmallCap and other non-Nasdaq/NM

          securities have upon alternative trading systems that are required to

          register as national securities exchanges?

          Question 68:  What effect would the prohibition on UTP trading of

          newly listed stock until the day following an initial public offering

          have upon systems that are required to register as national securities

          exchanges?

          Question 69:  How should existing exchange rules designed to limit

          members from effecting OTC transactions in exchange-listed stock be

          applied, if the Commission's interpretation of exchange were expanded

          to include alternative trading systems and organized dealer markets? 

          What customer protection and competitive reasons might there be to

          preserve these rules if alternative trading systems are classified as


                             ======END OF PAGE 128======





          exchanges? 

                    b.   Integration with National Market System Mechanisms and

                         Existing Exchange Practices

          A revised interpretation of the term "exchange" would not only affect

     currently registered exchanges and alternative trading systems required to

     register as exchanges, it could also have a significant impact on the NMS,

     coordination of market-wide trading policies, listing arrangements, and

     exchange rules governing member trading in the OTC market.  There could

     also be significant effects on coordination of market-wide surveillance and

     enforcement efforts among national securities exchanges.   

          Because alternative trading systems differ in several key respects

     from currently registered exchanges, a number of issues would need to be

     resolved before these systems could be integrated into national market

     system mechanisms.  Integrating newly registered national securities

     exchanges into the NMS mechanisms should not cause the homogenizing of all

     markets - to the contrary, it is as important today as it was in 1975 to

     cultivate an atmosphere in which innovation is welcome and possible.  Such

     integration therefore could require revision of NMS mechanisms so that they

     could accommodate diverse and evolving markets.  The Commission solicits

     comment, as discussed in greater detail below, on what revisions to the

     structure of NMS mechanisms might be necessary to accommodate alternative

     trading systems.  The Commission also solicits comment on the costs and

     potential effects on innovation if alternative trading systems were linked

     to NMS mechanisms.  In addition, the Commission solicits comment on the

     costs and potential effects if revisions to the NMS mechanisms were not

     effective. 


                             ======END OF PAGE 129======





          Question 70:  What effects would linking alternative trading systems

          to NMS mechanisms have on those systems?  For example, how would such

          linkages affect the ability of alternative trading systems to operate

          with trading and fee structures that differ from those of existing

          exchanges or to alter their structures?  To what extent could revision

          of the NMS plans alleviate these effects?

                         (i)  Inter-Market Plans

          If certain alternative trading systems were required to register as

     national securities exchanges, these systems would be expected to become

     participants in market-wide plans currently subscribed to and operated by

     registered exchanges and the NASD.  All of the currently registered

     exchanges and the NASD participate in joint plans for transaction and

     quotation reporting: the CQS, the CTA, the ITS,<(162)> the Options




                              

               <(162)>   The  CTA provides  vendors  and other  subscribers
                         (including   alternative  trading   systems)  with
                         consolidated  last  sale  information  for  stocks
                         admitted  to dealings  on any  exchange.   The CQS
                         gathers  quotations  from  all  market  makers  in
                         exchange-listed  securities and  disseminates them
                         to vendors  and other subscribers.   The ITS  is a
                         communications   system  designed   to  facilitate
                         trading  among competing markets by providing each
                         market participating in the ITS pursuant to a plan
                         approved by the Commission ("ITS plan") with order
                         routing  capabilities  based on  current quotation
                         information.   See, e.g., Securities  Exchange Act
                         Release Nos. 37191 (May 9, 1996), 61 FR 24842 (May
                         16,  1996); 17532  (Feb.  10, 1981),  46 FR  12919
                         (Feb.  18, 1981);  23365  (June 23,  1986), 51  FR
                         23865 (July  1, 1986) (Cincinnati Stock Exchange /
                         ITS linkage); 18713 (May 6, 1982) 47 FR 20413 (May
                         12, 1982) (NASD's CAES / ITS linkage); 28874 (Feb.
                         12,  1991), 56  FR 6889  (Feb. 20,  1991) (Chicago
                         Board Options Exchange / ITS linkage).

                             ======END OF PAGE 130======





     Price Reporting Authority ("OPRA"),<(163)> and the Nasdaq/National

     Market System/Unlisted Trading Privileges ("OTC-UTP").<(164)>  These

     plans form an integral part of the NMS for the trading of securities, and

     contribute greatly to the operation of linked, transparent, efficient, and

     fair markets.  In order for any newly registered national securities

     exchanges to become fully integrated into the NMS, it would be essential

     that the operations of those new exchanges and the market linkage systems

     be compatible.  If the Commission revises its approach to regulation of

     alternative trading systems by requiring those with active pricing

     mechanisms and significant volume to register as national securities

     exchanges, it may have to take action to ensure the suitable and timely

     inclusion of new exchanges into the NMS.

                              (A)  Quotation and Transacting Reporting

          If certain alternative trading systems are required to register as

     national securities exchanges, they would be required to have effective

     quote and transaction reporting plans and procedures in place under Section

     11A of the Exchange Act.<(165)>  The CTA and CQS plans, which are

     now operated by the eight national securities exchanges and the NASD, make

     quote and transaction information in exchange-listed securities available

     to the public.  Both the CTA and the CQS plans have provisions governing


                              

               <(163)>   See  infra note  169 and  accompanying text  for a
                         description of the OPRA plan.

               <(164)>   See  infra note  168 and  accompanying text  for a
                         description of the OTC-UTP plan.

               <(165)>   See also Exchange Act  Rules 11Ac1-1(b)(1), 17 CFR
                         240.11Ac1-1(b)(1);  11Aa3-2(c), 17  CFR 240.11Aa3-
                         2(c).

                             ======END OF PAGE 131======





     the entry of participants to the plans.<(166)>  According to the

     terms of the CTA plan, any national securities exchange or registered

     national securities association may become a participant of the CTA by

     subscribing to the CTA plan<(167)> and paying to the existing

     participants an appropriate amount for the "tangible and intangible assets"

     created under the plans that will be made available to the new participant. 

     The CQS Plan has similar terms.  Participants in the CTA and CQS plans

     share in the income and expenses associated with the provision of quotation

     information according to the terms of the plans.  

          Under the terms of the OTC-UTP plan governing trading of Nasdaq/NMS

     securities,<(168)> any national securities exchange where Nasdaq/NMS

     securities are traded may become a full participant thereunder.  The plan
                              

               <(166)>   The  CTA  plan  also  contains   a  provision  for
                         entities   other   than  participants   to  report
                         directly to the CTA as "other  reporting parties."
                         Pursuant to  this provision, parties other  than a
                         national securities exchange or association may be
                         permitted  to provide transaction data directly to
                         the CTA.

               <(167)>   See Securities Exchange Act Release No. 37191 (May
                         9, 1996), 61 FR 24842 (May 16, 1996).

               <(168)>   See   Joint   Self-Regulatory  Organization   Plan
                         Governing   the   Collection,  Consolidation   and
                         Dissemination   of   Quotation   and   Transaction
                         Information  for  Exchange-listed  Nasdaq/National
                         Market System Securities  and for  Nasdaq/National
                         Market System Securities Traded on Exchanges on an
                         Unlisted Trading Privilege Basis ("OTC-UTP plan").
                         Securities  Exchange Act  Release No.  24407 (Apr.
                         29, 1987), 52 FR 17349 (May 7,  1987).  Currently,
                         the NASD,  the CHX, and the  Phlx are participants
                         in  the OTC-UTP  plan.    The  BSE  is  a  limited
                         participant,  and as  such only  reports quotation
                         and   transaction    information   for   Nasdaq/NM
                         securities  that are also listed on  the BSE.  See
                         Securities Exchange  Act Release No.  36985, 61 FR
                         12122 (March 18, 1996).

                             ======END OF PAGE 132======





     specifically states that a new signatory must pay a share of development

     costs to become a participant in the plan.  The plan provides for the

     collection, consolidation, and dissemination of quotation and transaction

     information for Nasdaq/NM securities, sets forth specifications for

     transmission of data to Nasdaq, and establishes procedures for market

     access, regulatory trading halts, cost allocation, and revenue sharing. 

     Similarly, the OPRA plan approved by the Commission<(169)> provides

     for the collection and dissemination of last sale and quotation information

     on options that are traded on the participant exchanges.  Under the terms

     of the plan, any national securities exchange whose rules governing the

     trading of standardized options have been approved by the Commission may

     become a party to the OPRA plan.  The plan provides that any new party, as

     a condition of becoming a party, must pay a share of OPRA's start-up costs. 

     It also provides for revenue sharing among all parties.

          Given the breadth of these plans, existing plan participants would

     need to work expeditiously with newly registered exchanges to facilitate

     inclusion of these new exchanges into the NMS plans.  Participation in

     these transaction reporting plans should not seriously impair the

     functioning of most alternative trading systems.  If the Commission revised

     its approach to regulation of alternative trading systems by requiring

     those with active pricing mechanisms and high volume to register as

     national securities exchanges, it may have to take action to ensure the
                              

               <(169)>   The OPRA plan was approved pursuant to Section 11A
                         of the Exchange  Act and  Rule 11a3-2  thereunder.
                         See  Securities  Exchange  Act  Release  No. 17638
                         (Mar. 18, 1981) (hereinafter OPRA plan).  The five
                         exchanges which are participants  in the OPRA plan
                         are the Amex, the CBOE, the NYSE, the PCX, and the
                         Phlx.

                             ======END OF PAGE 133======





     suitable and timely inclusion of new exchanges into these quotation and

     transaction reporting plans. 

          Question 71:  Are there any insurmountable technical barriers to

          admission of alternative trading systems into the CTA, CQS, OPRA, or

          OTC-UTP plans?

          Question 72:  What costs are associated with the admission of new

          applicants to these plans?

          Question 73:  Are there any CTA, CQS, OPRA, or OTC-UTP plan rules that

          would prevent newly registered national securities exchanges from

          obtaining fair and equal representation on these entities?

          Question 74:  What effect would the admission of newly registered

          national securities exchanges to the CTA, CQS, OPRA, and OTC-UTP plans

          have upon the governance and administration of those plans?

          Question 75:  Do admissions fees for new participants required by the

          terms of the plans present a barrier to admission to the plans?  Do

          the plans' provisions that all participants are eligible to share in

          the revenues generated through the sale of data affect commenters'

          views on this issue?

                              (B)  Intermarket Trading System  

          It has been the Commission's longstanding policy that market centers

     trading listed stocks be linked.  The current linkage, ITS, enables a

     broker or dealer who participates in one market to execute orders, as

     principal or agent, in an ITS security at another market center, by sending

     a commitment to execute with another market through the system.  ITS also

     establishes a procedure that allows specialists to solicit pre-opening

     interest in a security from specialists and market makers in other markets,


                             ======END OF PAGE 134======





     thereby allowing these specialists and market makers to participate in the

     opening transaction.  Participation in an opening transaction can be

     especially important when the price of a security has changed since the

     previous close.  Finally, ITS rules require that the members of participant

     markets avoid initiating a purchase or sale at a worse price than that

     available on another ITS participant market ("trade-

     throughs").<(170)>  Participation in the ITS will give users of

     these new exchanges full access to, and enable them to execute transactions

     on other ITS participant markets.  Moreover, participation in ITS will

     require new exchanges to comply with other applicable ITS rules and

     policies on matters such as, for example, trade- throughs, locked

     markets,<(171)> and block trades.<(172)>

                              

               <(170)>   A trade-through  occurs  when an  ITS  participant
                         purchases securities at a  lower price or sells at
                         a higher price than  that available in another ITS
                         participant market.   For example, if  the NYSE is
                         displaying a bid of 20 and  an offer of 20 1/8 for
                         an ITS security, the prohibition on trade-throughs
                         would prohibit another ITS participant market from
                         buying that security  from a customer at 19 7/8 or
                         selling  that security  to a  customer at  20 1/2.
                         See  ITS plan, supra note  162, at Exhibit  B.  In
                         addition,  each  participant market  has  in place
                         rules  to implement  the  ITS Trade-Through  Rule.
                         See, e.g., NASD Rule 5262.  The plan also provides
                         a mechanism for  satisfying a market aggrieved  by
                         another  market's trade-through.    See ITS  plan,
                         supra note 162, at Exhibit B(b)(2).

               <(171)>   A  locked market  occurs  when an  ITS participant
                         disseminates a bid for an ITS security  at a price
                         that equals or exceeds the price of the offer  for
                         the  security  from  another  ITS  participant  or
                         disseminates  an offer  for an  ITS security  at a
                         price that equals or is less than the price of the
                         bid for the security from another ITS participant.
                         The plan provides a mechanism for resolving locked
                         markets.

                             ======END OF PAGE 135======





          Under an approach that involved broadening the interpretation of

     "exchange," entities newly registered as national securities exchanges

     would be expected to sign the plan and become participants in ITS, or an

     equivalent system if one were developed.<(173)>  Alternative trading

     systems, however, have developed differently than exchanges and often serve

     different constituencies.  Some practices of alternative trading systems

     would undoubtedly conflict with the current provisions of the ITS plan, or

     would be incompatible with participation in ITS.  For example, many

     alternative trading systems allow participants to trade in smaller

     increments than those available on current plan participants.  Similarly,

     many alternative trading systems have institutional participants who may

     prefer to trade at an inferior price in order to trade in a larger size,

     resulting in a locked or crossed market.  These characteristics are

     potentially incompatible with current ITS provisions.  If the Commission

     were to adopt a revised approach to the regulation of alternative trading

     systems, it likely would be necessary to work with plan participants to

     accommodate diverse market structures in the plan.

          Question 76:  What effect would the admission of new, highly automated
                              

               <(172)>(...continued)
               <(172)>   The ITS  block  trade  policy  provides  that  the
                         member who represents a block size order shall, at
                         the time of execution of the block trade,  send or
                         cause   to   be   sent,   through   ITS  to   each
                         participating ITS market  center displaying a  bid
                         (or  offer)  superior  to  the  execution  price a
                         commitment to trade at the execution price and for
                         the  number of  shares displayed with  that market
                         center's better priced bid (or offer).

               <(173)>   To  become a  participant in  ITS, an  exchange or
                         association must subscribe to, and agree to comply
                         and to enforce compliance with, the provisions  of
                         the plan.    See  ITS plan,  supra  note  162,  at
                         section 3(c).
                             ======END OF PAGE 136======





          participants have upon the operation of the ITS?

          Question 77:  How would compliance with the current ITS rules and

          policies affect trading on alternative systems that may be regulated

          as exchanges?  How appropriate are these rules and policies for

          alternative trading systems? 

          Question 78:  What costs would be associated with newly registered

          exchanges joining ITS? Would those costs represent a barrier for newly

          registered exchanges to join ITS?

          Question 79:  Are there any ITS plan rules or practices that would

          prevent newly registered national securities exchanges from obtaining

          fair and equal representation on the ITS?

          Question 80:  What effect would the admission of newly registered

          national securities exchanges to the ITS plan have upon the governance

          and administration of the plan?

                         (ii) Uniform Trading Standards

          The Commission is also considering how policies governing market-wide

     trading, such as trading halts and circuit breakers, would apply to

     alternative trading systems that register as exchanges.  Registered

     national securities exchanges, the NASD, and the Commission each have the

     authority to impose trading halts for individual securities, for classes of

     securities, and on markets as a whole.<(174)>  There are four types

     of trading halts: (1) halts due to primary or regional market order
                              

               <(174)>   See,  e.g., Amex  Rule 117, NASD  Rule 4120(a)(3),
                         NYSE Rules  80B and 717.  Pursuant to Exchange Act
                         Sections  12(k)(1)(A) and (B),  the Commission may
                         suspend trading in any security for up to 10 days,
                         and  all   trading  on  any   national  securities
                         exchange  or otherwise,  for up  to  90 days.   15
                         U.S.C. 78l(k)(1)(A) and (B).

                             ======END OF PAGE 137======





     imbalance, or operational problems; (2) regulatory halts (as a result of

     dissemination of material news); (3) halts due to data processing or

     telecommunications problems (e.g., the inability to disseminate quotations

     or trade reports); and (4) Commission ordered halts.  The existing

     registered exchanges and the NASD currently have different rules and

     procedures in place for applying trading halts, and a new interpretation of

     the term "exchange" would result in a broader application of these trading

     halts in some instances.  Because many alternative trading systems are

     currently operated by registered broker-dealers, they are subject to NASD

     rules, including rules requiring them to comply with trading halts imposed

     by the NASD.  If registered as national securities exchanges, however, such

     systems would be required to impose their own trading halts.<(175)> 

     In addition, a trading system that was regulated as an exchange, would need

     to implement circuit breaker rules for extraordinary market volatility.

          Question 81:  What effect would the requirements to impose trading

          halts or circuit breakers in some circumstances have upon alternative

          trading systems if such systems were regulated as exchanges?

                    c.   Oversight of Non-Broker-Dealers That Have Access to

                         Exchanges and Clearance and Settlement of Non-Broker-

                         Dealer Trades

          As discussed above, Congress intended for an exchange that allowed

     non-broker-dealers to access its facilities to be responsible for


                              

               <(175)>   For example,  a newly registered exchange would be
                         required  under Exchange Act  Rule 11Ac1-1, 17 CFR
                         240.11Ac1-1  (the "Quote  Rule"), to  halt trading
                         when neither quotation nor transaction information
                         can be disseminated.

                             ======END OF PAGE 138======





     overseeing the trading of such non-broker-dealers.<(176)>  The

     scheme of self-regulation and market oversight codified in the Exchange Act

     relies primarily on trading markets to implement and operate market

     mechanisms for enforcing the federal securities laws and for ensuring that

     all market participants have adequate access to market information.  This

     system may be able to function effectively only if all significant trading

     activity and market participants are supervised by an SRO.  If entities can

     participate directly in the market in a significant way without being

     overseen by an SRO, market mechanisms designed to ensure transparency and

     to surveil for fraud and manipulation may not be fully effective.  The

     Commission's findings in the NASD 21(a) Report, discussed above,

     demonstrate the problems that arise when trading occurs on markets that are

     not subject to effective market oversight.<(177)>  Therefore, it

     would probably be necessary for any registered exchange to supervise the

     trading of non-broker-dealer participants in the same manner as it

     supervises broker-dealer trading.  For example, as part of its obligations

     under the Exchange Act, each exchange currently maintains procedures to

     surveil for insider trading and manipulation on that exchange.  These

                              

               <(176)>   As  noted  above,  Congress  adopted  Section 6(f)
                         specifically  to  ensure that  the  Commission and
                         exchanges have sufficient  authority both to limit
                         the ability  of  non-members to  utilize  exchange
                         facilities and to ensure that transactions on that
                         exchange   are   effected   in   accordance   with
                         applicable  exchange  rules regardless  of whether
                         the  particular  transaction  is  brought  to  the
                         exchange  by  a  broker-dealer  that   is  not  an
                         exchange  member  or by  an  investor  who is  not
                         utilizing   a   broker.      See   supra   Section
                         II.B.2.a.(i).

               <(177)>   See NASD 21(a) Report, supra note 20.

                             ======END OF PAGE 139======





     procedures, while differing among exchanges, generally identify trading

     anomalies based on historical and current data, review trading data to

     isolate suspicious activity and, if suspicious activity is found, refer the

     matter for enforcement proceedings.<(178)>  If an exchange permitted

     institutions to directly participate in trading as members, the Commission,

     pursuant to its authority under Section 6(f) of the Exchange Act, could

     require that exchange to enforce its rules with respect to such non-broker-

     dealers by conducting equivalent surveillance procedures.

          Nevertheless, it may not be appropriate to enforce exchange rules for

     non-broker-dealers in precisely the same manner as for broker-dealers.  For

     example, although an exchange would have to maintain surveillance

     procedures for all of its participants, an exchange may require a non-

     broker-dealer participant to provide different information in the course of

     cooperating with investigations than would be required from broker-dealer

     participants.  Similarly, in addition to the Commission's net capital

     requirements for broker-dealers,<(179)> each registered exchange

     currently requires their broker-dealer members to maintain minimum levels

     of capital.<(180)>  Exchanges could consider applying different

     financial requirements to non-broker-dealer participants than they

                              

               <(178)>   An exchange's  surveillance depends on  the nature
                         of trading that occurs, and the type of securities
                         that are traded on the exchange.  

               <(179)>   17 CFR  240.15c3-1.  Capital requirements  help to
                         ensure that broker-dealers maintain  liquid assets
                         in sufficient amounts  to enable  them to  satisfy
                         their  obligations  promptly  and  to   provide  a
                         cushion   of  liquid  assets  to  protect  against
                         potential market and credit risks. 

               <(180)>   See, e.g., NYSE Rule 325.

                             ======END OF PAGE 140======





     currently apply to broker-dealers.

          In any case, institutions that trade for accounts other than their

     own, maintain custody of customer funds or securities, act as specialists

     or market makers, or otherwise act as brokers or dealers would be required

     to register as broker-dealers under the Exchange Act.  Entities that engage

     in broker-dealer activities would continue to be required to comply with

     broker-dealer registration requirements, Exchange Act and SRO capital and

     books and records requirements, as well as prohibitions under Section 11(a)

     and other provisions of the Exchange Act designed to protect against

     conflicts of interest between an exchange member trading for its own

     account on an exchange and its trading on an agency basis for other

     accounts.<(181)>

          In addition, integration of alternative trading systems that have

     institutional participants into exchange registration will raise issues

     regarding clearance and settlement of the trades of those participants. 

     Currently, institutions do not participate directly in the clearance and

     settlement process at registered clearing agencies such as the National

     Securities Clearing Corporation ("NSCC") or The Depository Trust Company

     ("DTC").<(182)>  There is, however, no statutory prohibition against
                              

               <(181)>   For  example,  broker-dealers are  prohibited from
                         trading ahead of a customer's order, frontrunning,
                         free-riding   and  withholding,   and  maintaining
                         accounts for the employees of other broker-dealers
                         without notifying such broker-dealers.

               <(182)>   Institutions will generally hire a bank or broker-
                         dealer that is a member of DTC to act as custodian
                         on their  behalf.  Institutions can  be members of
                         DTC's Institutional Delivery  system for  purposes
                         of the confirmation/affirmation  process, but  the
                         actual   settlement  of   securities  transactions
                                                             (continued...)

                             ======END OF PAGE 141======





     the admission of institutions as members of registered clearing

     agencies.<(183)>  Conversely, there are no provisions under the

     Exchange Act, the rules thereunder, or current SRO rules, that require a

     member conducting trades on an exchange to be a direct member of a clearing

     agency.  Currently, for example, broker-dealer members of an exchange may

     use a clearing broker for processing trades conducted on an exchange. 

     Similarly, the Commission anticipates that institutions that conduct trades

     on newly registered exchanges could continue to use separate entities for

     clearance and settlement of trades.  

          In order to provide future institutional members the same clearance

     and settlement choices available to current broker-dealer exchange members,

     it may be appropriate for clearing agency membership to be open to

     institutions.  Such admission would be subject to corresponding clearing

     agency rules assuring appropriate safeguards and qualifications.

          Question 82:  What impact would registration of an alternative trading

          system as an exchange have on the institutional participants of that

          trading system, including registered investment companies?

          Question 83:  If the Commission allows institutions to effect

          transactions on exchanges without the services of a broker, to what
                              

               <(182)>(...continued)
                         (i.e., the  transfer of  money and securities)  at
                         DTC  occurs  between  the   institutions'  broker-
                         dealers   and  custodians.    Similarly,  NSCC  is
                         designed to process street-side settlement between
                         financial  intermediaries such  as broker-dealers.
                         Therefore,  institutions are  not members  of NSCC
                         for the purposes of settlement of trades.

               <(183)>   In fact, Section 17A  of the Exchange Act requires
                         that registered investment companies and insurance
                         companies  be  permitted  to  become   members  of
                         clearing agencies.  15 U.S.C. 78q-1(b)(3)(B).

                             ======END OF PAGE 142======





          extent should an exchange's obligations to surveil its market and

          enforce its rules and the federal securities laws apply to such

          institutions?  

          Question 84:  How could an exchange adequately supervise institutions

          that effect transactions on an exchange without the services of a

          broker?

          Question 85:  What, if any, accommodations should be made with respect

          to an exchange's surveillance, enforcement, and other SRO obligations

          with respect to institutions that transact business on that exchange?

          Question 86:  How could institutions that directly access exchanges be

          integrated into existing systems for clearance and settlement?

                    d.   Application of Broker-Dealer Regulation to Certain

                         Exchanges

          Under the alternative discussed above, most alternative trading

     systems would be regulated as exempted exchanges.  A few alternative

     trading systems, however, combine both the services of a market and those

     of a broker-dealer.  For example, some systems perform market functions by

     operating electronic limit order books or crossing sessions.  These same

     systems employ persons to actively search for buyers and

     sellers<(184)> or use their discretion in executing

     orders.<(185)>
                              

               <(184)>   The  system employee,  for example,  negotiates or
                         assists in  negotiating the terms of  a particular
                         trade on  behalf of  a  participant by  initiating
                         communications with potential counterparties.

               <(185)>   These   additional   broker-dealer  services   may
                         include directing  the order to another  market or
                         broker-dealer  for  execution,  or  executing  the
                         order as principal.

                             ======END OF PAGE 143======





          Just as broker-dealer regulation has not effectively integrated

     alternative trading systems into market regulation, the current framework

     for regulating exchanges is not well-suited to address concerns raised by

     traditional broker or dealer activities.  As a result, the Commission would

     consider whether markets that are regulated as either exempted exchanges or

     as registered national securities exchanges, but that also provide

     traditional brokerage services, should be subject to broker-dealer

     regulation as well.  Application of broker-dealer regulation in such

     circumstances may not be inappropriate or necessarily duplicative.

          This approach is consistent with the way in which exchanges and the

     persons that trade on those exchanges have traditionally been regulated. 

     For example, specialists are registered broker-dealers that carry on a

     business for themselves while also serving the exchange as a whole.  Among

     other things, specialists help to ensure the maintenance of a continuous

     and liquid market.  They also often provide individualized services to

     their customers, such as alerting customers to market movements and

     forwarding orders to other markets.  Although they perform many services

     for exchanges, specialists are regulated as broker-dealers.  There is no

     reason, however, why an exchange could not choose to perform these

     activities itself rather than rely on third parties to perform them.  

          In such a situation, the Commission would have to consider how best to

     integrate the regulation of these broker-dealer activities with the

     regulation of the exchange's market activities.  To the extent that

     exchange and broker-dealer regulations overlap, the Commission could






                             ======END OF PAGE 144======





     determine which requirements a dually registered entity would

     follow.<(186)>

          The Commission does not anticipate that a revised interpretation of

     the term "exchange" would include other entities that currently provide

     services to participants in the U.S. securities markets without being

     registered as broker-dealers or as exchanges.  Examples of such service

     providers are those that restrict their activities to providing

     communication links between exchanges and broker-dealers and between

     broker-dealers and customers.  Entities that only provide such message

     routing services likely would not be required under this approach to

     register with the Commission as either broker-dealers or as national

     securities exchanges.<(187)>  Entities that provide such

     communication links and also have affiliates that use those links to

     perform market functions, however, could be deemed to be facilities of an

     exchange.  In general, in determining whether broker-dealer or exchange

     regulation would be appropriate for a particular entity, communication

     links offered in conjunction with other services would have to be viewed in

     their entirety.

                              

               <(186)>   For   example,   certain   broker-dealer   trading
                         systems, which are  subject to  Exchange Act  Rule
                         17a-23, would  be exchanges under the proposed new
                         interpretation of the term "exchange."  To prevent
                         an alternative trading  system from being  subject
                         to  the requirements  of both  Rule 17a-23  and an
                         exempted   exchange   or  a   national  securities
                         exchange, the Commission  could amend Rule  17a-23
                         as necessary to avoid duplicative regulation.

               <(187)>   See,  e.g.,  Letter   from  Richard  R.   Lindsey,
                         Director, Division  of Market Regulation,  SEC, to
                         Scott W. Campbell, V.P. & Assoc. General  Counsel,
                         Charles Schwab & Co., Inc. (Nov. 27, 1996).

                             ======END OF PAGE 145======





          Question 87:  Under what conditions should an entity be subject to

          both exchange and broker-dealer regulation?

          Question 88:  Should a dually registered entity be required to

          formally separate its exchange operations from its broker-dealer

          operations (e.g., through use of separate subsidiaries)?

          C.   Conclusion

          The exchange-based approach described above might address the gaps

     created by the current approach to oversight of alternative trading

     systems, as well as many of the concerns raised by the broker-dealer based

     approach, and could result in more consistent market protections over time. 

     In addition, such an approach might contribute substantial regulatory

     certainty and the application of fair and equitable principles of trade to

     alternative trading systems.  As noted above, however, such an approach

     might also have significant effects on existing exchanges, alternative

     trading systems, and market participants.  To some extent, many alternative

     trading systems that would be considered exempted exchanges under this

     approach would be subject to less regulation than they currently are, while

     the few significant alternative trading systems would be subject to more

     substantial regulatory requirements.  This approach would also potentially

     require greater adjustment to existing NMS mechanisms to accommodate newly

     registered exchanges than would a broker-dealer based approach.

          Question 89:  Would this approach be an effective means of addressing

          the issues raised by the growth alternative trading systems?  What

          would be the benefits of such an approach?  What would be the

          drawbacks of such an approach?

     V.   The Commission Could Consider Ways in Which Requirements Might Be


                             ======END OF PAGE 146======





          Reduced or Expedited for Registered Exchanges

          The effects of technology on domestic markets have not been limited to

     alternative trading systems.  Registered exchanges and Nasdaq are also

     engaged in applying technology to respond to the fast changing competitive

     pressures of modern securities markets.  In addition to considering the

     regulatory position of alternative trading systems, the Commission could

     therefore consider whether there are other areas of its approach to

     regulation of markets that would benefit from reevaluation.  Specifically,

     the Commission could examine ways to reduce unnecessary regulatory

     requirements that make it difficult for these registered entities to remain

     competitive in changing business environments.  The Commission has tried to

     fulfill its obligation under the Exchange Act to oversee the activities of

     exchanges and securities associations in a manner that is flexible and

     responsive to market developments and that allows for innovation by these

     entities.  This has entailed ongoing consideration of additional ways in

     which the obligations imposed by the Exchange Act on registered exchanges

     and securities associations may be streamlined, without sacrificing

     investor protection or market integrity.  

          The Commission could consider what changes might be made to expedite

     exchanges' and securities associations' procedures for changing their

     rules, and how automation might be used to lower the costs and improve the

     effectiveness of their surveillance and enforcement responsibilities.  The

     Commission could also consider what changes might be made to give exchanges

     and securities associations greater flexibility in determining how to

     fulfill their regulatory obligations.  For example, while it is generally

     in the public interest for each exchange to retain ultimate responsibility


                             ======END OF PAGE 147======





     for fulfilling its statutory obligations, it is clear that smaller SROs do

     not benefit from the economies and efficiencies of scale available to SROs

     that supervise larger memberships.  In addition, larger SROs may obtain

     greater cost efficiencies by offering their services to other SROs for a

     fee.  This type of "outsourcing" could be a useful tool for exchanges and

     securities associations.  

          A.   Ways to Further Expedite Rule Filings

          Section 19(b)(1) of the Exchange Act requires SROs to file copies of

     proposed rules and rule amendments with the Commission, accompanied by a

     concise general statement of the basis and purpose of the proposed rule

     change.<(188)>  Once a proposed rule change is filed, the Commission

     is required to publish notice of it and provide an opportunity for public

     comment.  This process serves a critical role in giving the Commission

     sufficient oversight authority to ensure that exchanges and securities

     associations carry out their self-regulatory obligations vigilantly and

     effectively.  

          Between 1934 and 1975, the Exchange Act did not give the Commission

     adequate authority over SRO rulemaking to act promptly and effectively




                              

               <(188)>   The  scope of this  requirement depends  upon what
                         constitutes a  "rule" under the Exchange  Act.  If
                         something does not rise to  the level of a "rule,"
                         Section   19(b)(1)  does  not   apply.    Sections
                         3(a)(27) and  (29) of the Exchange  Act define the
                         rules of  an SRO broadly  to include not  only the
                         constitution,   articles  of   incorporation,  and
                         bylaws, but also  any stated policies,  practices,
                         and interpretations that  the Commission, by rule,
                         determines  to be rules  of an SRO.   See Exchange
                         Act Rule 19b-4, 17 CFR 240.19b-4.

                             ======END OF PAGE 148======





     where a rule or proposed rule might be injurious to the public

     interest.<(189)>  During that time, the Commission carried out this

     responsibility by relying on inspections and by conducting administrative

     proceedings to effect needed changes in exchange rules.<(190)>  The

     Commission had limited authority to prevent the adoption of a particular

     exchange rule, or to amend rules once they had been adopted; Section 19(b)

     of the Exchange Act only gave the Commission the authority to amend

     exchange rules related to certain enumerated matters.<(191)>  As a

     result, with respect to the majority of exchange rules, although exchanges

     would consider concerns raised by the Commission or its staff, exchanges

     were not obligated to address those concerns.<(192)>  Moreover,
                              

               <(189)>   See SEC, Study of  Unsafe and Unsound Practices of
                         Brokers and Dealers, H.R. Rep. No. 231, 92d Cong.,
                         1st Sess. 6 (1971).

               <(190)>   The   Commission's   effort  to   eliminate  fixed
                         commission rates  is illustrative of  this process
                         and  why  it  was  problematic.    See  Securities
                         Exchange Act Release No. 11203 (Jan. 23, 1975), 40
                         FR 7394 (Feb. 20, 1975).

               <(191)>   Before  1975, exchanges  were  allowed  to  adopt,
                         without   Commission   approval,   any  rule   not
                         inconsistent  with either  the Exchange  Act or  a
                         Commission rule, and were required to furnish  the
                         Commission  with copies  of  rule amendments  only
                         upon their  adoption.   The  Commission,  however,
                         could  alter or  supplement  exchange  rules  that
                         related to certain  enumerated matters pursuant to
                         defined  procedures.    In   contrast,  registered
                         securities associations were required to file rule
                         changes with  the Commission 30  days before  they
                         became  effective,  and  the  Commission  had  the
                         authority to prevent proposals from taking effect.
                         The  Commission could  also alter,  supplement, or
                         abrogate   an   association's   rule  in   certain
                         circumstances.  See generally Special Study, supra
                         note 4, at 703-06.

               <(192)>   See Special Study, supra note 4, at 711.

                             ======END OF PAGE 149======





     persons with a significant stake were not provided with notice or an

     opportunity to comment on a proposed rule change or on the need or

     justification for a proposal.<(193)>

          The 1975 Amendments established a new uniform procedure for both

     exchanges and securities associations that required SRO rule changes to be

     justified to, and reviewed by, the Commission after an opportunity for

     public comment.<(194)>  In addition, Congress expanded the

     Commission's authority to permit it to amend all SRO rules.<(195)> 

     The legislative history of the 1975 Amendments indicates that Congress

     intended to clarify and strengthen the Commission's oversight role with

     respect to SROs and, specifically, to ensure that the Commission had the

     tools it needed to provide meaningful oversight of SRO rules and the




                              

               <(193)>   See   Securities   Industry  Study,   Subcomm.  on
                         Securities, Senate Committee on Banking, Housing &
                         Urban  Affairs, S.  Doc.  No. 13,  93d Cong.,  1st
                         Sess. 156-7, 198 (1973); Note, Informal Bargaining
                         Process:   An Analysis of the  SEC's Regulation of
                         the  New York  Stock  Exchange, 80  Yale L.J.  832
                         (1971).

               <(194)>   In  order to  provide interested  persons with  an
                         opportunity to obtain accurate information on rule
                         proposals  and  to participate  in the  review and
                         evaluation  of SROs'  proposed  rule changes,  the
                         1975  Amendments   required   SROs  to   file   an
                         explanation or justification  for their  proposals
                         and the Commission to  publish notice of the SROs'
                         proposed rule  changes.   Congress  intended  this
                         requirement to hold the SROs to the same standards
                         of  policy  justification that  the Administrative
                         Procedures  Act imposes  on the  Commission.   See
                         Exchange  Act  19(b)(1), 15  U.S.C.  78s(b)(1); S.
                         Rep. No. 75, supra note 22, at 29-32.

               <(195)>   Exchange Act 19(c), 15 U.S.C. 78s(c).

                             ======END OF PAGE 150======





     rulemaking process.<(196)>  Congress intended that the Commission

     would conduct a comprehensive review of proposed rule changes, including

     the justification for the change, any burden on competition and the public

     interest that the change may impose, and public comments received

     concerning the rule change.<(197)>  The Commission staff fulfills

     this responsibility by conducting a careful review of every rule filing it

     receives.  This review often requires the Commission staff to weigh complex

     and serious issues raised by the proposed changes.  The rule filing process

     also gives the public an opportunity to express its views as to the

     competitive and other effects of any significant rule changes.  For all

     these reasons, it may be appropriate for all exchanges, including newly

     registered alternative trading systems, to comply with the rule filing

     requirements of Section 19(b).

          Nonetheless, the Commission understands that the time required for

     solicitation and review of public comments can delay exchanges' and

     securities associations' implementation of innovative proposals and

     administrative or non-controversial filings.  In response to this concern,

     the Commission has already streamlined its internal process for reviewing
                              

               <(196)>   See, e.g., S. Rep. No. 75, supra note 22.

                    In the new regulatory environment created by this bill,
                    self-regulation would be continued,  but the SEC  would
                    be expected to  play a much larger role than  it has in
                    the past to ensure  that there is no gap  between self-
                    regulatory performance  and regulatory need,  and, when
                    appropriate, to provide leadership for  the development
                    of a more coherent and rational regulatory structure to
                    correspond  to  and  to  police   effectively  the  new
                    national market system.

               Id. at 2.

               <(197)>   Id.

                             ======END OF PAGE 151======





     and approving SRO rule filings.  This has reduced the average number of

     days between the filing of a proposed rule change by an SRO and the

     approval, withdrawal, or disapproval of the rule filing from 349 days at

     the beginning of fiscal year 1994 to 74 days at the end of fiscal year

     1996.

          In addition, to respond to SRO requests that the rule review process

     be expedited, in December 1994, the Commission adopted amendments to Rule

     19b-4, which expanded the scope of proposed rule changes that may become

     effective immediately upon filing pursuant to Section 19(b)(3)(A) of the

     Exchange Act.<(198)>  These amendments permitted SRO rule changes

     concerning routine procedural and administrative modifications to existing

     order-entry and trading systems to become effective immediately upon

     filing.  Certain non-controversial filings were also permitted to become

     operational 30 days after filing with the Commission, provided the SRO gave

     written notice to the Commission five business days prior to the

     filing.<(199)>  These amendments to Rule 19b-4, in part, were
                              

               <(198)>   Section 19(b)(3)(A) of the Exchange Act sets forth
                         certain specified categories  of rule changes that
                         may become  effective upon filing.   These include
                         rule changes that: (1) constitute a stated policy,
                         practice,  or interpretation  with respect  to the
                         meaning,  administration,  or  enforcement  of  an
                         existing rule of the  SRO; (2) establish or change
                         a due, fee, or other charge imposed by the SRO; or
                         (3)  are concerned solely  with the administration
                         of  the SRO.    In addition,  consistent with  the
                         public   interest  and   the   purposes  of   this
                         subsection,  the  Commission  may   specify  other
                         categories  of  rule   filings  that  may   become
                         effective upon filing.  15 U.S.C. 78s(b)(3)(A).  

               <(199)>   See  Securities Exchange  Act  Release  No.  35123
                         (Dec.  20, 1994),  59  FR 66692  (Dec. 28,  1994).
                         Particularly in the area relating to new exchange-
                                                             (continued...)

                             ======END OF PAGE 152======





     intended to enhance SROs' ability to implement prompt, flexible, and

     innovative systems changes.<(200)>  The Commission staff has also
                              

               <(199)>(...continued)
                         traded  products,  the  Commission   continues  to
                         reduce  the  number  of days  between  filing  and
                         allowed  trading of  those  products that  do  not
                         raise significant regulatory  issues or  concerns.
                         For  example, when  an exchange  seeks to  trade a
                         product  that meets  generic criteria  for listing
                         options on narrow-based  indexes, the time  period
                         between filing and allowed trading of  the product
                         can   be  shortened  considerably.     See,  e.g.,
                         Securities  Exchange Act  Release No.  38307 (Feb.
                         19, 1997), 62 FR 8469  (Feb. 24, 1997) (options on
                         The de Jager Year 2000 Index); Securities Exchange
                         Act Release No. 38207 (Jan. 27, 1997), 62 FR  5268
                         (Feb. 4,  1997) (options and LEAPS on the Phlx Oil
                         Service  Index);  Securities Exchange  Act Release
                         No. 37312 (June 14,  1996), 61 FR 31570  (June 20,
                         1996)  (options on  The  Morgan Stanley  Commodity
                         Related  Equity  Index);  Securities Exchange  Act
                         Release  No. 37115  (Apr. 15,  1996), 61  FR 17741
                         (Apr. 22, 1996) (options  on the CBOE Gold Index);
                         Securities  Exchange Act  Release No.  37026 (Mar.
                         26, 1996),  61 FR 4502 (Apr. 3,  1996) (options on
                         the  Chicago  Board   Options  Exchange   Computer
                         Networking Index).  The exchange may trade the new
                         product 30 days after the date  the rule change is
                         filed with the Commission. 

               <(200)>   It appears that  SROs, including exchanges,  could
                         take  better advantage  of  the expedited  process
                         available   under   Section  19(b)(3)(A)   of  the
                         Exchange Act.   In fiscal year  1996, for example,
                         out  of a total of 552 rule changes filed with the
                         Commission, only 18 (or 3.5%) were filed under the
                         expanded  expedited process.  Similarly, in fiscal
                         year  1995, only  12 out  of a  total of  593 rule
                         changes   (2%)  were  filed   under  the  expanded
                         expedited process.  SROs could also facilitate the
                         prompt  publication of  notices  of proposed  rule
                         changes by submitting rule  filings in such a form
                         that enables the  staff to expedite  their review.
                         The   Commission   strongly  encourages   SROs  to
                         evaluate their internal  procedures for  drafting,
                         reviewing,  and  submitting rule  filings  to take
                         greater advantage  of expedited procedures  and to
                         ensure  complete  filings  that  will  enable  the
                         Commission to respond promptly.

                             ======END OF PAGE 153======





     taken a flexible approach in applying the expedited procedures under Rule

     19b-4.  For example, filings that are virtually identical to an SRO filing

     already approved by the Commission can often be approved on an accelerated

     basis, particularly in the context of new product listing standards that

     duplicate listing standards already approved for an identical product on

     another exchange.<(201)>

          Nonetheless, there may be additional ways in which the Commission

     could reduce rule filing requirements to facilitate a rapid response by

     SROs to changing market conditions and competitive pressures.  For example,

     the Commission could consider further expanding the scope of proposed rule

     changes eligible for effectiveness immediately upon filing to include, for

     example, any proposed changes to listing standards to accommodate new

     products.  In expanding the scope of rules eligible for this treatment, it

     may be appropriate to require an SRO to make an affirmative statement that

     it has undertaken a review of the Commission's eligibility criteria for
                              

               <(201)>   See  Securities  Exchange  Act Release  No.  36296
                         (Sept.  28,  1995), 60  FR  52234  (Oct. 5,  1995)
                         (relating  to listing  and trading  of broad-based
                         index warrants on Nasdaq); Securities Exchange Act
                         Release  No. 36165  (Aug. 29,  1995), 60  FR 46653
                         (Sept. 7, 1995)  (establishing the NYSE's  uniform
                         listing  and trading  guidelines for  stock index,
                         currency, and currency index warrants); Securities
                         Exchange Act Release No. 36166 (Aug. 29, 1995), 60
                         FR  46660  (Sept.  7,  1995)  (establishing  PCX's
                         uniform  listing and trading  guidelines for stock
                         index,  currency,  and  currency index  warrants);
                         Securities  Exchange Act  Release No.  36167 (Aug.
                         29,   1995),  60   FR   46667   (Sept.  7,   1995)
                         (establishing Phlx's uniform  listing and  trading
                         guidelines for stock index, currency, and currency
                         index warrants); Securities  Exchange Act  Release
                         No. 36169 (Aug. 29,  1995), 60 FR 46644  (Sept. 7,
                         1995)  (establishing  CBOE's  uniform listing  and
                         trading guidelines for stock index,  currency, and
                         currency index warrants).

                             ======END OF PAGE 154======





     immediate effectiveness under Rule 19b-4 and is satisfied that the rule

     filing being submitted conforms to such requirements.  

          The Commission could also consider exempting certain SRO programs

     designed to implement innovative new trading systems or mechanisms from

     rule filing requirements during development and initial operating stages. 

     In the past several years, a few SROs have attempted to implement

     innovative trading structures for their members.  For example, in 1991, the

     NYSE established after-hours crossing systems that automate the execution

     of single stock orders and baskets of securities,<(202)> and in

     1994, the CHX developed the Chicago Match system.<(203)>  Although

     neither program has generated significant trading activity,<(204)>

     in both cases, the exchanges submitted rule filings prior to operation. 

     Because of the innovative nature of such systems for the sponsoring

     exchanges, the approval process was protracted.  Alternative trading

     systems that offer similarly innovative, start-up services today are not

     required to follow the same procedures prior to operation of the services. 
                              

               <(202)>   See Securities Exchange Act Release No. 29237 (May
                         24, 1991), 56 FR  24853 (May 31, 1991); Securities
                         Exchange Act Release No.  32368 (May 25, 1993), 58
                         FR 31565 (June 3, 1993).

               <(203)>   See, e.g.,  Securities  Exchange Act  Release  No.
                         35030 (Nov. 30, 1994), 59 FR  63141 (Dec. 7, 1994)
                         (order  approving  Chicago  Match,  an  electronic
                         matching   system  operated  by   the  CHX,  which
                         provided for the crossing of orders entered by CHX
                         members  and non-members,  including institutional
                         customers).

               <(204)>   The NYSE's crossing  sessions continue to generate
                         volume that  is well below  that of POSIT  and the
                         smallest  registered exchange.  The CHX determined
                         not to  continue operating Chicago Match  in 1996.
                         See Sarah  Gates, Will Anyone  Miss Chicago Match,
                         Wall Street & Technology, Apr. 1996, at 26.

                             ======END OF PAGE 155======





     In addition, SROs have indicated that revealing the business plans for such

     innovative programs prior to operation makes it more difficult for them to

     compete effectively with alternative trading systems in offering start-up

     services to their members.

          The Commission believes that markets should be encouraged to innovate. 

     One way of facilitating innovation by exchanges and securities

     associations, as well as vigorous competition among these markets, would be

     to enable exchanges and securities associations to establish innovative

     trading programs, apart from their other operations.  For example, an

     exchange may wish to establish an electronic book for the trading of

     securities not traded on the exchange's primary system.  Such programs

     could then be subject to similar oversight as that applied to small, start-

     up alternative trading systems, to the extent appropriate in light of

     investor protection.  Under such an approach, the Commission could exempt

     pilot programs from rule filing requirements until such time as the program

     obtained significant volume, was integrated with an exchange's or

     securities association's other trading mechanisms, or otherwise began to

     have significant market impact.

          Any such proposal would require careful consideration as to the types

     of programs that might be eligible for exemption, and other conditions that

     might be appropriate in light of investor protection concerns, national

     market system goals, and just and equitable principles of trade.  As noted

     above, one reason that Congress required SROs to submit rule filings was to

     ensure that the interests of investors were considered in SRO actions, and

     that persons with a significant stake were provided with notice and an

     opportunity to comment on a proposed rule change.  For example, pilot


                             ======END OF PAGE 156======





     programs that might be eligible for exemption could potentially function as

     alternatives to trading through a market's primary system.  In such

     circumstances, these programs would affect not only investors whose orders

     are executed on such systems, but also investors and traders who were not

     given the opportunity to use the pilot program.  Moreover, customers who

     placed orders in the exchange's main trading system could also be affected,

     e.g., if their orders did not have an opportunity to interact with orders

     executed through the pilot program.  For these reasons, it may not be

     appropriate to make a rule filing exemption available for pilot programs

     that trade the same securities, operate during the same time of day, or

     have similar trading structures as a market's main trading system or are

     otherwise linked to a market's primary operations.

          In addition, the Commission could consider the appropriate standards

     for determining whether a particular proposal would qualify as a pilot

     program.  Other issues to be considered would include whether any exemption

     for pilot programs should be limited in duration, even if the programs did

     not reach significant volume, and what would be the appropriate measure for

     determining when a program would have limited volume in light of all

     relevant factors.<(205)>  Finally, the Commission could consider how

     SROs would notify the Commission and the SROs' participants prior to

     implementing a pilot program, and disclose to participants in the pilot

     program whether the quality or type of execution capabilities of the pilot

     system differ from those of the exchange's established systems. 
                              

               <(205)>   As discussed above, whether  a trading system  has
                         enough  volume to  have significant  market impact
                         will  differ depending  upon, among  other things,
                         the  size  and liquidity  of  the  market for  the
                         instruments traded.

                             ======END OF PAGE 157======





          Question 90:  Would it be feasible for the Commission to expand the

          scope of rules eligible for expedited treatment pursuant to Section

          19(b)(3)(A) without jeopardizing the investor protection and market

          integrity benefits of Commission oversight of exchange and other SRO

          rule changes?  If so, to what types of rule filings should immediate

          effectiveness, pursuant to Section 19(b)(3)(A), be extended?

          Question 91:  If the Commission expands the scope of rule filings

          eligible for treatment under Section 19(b)(3)(A) to include, for

          example, certain types of new products, what conditions or

          representations should be required of an SRO to ensure that the

          proposed rule change is eligible for expedited treatment under Rule

          19b-4?

          Question 92:  Should the Commission exempt markets' proposals to

          implement new trading systems, separate from their primary trading

          operations, from rule filing requirements?  If so, should SROs be

          permitted to operate pilot programs under such an exemption if they

          trade the same securities, operate during the same hours, or utilize

          similar trading procedures as the SRO's main trading system?  Should

          there be a limit on the number of pilot programs an SRO can operate

          under an exemption at any one time?  What other conditions should

          apply to such exemption?  

          B.   Surveillance and Enforcement

          Technological advances have greatly increased an exchange's ability to

     fulfill its enforcement obligations under the Exchange Act efficiently and

     cost effectively.  Some sponsors of trading systems have suggested that

     automated trading activity requires less extensive surveillance, and that


                             ======END OF PAGE 158======





     markets with fully automated trading should not be required to conduct the

     same surveillance as non-automated exchanges.  This suggestion may be based

     in part on the view that automation of trading algorithms may make it more

     difficult for participants to trade in violation of the trading rules

     embedded in those algorithms.  While automation and embedded algorithms

     alone cannot prevent insider trading or market manipulation,<(206)>

     automation may make it easier to detect potential and attempted abuses by

     providing a full audit trail of trading activity.  By circumscribing

     participant trading activity, automation can also reduce the resources that

     must be devoted to monitoring trading activities, which, consequently,

     would reduce the costs of exchange regulation.  For example, failures by

     market makers to fulfill their obligation to honor quotations are easier to

     detect in a fully automated environment.<(207)>  Accordingly, the

     Commission is considering whether fully automated markets may be able to

     fulfill their regulatory obligations in non-traditional ways.

          Existing Commission initiatives and SRO plans that coordinate

     supervision of broker-dealers that are members of more than one SRO

     ("common members") could also apply to newly registered exchanges.  For

     example, while exchanges are required to enforce compliance by their
                              

               <(206)>   While automation may reduce the  cost and increase
                         the  effectiveness  of  a   market's  surveillance
                         program, a responsible party must still be able to
                         recognize  potentially manipulative  activity and,
                         in many cases, review trading records.

               <(207)>   See NASD 21(a) Report, supra note 20, at 28 and 45
                         for discussion of failures by market makers on the
                         Nasdaq  market  to  honor their  quotations  or to
                         "back away," and steps that the NASD undertook, as
                         part  of its  settlement with  the Commission,  to
                         upgrade its  capabilities  to detect  and  prevent
                         such backing away.

                             ======END OF PAGE 159======





     members (and persons associated with their members) with applicable laws

     and rules, the Commission has used its authority under Sections 17 and 19

     of the Exchange Act to allocate oversight of common members to particular

     exchanges, and to exempt exchanges from enforcement obligations with

     respect to persons that are associated with a member, but that are not

     engaged in the securities business.<(208)>  In order to avoid

     unnecessary regulatory duplication, the Commission appoints a single SRO as

     the designated examining authority ("DEA") to examine common members for

     compliance with the financial responsibility requirements.<(209)> 

     When an SRO has been named as a common member's DEA, all other SROs to

     which the common member belongs are relieved of the responsibility to

     examine the firm for compliance with applicable financial responsibility

     rules.<(210)>  Consistent with past Commission action, the

     Commission could continue to designate one SRO, such as the NASD or the

     NYSE, as the primary DEA for common members of exchanges.  The Commission

     has also permitted existing SROs to contract with each other to allocate
                              

               <(208)>   See 17 CFR 240.17d-2; 17 CFR 240.19g2-1.

               <(209)>   With respect to a  common member, Section 17(d)(1)
                         of the Exchange Act authorizes the Commission,  by
                         rule  or   order,  to   relieve  an  SRO   of  the
                         responsibility to receive  regulatory reports,  to
                         examine for and enforce compliance with applicable
                         statutes,  rules and  regulations,  or to  perform
                         other  specified regulatory functions.   15 U.S.C.
                         78q(d)(1).

               <(210)>   See Securities Exchange Act Release No. 23192 (May
                         1, 1986) 51  FR 17426 (May  12, 1986).   Moreover,
                         Section 108 of the 1996 Amendments, supra note 68,
                         adds a provision to Section 17 of the Exchange Act
                         that   calls   for   improving   coordination   of
                         supervision  of  members  and elimination  of  any
                         unnecessary  and  burdensome  duplication  in  the
                         examination process. 

                             ======END OF PAGE 160======





     non-financial regulatory responsibilities.<(211)>  For example, the

     Commission has approved a regulatory plan filed by the Amex, CBOE, NASD,

     NYSE, PCX, and the Phlx that designates, with respect to each common

     member, an SRO participating in the plan as a broker-dealer's options

                              

               <(211)>   Rule 17d-2 under the  Exchange Act permits SROs to
                         establish   joint   plans   for   allocating   the
                         regulatory   responsibilities   imposed   by   the
                         Exchange  Act  with  respect  to  common  members.
                         Securities  Exchange Act  Release No.  12935 (Oct.
                         28,  1976),  41 FR  49093  (Nov.  8,  1976).    In
                         addition  to  the  regulatory responsibilities  it
                         otherwise has  under the Exchange Act,  the SRO to
                         which  a  firm  is  designated under  these  plans
                         assumes  regulatory responsibilities  allocated to
                         it.    Under  Rule  17d-2(c),  the Commission  may
                         declare  any  joint   plan  effective  if,   after
                         providing notice  and opportunity for  comment, it
                         determines  that   the   plan  is   necessary   or
                         appropriate in  the public  interest  and for  the
                         protection of investors, to foster cooperation and
                         coordination among the SROs, to remove impediments
                         to and foster the development of a national market
                         system  and a  national  clearance and  settlement
                         system,  and in  conformity  with the  factors set
                         forth in Section 17(d)  of the Exchange Act.   The
                         Commission  has approved plans filed by the equity
                         exchanges  and  the  NASD  for the  allocation  of
                         regulatory   responsibilities  pursuant   to  Rule
                         17d-2.  See, e.g., Securities Exchange Act Release
                         No.  13326 (Mar. 3,  1977), 42 FR  13878 (Mar. 14,
                         1977) (NYSE/Amex); Securities Exchange Act Release
                         No.  13536 (May  12, 1977),  42 FR 26264  (May 23,
                         1977) (NYSE/BSE); Securities Exchange  Act Release
                         No. 14152 (Nov.  9, 1977), 42  FR 59339 (Nov.  16,
                         1977) (NYSE/CSE); Securities Exchange  Act Release
                         No. 13535  (May 12,  1977), 42 FR  26269 (May  23,
                         1977) (NYSE/CHX); Securities Exchange  Act Release
                         No. 13531  (May 12,  1977), 42  FR 26273  (May 23,
                         1977) (NYSE/PSE); Securities Exchange  Act Release
                         No. 14093 (Oct.  25, 1977), 42  FR 57199 (Nov.  1,
                         1977) (NYSE/Phlx); Securities Exchange Act Release
                         No. 15191  (Sep. 26, 1978),  43 FR 46093  (Oct. 5,
                         1978) (NASD/BSE, CSE, CHX and PSE); and Securities
                         Exchange Act Release No.  16858 (May 30, 1980), 45
                         FR 37927  (June 5,  1980) (NASD/BSE, CSE,  CHX and
                         PSE).

                             ======END OF PAGE 161======





     examination authority.  This designated SRO has sole regulatory

     responsibility for certain options-related trading matters.<(212)> 

     An SRO participating in a regulatory plan is relieved of regulatory

     responsibilities with respect to a broker-dealer member of such an SRO, if

     those regulatory responsibilities have been designated to another SRO under

     the regulatory plan.  These programs could also be applicable to newly

     registered exchanges. 

          These plans permit an SRO to allocate its oversight obligations with

     respect to certain members' compliance with various requirements.  They do

     not permit an SRO to allocate its oversight obligations with respect to the

     activities taking place on its market.  Currently, enforcement and

     disciplinary actions for violations relating to transactions executed in an

     SRO's market or rules unique to that SRO must be retained by that SRO. 

     Existing exchanges generally employ personnel and establish extensive

     programs to fulfill this responsibility.  Fully automated exchanges,

     however, might be able to contract with other exchanges to perform these

     activities while retaining ultimate responsibility for ensuring that these

     activities are performed.  Fully automated exchanges can produce

                              

               <(212)>   See  Securities  Exchange  Act  Release  No. 20158
                         (Sept.  8, 1983),  48 FR  41265 (Sept.  14, 1983).
                         The  SRO designated  under the  plan as  a broker-
                         dealer's   options    examination   authority   is
                         responsible  for conducting  options-related sales
                         practice     examinations    and     investigating
                         options-related     customer    complaints     and
                         terminations for cause of associated persons.  The
                         designated SRO is also responsible for examining a
                         firm's   compliance   with   the   provisions   of
                         applicable federal securities  laws and the  rules
                         and regulations thereunder, its own rules, and the
                         rules  of any SRO of  which the firm  is a member.
                         Id.

                             ======END OF PAGE 162======





     comprehensive, instantaneous automated records that can be monitored

     remotely.  As a result, it may be possible for such an exchange to contract

     with another exchange to perform its day-to-day enforcement and

     disciplinary activities.  The Commission could consider whether allowing an

     automated market to do so would be consistent with the public interest.

          Another approach would be for fully automated exchanges to form a

     separate SRO solely for the purpose of overseeing the activities of their

     markets.  This SRO, rather than the automated exchanges, would have the

     responsibility for bringing enforcement and disciplinary actions for

     violations relating to transactions executed on those exchanges.  The

     Commission seeks comment on the advisability and feasibility of such an

     approach.

          Question 93:  Do differences between automated and non-automated

          trading require materially different types or degrees of surveillance

          or enforcement procedures?

          Question 94:  Which Exchange Act requirements applicable to registered

          exchanges, if any, could be minimized or eliminated without

          jeopardizing investor protection and market integrity?

          Question 95:  If an automated exchange contracts with another SRO to

          perform its day-to-day enforcement and disciplinary activities, should

          this affect the exchange's requirement to ensure fair representation

          of its participants and the public in its governance?

          Question 96:  If an exchange contracts with another entity to perform

          its oversight obligations, should that exchange continue to have

          responsibility under the Exchange Act for ensuring that those

          obligations are adequately fulfilled?


                             ======END OF PAGE 163======





     VI.  Costs and Benefits of Revising the Regulation of Domestic Markets 

          The two alternatives discussed in Section IV could provide significant

     benefits to U.S. securities markets and market participants.  By

     integrating all significant markets in the market regulatory framework,

     these proposals would bolster the effectiveness of the national market

     system by better protecting market participants.  For example, if the

     Commission were to continue to regulate alternative trading systems as

     broker-dealers, but adopted additional regulations (the first approach

     discussed in Section IV), the market as a whole would benefit from the

     additional transparency provided by the public reporting of all orders

     submitted to alternative trading systems.  Moreover, enhancing the

     surveillance of trading on alternative trading systems would benefit the

     public by preventing fraud and manipulation.  Similarly, by regulating

     alternative trading systems under a tiered approach to exchange regulation,

     investors and other market participants could benefit because, as

     exchanges, significant alternative trading systems would be prohibited from

     unfairly denying access, taking discriminatory action against participants,

     imposing unreasonably discriminatory fees, or establishing anticompetitive

     rules.  In addition, because significant alternative trading systems would

     be required to directly participate in market-wide plans such as the CQS,

     CTA, OPRA, and ITS, investors could benefit from reductions in

     misallocations of capital, inefficiency, and trading fragmentation. 

     Moreover, under the proposed reinterpretation of "exchange," investors and

     the integrity of the market generally could benefit from alternative

     trading systems sharing SRO responsibilities with currently registered

     exchanges.  In particular, the Commission's ability to prevent fraud and


                             ======END OF PAGE 164======





     manipulation would be strengthened.

          The Commission also recognizes that the proposals discussed in this

     release would have a substantial impact on the allocation of regulatory

     costs among market participants.  In particular, the additional obligations

     contemplated under both alternative proposals to revise domestic market

     regulation could impose costs on alternative trading systems.  For example,

     alternative trading systems could be required to adopt rules to prevent

     fraud and manipulation, promote just and equitable principles of trade, and

     not impose any unnecessary or inappropriate burden on competition. 

     Alternative trading systems could also be required to establish mechanisms

     to assure regulatory oversight of their participants and review their

     listing procedures.  In addition, there would also be costs associated with

     joining market-wide plans, such as the CQS, CTA, ITS, OPRA, and OTC-UTP. 

     These costs, however, would at least partially be offset because most

     alternative trading systems would no longer be regulated as broker-dealers. 

     In addition, because alternative trading systems, as exchanges, would share

     the responsibilities of self-regulation, the regulatory burden carried by

     currently registered exchanges should be reduced.  In contrast, integrating

     these alternative trading systems into the mechanisms of the national

     market system through broker-dealer regulation could entail additional

     costs for the trading systems as well as their supervising SROs.

          Question 97:  What costs to investors and other market participants

          are associated with the current regulation of alternative trading

          systems as broker-dealers?  Specifically, what costs are associated

          with the potential denial of access by an alternative trading system? 




                             ======END OF PAGE 165======





          Question 98:  What costs are associated with each of the alternatives

          for revising market regulation discussed above?  For example, would

          either of the two principal alternatives discussed in Section IV above

          impose costs by limiting innovation?  Would these costs be greater

          than those imposed by the current regulatory approach?

          Question 99:  What regulatory costs can be shared by markets operating

          simultaneously as self-regulatory organizations, and what regulatory

          costs must be borne by each market individually?  What are the

          relative magnitudes of these costs (as a proportion of total costs)?

          Question 100:  Are there innovations or adjustments that can be made

          to market wide plans such as CQS, CTA and ITS that will lead to lower

          regulatory costs for exchanges under any of the alternatives for

          regulating domestic markets?

          Question 101:  Total regulatory costs vary with a variety of  factors

          (e.g., volume of trade, degree of technology applied in trade).  Of

          these factors, which are most relevant in considering the alternatives

          discussed above?  For example, recognizing that some market mechanisms

          may rely on some factors more than others, to what extent are

          regulatory costs greater for particular mechanisms than others?

          Question 102:  What costs are associated with the responsibilities of

          an SRO?  Will the costs to existing SROs be reduced by registering

          significant alternative trading systems as exchanges?   

          Question 103:  What regulatory burdens currently inhibit innovation of

          trading systems?  How will the alternatives discussed above change the

          incentives for innovation?   

          Question 104:  Will the alternatives discussed above impose costs on


                             ======END OF PAGE 166======





          systems that differ depending on the nature of the trade?  For

          example, will the proposed regulatory revisions change the costs of

          trades directly between customers relative to the costs of trades

          between a customer and a dealer?   

     VII. Regulation of Foreign Market Activities in the United States

          A.   The Need for A Clear Regulatory Structure to Address U.S.

               Investors' Electronic Cross-Border Trading

          In addition to significantly changing the way domestic markets

     operate, technology has given U.S. investors new and varied options for

     accessing foreign markets.  The desire of many investors to diversify their

     portfolios through foreign investment has already resulted in an

     exponential increase in trading in foreign securities by U.S.

     persons.<(213)>  The use of advanced technology by broker-dealers,

     markets, and other entities has the potential to greatly increase

     institutions' and other U.S. investors' cross-border trading opportunities,

     to make cross-border trading both more efficient and more affordable, and

     to promote competition among global markets and intermediaries.

          Until recently, in order to obtain current information regarding

     foreign market activity and to purchase or sell securities on a foreign

     market, a U.S. investor typically contacted a U.S. broker-dealer by

     telephone or facsimile.  The U.S. broker-dealer would then give the

     investor current information and transmit the investor's order to a foreign

                              

               <(213)>   Between 1980 and 1995,  the total activity by U.S.
                         persons  in  foreign  securities  grew  from $53.1
                         billion to $2,573.6  billion, representing over  a
                         4700% increase.  Securities  Industry Association,
                         1996 Securities Industry Fact Book 67 (forthcoming
                         June 1997). 

                             ======END OF PAGE 167======





     broker-dealer member of the foreign market<(214)> on which the

     security was traded.  Alternatively, the U.S. investor could contact a

     foreign broker-dealer member of the foreign market directly.  Today,

     however, it is possible for U.S. investors to obtain real-time information

     about trading on foreign markets from a number of different sources and to

     enter and execute their orders on those markets electronically from the

     United States.  

          For example, an investor that is not a member of a foreign market can

     nonetheless trade directly on that market using electronic interfaces, by

     linking to the market through a member of that market (typically the

     investor's broker-dealer).  The market member provides a direct, automated

     link between the customer and the foreign market by connecting the

     customer's computer system directly to its own, which is also connected

     with the foreign market.  This may be accomplished in a variety of ways,

     including through the use of proprietary software, leased lines or a public

     network such as the Internet.  The member's systems will then automatically

     distribute market information to the U.S. investor and route the investor's

     orders directly to the market.  Through these types of "pass-through"

     linkages, the non-member customer can enjoy electronic trading capabilities

     that are equivalent to the trading privileges of a member of the foreign

     market.  From the broker-dealer's and customer's perspectives, this type of

                              

               <(214)>   As used in this release,  a "member" of a  foreign
                         market  includes  any person  to  which a  foreign
                         market   provides  access   for  the   purpose  of
                         effecting transactions on that market.  This would
                         include  any  person that  is  a  full or  limited
                         member  of a  foreign market  or that  the foreign
                         market allows to electronically access its trading
                         facilities. 

                             ======END OF PAGE 168======





     "pass-through" service enables the investor to send orders through the

     electronic interface without the broker-dealer having prior knowledge of

     each order or manually interpositioning itself in the trading process.  As

     a result, orders routed electronically by a customer to the exchange remain

     under the customer's control until the moment of execution.  This is in

     contrast to traditional brokerage activities involving orders that are

     routed from a customer to a foreign market member (or its affiliate), and

     from the member to the exchange.  From the perspective of the foreign

     market, orders sent by a broker-dealer customer through a member's

     electronic interface may be indistinguishable from orders placed directly

     by the member.<(215)>  Some broker-dealers have also begun to

     facilitate trading directly on the facilities of foreign markets in which

     those broker-dealers are not members, for their U.S. customers or

     affiliates.  This is typically accomplished through agreement or

     affiliation with a local member of that market.  

          In addition to allowing investors that are not members to trade

     directly on foreign markets, technological advances have enabled market

     members themselves to trade from remote locations outside of particular

     markets' home countries.  Many foreign markets have integrated new

     technology into their trading processes in recent years, either by using

     computers in combination with traditional floor trading

     procedures,<(216)> or by completely automating their trading
                              

               <(215)>   Although  orders originate from a non-member, they
                         are  electronically  identified, or  "stamped," as
                         coming from the member providing the interface.

               <(216)>   For  example,  in  September 1994,  the  Amsterdam
                         Stock Exchange introduced a new electronic trading
                                                             (continued...)

                             ======END OF PAGE 169======





     facilities.<(217)>  This enhanced technology enables members of
                              

               <(216)>(...continued)
                         system  that permits  banks and  broker-dealers to
                         effect  wholesale  trades   on-screen  using   the
                         Automatic    Interprofessional    Dealing   System
                         Amsterdam ("AIDA").   This system permits exchange
                         participants  to  enter  bids  and  offers  and to
                         execute trades  via a  remote computer  located in
                         their  offices.    The Netherlands,  Institutional
                         Investor,  Inc.,  Sept.  16,  1996,   at  11;  The
                         Amsterdam Stock Exchange - An Overview - Amsterdam
                         Stock Exchange,  Business Monitor, Mar.  30, 1995.
                         Similarly,  Frankfurt's  Deutsche  Borse  provides
                         remote  access  in London,  Amsterdam,  Paris, and
                         Zurich, and has attracted  44 remote members.  The
                         number of remote members  of the Deutsche Borse is
                         predicted to swell to at least 100 within three to
                         five  years.     Laura  Covill,  Survival  of  the
                         Fittest,  ABI/INFORM,  Aug.  1996,  at  60.     In
                         addition,  the Athens Stock Exchange has installed
                         an electronic  trading system that  allows members
                         to  execute  orders via  exchange-owned terminals.
                         Internet   Site  of  the  Athens  Stock  Exchange,
                         address:   http://www.ase.gr/waser.htm  (Dec.   5,
                         1996).

               <(217)>   For  example, since  1989, OM  Stockholm (formerly
                         the Stockholm Stock Exchange) has  been completely
                         electronic,  and has  remote  members  in  London,
                         Denmark, Norway, Finland,  and Switzerland.  OMLX,
                         the  London  Securities  &  Derivatives  Exchange,
                         which  is   owned  by  the  same   company  as  OM
                         Stockholm, is also a completely electronic trading
                         system.    See  Laura   Covill,  Survival  of  the
                         Fittest,   ABI/INFORM,  Aug.  1996,  at  60;  Hugh
                         Carnegy,  Survey -  Swedish  Banking; Two  Dynamic
                         Exchanges,  Fin.  Times,  June  20,  1996,  at  6.
                         Tradepoint,   a   London-based  electronic   stock
                         exchange, started  trading in September 1995.  See
                         Henry   Harrington,   Survey  of   European  Stock
                         Exchanges, Fin.  Times, Feb. 16, 1996.   The Paris
                         Bourse  is  now  an  entirely  computerized  stock
                         market.  Supercac, a system linked to member firms
                         and other intermediaries collecting client orders,
                         went  on  line  in   April  1995  and  allows  for
                         continuous,  automated  trade  execution  to  take
                         place on the Paris  Bourse.  See Internet  Site of
                         The     Paris     Stock     Exchange,     address:
                         http://www.bourse-de-paris.fr   (Nov.  6,   1996);
                                                             (continued...)

                             ======END OF PAGE 170======





     those markets to trade without being physically present on a market "floor"

     or establishing a physical presence in a market's home country.  As a

     result, several foreign markets have begun to offer their members in non-

     U.S. jurisdictions "remote" access to their trading facilities, typically

     by installing proprietary market terminals in the members' offices, by

     providing data feeds or codes for use with software operated through the

     members' own computers, or by allowing members to access a market's trading

     facilities through third party service vendors or public networks (such as

     the Internet).  In recent years, several foreign markets have proposed

     permitting U.S. broker-dealers and institutional investors to become market

                              

               <(217)>(...continued)
                         Henry   Harrington,   Survey  of   European  Stock
                         Exchanges,   Fin.  Times,  Feb.  16,  1996.    The
                         purchase by the Toronto Stock  Exchange ("TSE") of
                         the  Paris Bourse's Supercac  software enabled the
                         TSE to close  its floor  on April 24,  1997.   See
                         Toronto Stock  Exchange Closes its  Trading Floor,
                         The  Wall Street J., Apr. 24, 1997, at C15.  Other
                         examples of completely automated exchanges include
                         the  MEFF Renta  Fija and  MEFF Renta  Variable in
                         Spain, the New Zealand Stock  Exchange, the Korean
                         Stock Exchange, the Philippine Stock Exchange, the
                         Singapore Stock  Exchange, and the  Thailand Stock
                         Exchange.   Foreign  futures and  options  markets
                         have  also  embraced  electronic trading  systems.
                         For  example,  the  Tokyo International  Financial
                         Futures  Exchange, the  Osaka Futures  and Options
                         Exchange,  the Swiss Options and Financial Futures
                         Exchange, the Irish  Futures and Options Exchange,
                         and the New Zealand Futures and  Options Exchanges
                         are completely  electronic.   See Hughes  Levecq &
                         Bruce  W.  Weber,  Electronic  Markets  and  Floor
                         Markets:    Competition  for  Trading  Volumes  in
                         Futures and Options Exchanges, Center for Research
                         on Information  Systems, Working Paper  Series No.
                         IS-95-20, June  15, 1995; Allan D.  Grody & Hughes
                         Levecq,  Past, Present and  Future:  The Evolution
                         and Development of  Electronic Financial  Markets,
                         Center  for  Research   on  Information   Systems,
                         Working Paper Series No. IS-95-21, Nov. 1993.

                             ======END OF PAGE 171======





     members through similar remote access arrangements.<(218)>  If this

     remote access were offered in the United States, U.S. investors would have

     the ability to trade directly on foreign markets and to bypass broker-

     dealers. 

          These are examples of ways in which U.S. investors might access

     foreign markets.  As technology evolves and investor comfort with

     electronic trading increases, other types of access will likely develop as

     well, including those that may make greater use of the Internet.

               1.   The Applicability of the U.S. Regulatory Structure to the

                    Activities of Access Providers Has Not Been Expressly

                    Addressed

          When a foreign market, broker-dealer, or other entity provides the

     type of direct foreign market access described above to investors located

     in the United States (hereinafter referred to as an "access provider"), its

     activities typically differ from both traditional brokerage activities and
                              

               <(218)>   For   example,   Deutsche   Terminborse   ("DTB"),
                         Germany's electronic futures  and options  market,
                         installed  computer terminals in the United States
                         for trading non-U.S. futures products.  See Letter
                         from Andrea  M.  Corcoran, Director,  Division  of
                         Trading  and  Markets,  Commodity Futures  Trading
                         Commission, to Lawrence H. Hunt, Jr., Esq., Sidley
                         &   Austin  (Feb.  29,   1996)  (no-action  letter
                         authorizing   DTB  to  install  and  use  computer
                         terminals in  the United States in connection with
                         the  purchase  and  sale  of  certain futures  and
                         options   contracts).      The  no-action   letter
                         explicitly did not  address securities law issues.
                         See also  Mark J. Arend, Securities  Trading:  How
                         Electronic    Markets    Empower     Institutional
                         Investors,  Global Investment,  Dec. 1996,  at 30;
                         The  Netherlands,  Institutional  Investor,  Inc.,
                         Sept. 16,  1996, at 11; Laura  Covill, Survival of
                         the  Fittest,   ABI/INFORM,  Aug.  1996,   at  60;
                         Business,  Legal News  from Around  Europe, Buraff
                         Publications, May 13, 1996.

                             ======END OF PAGE 172======





     the activities of exchanges.  The Commission to date has not expressly

     addressed the regulatory status of entities that provide U.S. persons with

     the ability to trade directly on foreign markets from the United States. 

     While some access providers may be registered as U.S. broker-dealers

     because of their other activities, the lack of regulatory guidance in this

     context has discouraged other parties from offering U.S. persons foreign

     market access.  Similarly, foreign markets have been reluctant to permit

     U.S. persons to become members of their markets without assurances from the

     Commission that they would not be required to register as national

     securities exchanges.<(219)>  The Commission therefore is soliciting

     comment on how best to address U.S. investors' increasing access to foreign

     markets.  Specifically, the Commission requests comment on whether

     investors could benefit from a clearer regulatory framework for entities

     that provide U.S. investors with the technological capability to trade

     directly on foreign markets from the United States.

               2.   U.S. Investors' Ability to Trade Directly on a Foreign

                    Market And Investor Protection Concerns Under the Federal

                    Securities Laws

          In addressing issues raised by cross-border trading, it is important

     to ensure that investors are provided with certain key protections under

     the federal securities laws.  From an investor's perspective, trading on a

     foreign market through an access provider is often indistinguishable from

                              

               <(219)>   Several foreign  markets have proposed  to provide
                         U.S.  investors with  direct electronic  access to
                         their trading systems.  In conjunction  with these
                         proposals,  the  foreign  markets  have  requested
                         certain  relief  from  U.S.  exchange  and broker-
                         dealer registration requirements.

                             ======END OF PAGE 173======





     trading on a domestic market.  These similarities could lead many investors

     to expect that such trading would be subject to the same protections

     provided by the U.S. securities laws.  There are, however, significant

     differences in the protections available to investors trading on domestic

     U.S. markets, and those available to investors trading on foreign markets

     from the United States.  For example, the U.S. securities laws provide

     significant protections to investors trading on U.S. markets.  These

     protections include assurances that markets and intermediaries will

     disclose information regarding the rules governing trading operations, as

     well as requirements regarding transaction reporting and issuer disclosure

     practices.  In addition, U.S. securities laws provide the Commission with

     the tools to detect and deter fraud and manipulation.  Because foreign

     securities laws are generally not designed to provide these protections to

     U.S. investors that directly trade on their markets, in the absence of

     disclosure these differences have the potential to mislead U.S. investors

     that have come to rely on the U.S. securities laws.

          The Commission has been examining alternative regulatory frameworks

     for addressing these concerns.  As an initial matter, the optimal framework

     for addressing these issues should not impose unnecessary obligations on

     foreign markets that could effectively preclude U.S. investors from taking

     advantage of an otherwise efficient, cost-effective investment alternative. 

     Cross-border trading opportunities may raise concerns, however, that U.S.

     investors may not receive sufficient disclosure about foreign markets or

     foreign issuers and their securities.  As foreign markets are made

     increasingly accessible to U.S. investors through technological advances,

     therefore, the Commission should examine how to ensure that investors will


                             ======END OF PAGE 174======





     receive sufficient information to make informed decisions.

          B.   Regulating Foreign Market Activities in the United States

          The Commission's goal is to initiate a dialogue as to how to develop a

     consistent, long-term approach that clarifies the application of the U.S.

     securities laws to the U.S. activities of foreign markets.  Any such

     approach must not impose unnecessary regulatory costs on cross-border

     trading and, at the same time, must allow the Commission to oversee foreign

     markets' activities in the United States and protect U.S. investors under

     the U.S. regulatory framework.  There are several ways to achieve these

     goals.  As discussed below, for example, the Commission could (1) rely

     solely on a foreign market's home country regulator; (2) require all

     foreign markets to register as national securities exchanges or apply for

     an exemption from registration; or (3) develop a tailored regulatory scheme

     designed to regulate the entity that provides U.S. investors with the

     ability to trade directly on foreign markets, rather than regulating the

     foreign market itself.  The Commission solicits comments on whether any

     other alternatives could achieve the goals discussed above.

          Question 105:  What regulatory approaches would best address the

          concerns raised by the development of automated access to foreign

          markets?  Would these approaches differ if U.S. investors accessed

          foreign markets in ways other than those described above, such as

          through the Internet?  Are there any other alternative approaches that

          could be more appropriate?

               1.   Sole Reliance on Foreign Markets' Home Country Regulation

          One option could be for the Commission to rely solely on the laws of

     the primary regulators of foreign markets, if those foreign markets are


                             ======END OF PAGE 175======





     subject to regulation comparable to U.S. securities regulation.  Under this

     approach, the Commission could specify foreign markets that it determines

     are subject to comparable regulation.  In determining whether a foreign

     market is subject to comparable regulation, the foreign regulatory

     structure could be viewed as a whole to determine whether it, in its design

     and implementation, adequately addresses the key protections provided by

     U.S. securities laws.  The Commission could make this determination on a

     case-by-case basis or it could establish certain standards governing the

     determination.  Under the latter approach, if a foreign market met those

     enumerated standards, the foreign market could be considered subject to

     "comparable" regulation.<(220)>

          This approach might have several advantages.  First, it could provide

     regulatory certainty to foreign markets entering the United States. 

     Second, it would not impose any additional regulatory costs on foreign

     markets.  As a result, foreign markets would be able to provide their

     services to U.S. investors at lower cost.  Third, this approach would

     recognize that principles of international comity support reasonable

     deference to a home country's governance of its own markets, particularly

     with respect to trading in the securities of home country issuers.  

          Despite these advantages, an approach that relies solely on foreign

     regulation has significant drawbacks.  As discussed above, a U.S. investor

     trading on a foreign market through an access provider may incorrectly

     assume that such trading is subject to the same protections as trading on
                              

               <(220)>   It could  be appropriate to permit foreign markets
                         regulated solely  under  the laws  of  their  home
                         country to trade only foreign securities with U.S.
                         persons.     Possible  definitions   of  the  term
                         "foreign securities" are discussed below.

                             ======END OF PAGE 176======





     U.S. markets.  Foreign laws, however, may differ significantly from U.S.

     securities laws.<(221)>  For example, under the federal securities

     laws, a registered exchange must establish rules that describe its trading

     processes, file those rules with the Commission (which publishes them for

     comment), and enforce those rules fairly among its members.  These

     requirements are designed to enable investors to make informed decisions

     about the risks and benefits of trading in a particular market.  U.S.

     investors rely on the availability and accuracy of the information provided

     by markets, as well as the information provided by intermediaries, when

     making their investment decisions.  Many foreign markets, however, do not

     require a similar level of disclosure.

          The practices of foreign markets in areas that affect market integrity

     can also differ significantly from those of U.S. exchanges.  For example,

     some foreign markets are not subject to laws designed to prevent insider

     trading or other forms of market manipulation that are prohibited in the

     United States.  In addition, U.S. securities laws require market makers and

     specialists to have firm quotes,<(222)> and to display certain

     customer limit orders.<(223)>  They also require U.S. markets and

     certain participants to report most trades for public dissemination within

     90 seconds.<(224)>  On the other hand, many foreign markets do not
                              

               <(221)>   See supra Section VII.A.2.

               <(222)>   Exchange Act Rule 11Ac1-1, 17 CFR 240.11Ac1-1.

               <(223)>   Exchange Act Rule 11Ac1-4, 17 CFR 240.11Ac1-4.

               <(224)>   Pursuant to the  terms of the CTA  Plan, see supra
                         notes 166 and 167, it is the responsibility of all
                         participant exchanges  and the NASD to  report all
                         sales  transactions as  promptly as  possible, and
                                                             (continued...)

                             ======END OF PAGE 177======





     require market participants to report trading activity as quickly as under

     U.S. law,<(225)> and do not publicly disseminate such information as

     promptly as U.S. markets.  Some foreign markets also do not require

     companies to provide financial and other material information to investors

     as often or as completely as is required under U.S. law.  Moreover, the

     methods of calculating and reporting financial information that are used on

     foreign markets often differ from U.S. standards.  U.S. investors trading

     electronically on foreign markets from the United States may not have

     access to complete information regarding these transaction reporting and

     issuer disclosure practices so as to evaluate whether published information

     is current.  

          Foreign markets also may not be subject to regulations designed to

     provide regulators with the tools to detect and deter behavior that is

     prohibited under U.S. securities laws, such as fraud, manipulation, or

     insider trading.  For example, unlike domestic exchanges, which are

     required to comply with federal securities laws and to enforce compliance

                              

               <(224)>(...continued)
                         establish collection procedures to ensure that 90%
                         of such  last sale reports are  provided within 90
                         seconds  of execution.   CTA  Plan, Section  VIII.
                         Market  rules also require  participants to report
                         trades   within  90  seconds  after  execution  or
                         designate  them as  being late.   See,  e.g., NASD
                         Rule  4632.    A   pattern  or  practice  of  late
                         reporting without exceptional circumstances may be
                         considered  inconsistent  with  high standards  of
                         commercial honor and just and equitable principles
                         of trade in violation of NASD Rule 2110.

               <(225)>   Other foreign markets allow market participants to
                         delay  reporting of certain  trades.  For example,
                         the London Stock Exchange  allows members to delay
                         publication of  certain large block  trades for up
                         to 60 minutes.

                             ======END OF PAGE 178======





     with such laws by their members,<(226)> foreign markets may have

     less comprehensive surveillance, examination, or enforcement capabilities. 

     In addition, many foreign markets are not required under the laws of their

     home countries to preserve the trading information that would enable an

     investigation to be commenced under U.S. law.  Without adequate

     recordkeeping, it could be difficult for the Commission to detect

     fraudulent or other illegal activity being conducted through access

     providers.<(227)>  

          An equally important component of the Commission's ability to detect

     and investigate violations of the federal securities laws is access to

     trading information.  Even if a foreign market maintains comprehensive

     trading records, it may be constrained by local law from sharing these

     records or other market information with U.S. regulators.<(228)> 

     Unless the Commission has access to trading records, its ability to fully

     investigate and bring enforcement actions for violations of the U.S.

     securities laws could be undermined.  

          U.S. investors may also expect that, because they are trading on
                              

               <(226)>   See supra Section II.B.1.

               <(227)>   As the Commission staff  stated in its 1994 report
                         on  the U.S.  equity markets, the  Commission also
                         has  a significant regulatory interest in ensuring
                         that foreign markets are  not used by U.S. broker-
                         dealers  to  circumvent  the  application  of U.S.
                         regulatory requirements to  the detriment of  U.S.
                         persons  complying  with  those requirements.  See
                         Market 2000 Study, supra note 14, at VII-4.

               <(228)>   See   generally   Technical   Committee   of   the
                         International    Organization     of    Securities
                         Commissions (IOSCO), Report  on Issues Raised  for
                         Securities  and  Futures   Regulators  by   Under-
                         Regulated and Uncooperative Jurisdictions  5 (Oct.
                         1994).

                             ======END OF PAGE 179======





     foreign markets from the United States, they will be able to file private

     actions to recover losses arising from trading on those markets.  In

     reality, the foreign nature of such trading may prevent U.S. investors from

     filing such claims in U.S. courts, from obtaining evidence to support their

     claims, from serving process on defendants, or from enforcing judgments. 

          In sum, although relying on foreign market regulation could provide

     regulatory certainty and allow foreign markets and access providers to

     provide their services to U.S. investors, it may not provide U.S. investors

     with certain essential protections they have come to expect.  The

     Commission seeks comment on whether this option is feasible and consistent

     with the federal securities laws.

          Question 106:  If the Commission were to rely solely on a foreign

          market's primary regulator, how could it address the investor

          protection and enforcement concerns discussed above?

               2.   Requiring Foreign Markets to Register as National Securities

                    Exchanges

          A second option could be to require foreign markets with U.S.

     activities to register as national securities exchanges under the Exchange

     Act or to satisfy criteria for exemption from exchange

     registration.<(229)>  Foreign markets that offer their services to

     U.S. persons would have to comply with the same regulatory obligations as

     U.S. exchanges.  Under this approach, U.S. investors trading on foreign
                              

               <(229)>   Currently,  the  only  available   exemption  from
                         exchange registration  is based on  limited volume
                         of transactions.   15 U.S.C. 78(e).   As discussed
                         in Section IV.B. above, however, the Commission is
                         soliciting   comment   on   using  its   exemptive
                         authority under Section 36  of the Exchange Act to
                         create a new category of exempted exchanges.  

                             ======END OF PAGE 180======





     markets would be provided with the same protections they have when trading

     on U.S. markets.  This could address the concern that, because trading on a

     foreign market may be indistinguishable from trading on a domestic market,

     investors may be led to expect that such trading would be subject to the

     same protections provided by the U.S. securities laws.  This approach also

     could ensure that any foreign markets that offer services to U.S. investors

     would provide the same protections as registered or exempted exchanges,

     such as disclosure of trading rules, transparency, timely transaction

     reporting, and T+3 clearance and settlement.

          The U.S. regulatory scheme applicable to exchanges, however, is not

     necessarily designed to accommodate entities that only engage in limited

     activities in the United States and that are primarily regulated in foreign

     jurisdictions.  It may not be feasible, therefore, to regulate a foreign

     market's activities under a regulatory scheme that applies to domestic

     markets, particularly if a foreign market's only activity in the United

     States is to provide its U.S. members with the ability to trade directly on

     its facilities or to allow its members to provide U.S. persons with

     electronic linkages to trade outside of the United States.  For example,

     U.S. exchange regulation could conflict with the regulation to which these

     markets are already subject in their home countries or could subject these

     markets to unnecessarily duplicative and expensive obligations.  Any

     approach to regulating the U.S. activities of these foreign markets should

     attempt to minimize conflict with obligations imposed by their primary

     regulators.  There may also be limits on the Commission's jurisdiction to

     impose exchange requirements on foreign markets that have remote access

     arrangements with U.S. persons.  The Commission seeks comment on whether


                             ======END OF PAGE 181======





     this option is feasible and consistent with the federal securities laws.  

          Question 107:  Should the Commission require foreign markets with only

          limited activities in the United States to register as national

          securities exchanges or obtain an exemption from such registration? 

          How would this affect U.S. persons trading directly on foreign

          markets?

               3.   Regulating Access Providers to Foreign Markets

          A third approach could be to regulate the access providers to foreign

     markets, including broker-dealers, rather than regulating the foreign

     markets themselves.  Entities that provide U.S. investors with the

     technological capability to trade directly on a foreign market's facilities

     appear to fall into two basic categories.  The first category includes

     those entities that distribute or publish information regarding

     transactions on a foreign market, and provide a direct electronic link on

     behalf of the U.S. members of that foreign market.  This category of access

     providers could be regulated as SIPs.<(230)>  Under this approach,

     foreign markets, information vendors, and other parties that provide U.S.

     members with the ability to trade directly on foreign markets could either

     register as SIPs themselves, or could choose instead to have another

     registered SIP provide this capability to U.S. persons.  This approach

     could also provide a safe harbor from exchange registration for foreign

     markets regulated abroad that choose to conduct their limited U.S.

     activities through a registered SIP.

                              

               <(230)>   See  infra note  235 and  accompanying text  for a
                         discussion  of the  statutory  definition of  SIP.
                         Registered  SIPs  are  required  to   comply  with
                         Section 11A of the Exchange Act.

                             ======END OF PAGE 182======





          The second category of access providers consists of those U.S. and

     foreign broker-dealers that provide U.S. persons who are not members of a

     foreign market with the technological capability to trade directly on a

     foreign market.  Through their own or another broker-dealer's electronic

     linkage to a foreign market, broker-dealer access providers enable their

     customers to trade directly on the facilities of those foreign

     markets.<(231)>  Because this access is provided in a manner that is

     functionally equivalent to that provided by SIP access providers, it

     presents the same risks to U.S. investors.  Therefore, similar basic

     requirements, such as recordkeeping, reporting, disclosure, and antifraud

     requirements, could be applied to both SIP and broker-dealer access

     providers.  

          Such an approach, based on the regulation of access providers, might

     have several advantages over the two alternatives discussed above.  First,

     regulating only the U.S. activities of foreign markets and other entities

     might reduce the likelihood of conflict with foreign markets' home country

     regulations.  Second, creating a regulatory framework tailored for foreign

     markets could ensure appropriate protections for U.S. investors and clarify

     the regulatory status of foreign markets and other entities with only

     limited activities in the United States.  Third, establishing a regulatory

     structure that focuses on the limited activities occurring in the United

     States, rather than on the activities that a foreign market or third party

     conducts primarily in a foreign country, may be more consistent with the
                              

               <(231)>   A broker-dealer  would not be considered an access
                         provider to a foreign market's trading facilities,
                         however,  if  it  handled  the  execution  of  its
                         customer orders on foreign  markets as part of its
                         traditional brokerage activities.  

                             ======END OF PAGE 183======





     Commission's mandate under the Exchange Act.<(232)>  Finally, this

     approach recognizes that U.S. investors trade directly on foreign markets

     through a variety of sources, and could permit the Commission to regulate,

     in a similar manner, all entities that provide this service. 

          Question 108:  How can the Commission best achieve its goal of

          regulating the U.S. activities of foreign markets?  Commenters should

          take into consideration that foreign markets are regulated abroad,

          that there is a potential for international conflicts of law, and that

          the Commission has jurisdictional limits.  Given the difficulties of

          surveilling public networks such as the Internet, would an access

          provider approach be workable?

                    a.   Access Providers to U.S. Members of Foreign Markets

          Entities that provide U.S. members of foreign markets with the

     technological capability to trade directly on these markets from remote

     locations could be regulated as SIPs under Section 11A of the Exchange Act. 

     Section 11A was enacted by Congress more than twenty years ago to create a

     statutory framework for the integration of automation into the securities

     markets.<(233)>  Through this section, Congress sought to ensure

     that "the securities markets and the regulations of the securities industry

     remain strong and capable of fostering [the] fundamental goals [of the

     Exchange Act] under changing economic and technological

     conditions."<(234)>  
                              

               <(232)>   See generally 15 U.S.C. 78dd(b).

               <(233)>   Section  11A of  the Exchange  Act was  adopted as
                         part of the 1975  Amendments.  Pub. L. No.  29, 89
                         Stat. 97 (1975).

               <(234)>   S. Rep. No. 75, supra note 22, at 3.

                             ======END OF PAGE 184======





          While Congress did not focus on cross-border trading specifically,

     Section 11A provides a regulatory basis to address changes in the markets

     that result from the development of a global, electronic marketplace. 

     Section 11A extended the Commission's oversight authority to "any person

     engaged in the business of (i) collecting, processing, or preparing for

     distribution or publication, or assisting, participating in, or

     coordinating the distribution or publication of, information with respect

     to transactions in or quotations for any security . . . or (ii)

     distributing or publishing . . . on a current and continuing basis,

     information with respect to such transactions or quotations."<(235)> 

     Congress gave the Commission authority to require such entities -- referred

     to as SIPs -- to register with the Commission and to establish rules

     governing SIP activities.  All registered SIPs must carry out their

     functions in a manner consistent with the Exchange Act and report to the

     Commission denials or limitations of access to the services they provide. 

     The Commission has the authority to review those decisions in much the same

     manner as it reviews denials or limitations of access to the services

     offered by registered U.S. exchanges.

          Because information processing and dissemination are critical

     components of today's automated market, the definition of SIP potentially

     covers a broad range of entities that facilitate communications among

     investors, intermediaries, and markets.  To date, however, only SIPs that

     process information exclusively on behalf of a U.S. exchange or securities




                              

               <(235)>   Exchange Act 3(a)(22), 15 U.S.C. 78c(a)(22).

                             ======END OF PAGE 185======





     association (known as "exclusive processors")<(236)> have been

     required to register with the Commission.  Congress exempted non-exclusive

     SIPs from the Section 11A registration requirements until such time as the

     Commission, by rule or order, finds that the registration of such non-

     exclusive SIPs is necessary or appropriate in the public interest, for the

     protection of investors, or for the achievement of the purposes of Section

     11A.  The Commission has not yet promulgated any such rules or

     orders.<(237)>

                              

               <(236)>   Exchange Act 3(a)(22)(B), 15 U.S.C. 78c(a)(22)(B).
                         An   "exclusive   processor"  is   any  securities
                         information processor (which is defined in Section
                         3(a)(22)(A)) that:

                    directly or  indirectly, engages on an  exclusive basis
                    on  behalf  of  any  national  securities  exchange  or
                    registered  securities  association  or,  any  national
                    securities    exchange    or   registered    securities
                    association which engages on  an exclusive basis on its
                    own behalf, in collecting, processing, or preparing for
                    distribution  or  publication   any  information   with
                    respect  to  (i)  transactions   or  quotations  on  or
                    effected  or made  by  means of  any  facility of  such
                    exchange or (ii) quotations distributed or published by
                    means of any electronic  system operated or  controlled
                    by such association.

               Id.

               <(237)>   Exchange Act 11A(b)(1), 15 U.S.C. 78k-1(b)(1).  In
                         1975, the Commission adopted Rule 11Ab2-1 and Form
                         SIP, which provide that  each SIP that is required
                         to be registered pursuant to Section  11A(b)(1) of
                         the Exchange Act (i.e.,  exclusive SIPs) must file
                         an  application  for  registration  on  Form  SIP.
                         Securities  Exchange Act Release  No. 11673 (Sept.
                         23,  1975),  40   FR  45448  (October   2,  1975).
                         Currently,  there  are  five exclusive  processors
                         registered   under   Section   11A:      (1)   the
                         Consolidated    Tape    Association,    (2)    the
                         Consolidated Quotation System, (3)  the Securities
                         Industry Automation Corporation,  (4) Nasdaq,  and
                         (5) the Options Price Reporting Authority.

                             ======END OF PAGE 186======





          The Commission could use its authority to register and oversee non-

     exclusive SIPs in order to establish a regulatory framework that could

     accommodate U.S. investors' and intermediaries' participation in foreign

     markets from the United States.  For example, any non-exclusive SIP could

     be required to register with the Commission under Section 11A if it met the

     statutory definition of a SIP with respect to securities traded or approved

     for trading on a foreign market and if it provided a facility or means

     through which a U.S. person could transmit orders to a foreign market of

     which the U.S. person is a member.  

          This approach may have several advantages.  For example, it would

     clarify the regulatory status of foreign markets that arrange for U.S.

     investors to be members of their trading facilities from the United States. 

     As discussed above, several foreign markets have been reluctant to provide

     U.S. persons with direct trading capability without receiving assurances

     from the Commission that they would not be required to register as national

     securities exchanges under Section 5 of the Exchange Act.  If the

     Commission's concerns regarding the effects of U.S. investors' direct

     trading on foreign markets could be addressed through SIP regulation, there

     might be no overriding interest in regulating these limited activities of

     foreign exchanges in the United States under Section 5.  The Commission

     therefore solicits comment on the advantages of this approach.  The

     Commission is also soliciting comment on whether it would be appropriate to

     create a "safe harbor" from exchange registration for bona

     fide<(238)> foreign markets that conduct all their securities

     activities in the United States through a registered SIP.  
                              

               <(238)>   See infra Section VII.B.1.c.(i).

                             ======END OF PAGE 187======





          Question 109:  What would be the best way for the Commission to

          regulate the limited U.S. activities of foreign markets that provide

          remote access to U.S. members?  

          Question 110:  When should an entity be required to register with the

          Commission as a non-exclusive SIP under Section 11A of the Exchange

          Act?  For example, should the activities described above require

          registration as a SIP?

          Question 111:  If the SIP approach were adopted, is it likely that

          U.S. members of foreign markets would wish to transmit their orders to

          such markets through more than one SIP registered with the Commission? 

          If so, should all but one of those SIPs be exempt from registration?

          Question 112:  Under the SIP approach, should foreign markets that

          allow their U.S. members to transmit their orders solely through a

          registered SIP have a safe harbor from registration as national

          securities exchanges?

          Question 113:  What type of activities should a registered SIP be

          permitted to conduct on behalf of a foreign market without the SIP or

          the foreign market registering as an exchange?

                    b.   Broker-Dealer Access Providers

          A U.S. or foreign broker-dealer that provides U.S. persons with

     terminals, software, access codes, or other means of directly trading on

     the facilities of a foreign market through a member's interface with that

     market, provides those U.S. persons with trading capabilities that are

     functionally equivalent to those of market members, as described above. 

     These types of arrangements therefore present the same risks to U.S.

     investors and investor protection concerns as described above.  An example


                             ======END OF PAGE 188======





     of this type of arrangement is where a broker-dealer's customer is provided

     with the technological capability to direct the execution of its orders by

     viewing a foreign exchange's central limit order book and then

     transmitting, modifying, or subsequently cancelling an order based on the

     information in the limit order book.<(239)>  Although the customer's

     trading on the foreign exchange may be technically or legally considered to

     be routed by the foreign market member, the customer has the ability to use

     the facilities of the exchange as though it were a member.  By providing

     U.S persons with the capability to transmit directly, and to direct the

     execution of, orders to a foreign market, the broker-dealer is providing

     services that go beyond traditional brokerage services.<(240)> 

     Because these services are a relatively recent development, it appears that

     only a small number of registered broker-dealers provide this type of

     direct automated service to their institutional customers.<(241)> 

     In view of these developments, it may be appropriate to regulate, in the

     manner just described for SIP access providers, both foreign and U.S.

                              

               <(239)>   This  type of arrangement  is commonly referred to
                         in this context as a broker-dealer "give-up."

               <(240)>   This type of electronic "pass-through" arrangement
                         would  not encompass  customer orders  executed on
                         foreign  markets  by broker-dealers  on  behalf of
                         their  customers  as  part  of  a  broker-dealers'
                         traditional brokerage activities.  

               <(241)>   The  principal  additional requirement  with which
                         registered   broker-dealers    that   are   access
                         providers  to foreign markets would have to comply
                         under this type  of approach, would be  disclosure
                         of the  specific risks relating to  the trading on
                         foreign  markets.   Registered  broker-dealers are
                         already  subject  to  most of  the  recordkeeping,
                         reporting, and antifraud requirements discussed in
                         Section VII.B.1.c.(iii).

                             ======END OF PAGE 189======





     broker-dealers that provide U.S. persons with access to an automated

     facility or means through which they can directly transmit, and direct the

     execution of, orders on a foreign market.

          In some cases, broker-dealers provide their customers with this type

     of direct linkage to U.S. exchanges through systems such as the NYSE's

     SuperDOT system.<(242)>  Although a U.S. exchange has obligations

     under the federal securities laws and is subject to Commission oversight, a

     foreign market does not have similar obligations.  The ability to trade

     directly on foreign markets, therefore, may raise investor protection

     concerns.

          U.S. registered broker-dealers are also subject to a panoply of

     regulations and supervisory requirements intended to protect both the

     capital markets and investors,<(243)> and have general agency

     obligations to their customers under the federal securities laws. 

     Nevertheless, these requirements, in their current form, do not necessarily

     address concerns raised when broker-dealers provide automated means for

     U.S. persons to trade directly on foreign markets.  Consequently, the

     Commission could separately regulate the activities of U.S. broker-dealers

     that act as access providers.
                              

               <(242)>   See supra note 16.

               <(243)>   For  example,  a  broker-dealer  is   required  to
                         register with  the Commission, become a  member of
                         an SRO  and SIPC, maintain  certain minimum levels
                         of net capital, segregate customer funds, maintain
                         certain  books  and  records,  and  make  periodic
                         reports to the  Commission.  In addition,  broker-
                         dealers are subject to  statutory disqualification
                         standards   and   the  Commission's   disciplinary
                         authority.   See Exchange  Act 15, 15  U.S.C. 78o;
                         Securities Investor  Protection  Act of  1970,  15
                         U.S.C. 78aaa.  See also 17 CFR 240.15a-6.

                             ======END OF PAGE 190======





          Foreign broker-dealers that engage in activities as broker-dealer

     access providers are, in most cases, exempt from broker-dealer registration

     pursuant to Rule 15a-6 under the Exchange Act.<(244)>  These access

     providers therefore are not subject to the same requirements under the U.S.

     securities laws as registered broker-dealers.  The question thus arises of

     whether the Commission should require foreign broker-dealers to register as

     U.S. broker-dealers if they act as access providers to foreign markets on

     behalf of U.S. persons.  Traditional broker-dealer regulation could subject

     foreign broker-dealers to requirements that are not necessary to address

     concerns raised by the activities of access providers.  Such requirements

     could include the maintenance of specified capital, and SIPC and SRO

     membership.  Under an approach that applied to broker-dealer access

     providers, however, the Commission could subject foreign broker-dealers

     that enable U.S. investors to trade directly on foreign markets to a

     regulatory framework tailored to their access provider activities.

          Question 114:  What types of automated broker-dealer systems, both

          operational and contemplated, would be encompassed within the above

          description of access providers to foreign markets?  How widespread

          are these activities?  

          Question 115:  Would the above description of broker-dealer access

          providers adequately and clearly exclude traditional brokerage

          activities, particularly handling the execution of customer orders on

          foreign markets?  If not, how should such activities be distinguished
                              

               <(244)>   This release does not  address any issues that may
                         be raised regarding the applicability of Rule 15a-
                         6  under the  Exchange  Act or  a foreign  broker-
                         dealer's obligations thereunder.  17  CFR 240.15a-
                         6.

                             ======END OF PAGE 191======





          from traditional brokerage activities, particularly traditional cross-

          border activities?  Should U.S. broker-dealers that provide investors

          with access to foreign markets be subject to any additional

          requirements?

          Question 116:  Should foreign broker-dealers that provide U.S.

          investors with automated access to foreign markets be required to

          register as broker-dealers on the basis of that activity?

                    c.   Requirements Applicable to Access Providers

          If the Commission were to regulate foreign market access providers,

     there are a number of conditions that could be applied to these entities. 

     For example, as discussed further below, the Commission could subject

     registered SIP and broker-dealer access providers to recordkeeping,

     reporting, disclosure, or antifraud requirements.

          Question 117:  What types of conditions, if any, should the Commission

          place on access providers if it were to pursue that approach?  

                         (i)  Conditions Relating to the Type of Foreign Market

          Any new regulatory approach developed by the Commission to address the

     unique concerns raised by access providers would not be intended as an

     alternative regulatory scheme for U.S. exchanges.  Accordingly, any such

     approach would be applicable only to bona fide foreign markets.  There are

     a variety of ways the Commission could define a bona fide foreign market. 

     For example, a bona fide foreign market could be any entity that meets the

     definition of an exchange under Section 3(a)(1) of the Exchange Act or that

     otherwise conducts the business of an exchange, but that is organized and

     has its principal place of business outside of the United States.  Any

     national securities exchange, national securities association, or exchange


                             ======END OF PAGE 192======





     exempt from registration pursuant to a Commission rule or order would not

     be considered a bona fide foreign market.  The Commission could also

     exclude from the definition of a bona fide foreign market an exchange that

     operates a trading facility or provides terminals in the United States.  

          Another issue is whether SIP and broker-dealer access providers should

     be permitted to transmit orders for U.S. persons only to foreign markets

     that would be able to share information with the Commission in connection

     with an investigation.  As discussed above, the ability to access trading

     and other market information is an essential component of the Commission's

     ability to detect and deter fraud.  Therefore, the Commission could require

     a level of information sharing that could ensure that the Commission has

     the ability to obtain necessary information from a foreign regulatory

     authority and to obtain meaningful assistance in the case of fraud or

     manipulation involving U.S. persons and a foreign market's

     participants.<(245)>  For example, the Commission could require

     access providers to enter into private contractual agreements with foreign

     markets to which orders are transmitted, under which foreign markets

     represent that they are not prohibited by local law from sharing

     information with the Commission and, as a condition of registration, agree

     to provide information to the Commission upon request.  Alternatively, the

                              

               <(245)>   Some U.S. exchanges that trade derivative products
                         based  on securities  primarily traded  on foreign
                         markets   already    have   surveillance   sharing
                         agreements in place.   These surveillance  sharing
                         agreements   typically   require  signatories   to
                         provide  to each  other, upon  reasonable request,
                         information   about   market   trading   activity,
                         clearing  activity, and,  in  some instances,  the
                         identities  of  the  purchasers  and   sellers  of
                         securities.

                             ======END OF PAGE 193======





     Commission could designate certain foreign markets that, in its experience,

     are able to share information with the Commission.  

          Question 118:  If the Commission decides to regulate access providers

          to foreign markets, what criteria should the Commission use in

          determining whether an exchange is a bona fide foreign market?  Should

          a market be required to have at least a majority of foreign members in

          order to be a bona fide foreign market?  Should the Commission exclude

          exchanges that provide terminals in the United States?   

          Question 119:  Should the Commission regulate as a U.S. exchange any

          market that, although organized and having its principal place of

          business outside of the United States, is under common control with or

          controlled by U.S. persons, or whose decisions regarding trading

          rules, practices, or procedures are made by U.S. persons?

          Question 120:  What factors should the Commission use in determining

          whether an exchange is operating a trading facility in the United

          States and is not a bona fide foreign market?  If exchange-owned

          terminals are located in the United States, should this constitute

          operating a trading facility in the United States?

          Question 121:  What effect would a reinterpretation of the term

          "exchange" under Section 3(a)(1) of the Exchange Act have on any

          Commission proposal to regulate SIP and broker-dealer access

          providers?

          Question 122:  If the Commission decides to regulate access providers

          to foreign markets, should the Commission require access providers to

          transmit orders only to foreign markets that are willing to share, and

          capable of sharing, information with the Commission in connection with


                             ======END OF PAGE 194======





          investigations involving violations of U.S. securities laws?  If so,

          what standard should the Commission use in determining whether a

          foreign market would provide meaningful assistance to the Commission? 

          If commenters believe that SIP and/or broker-dealer access providers

          should be permitted to transmit orders to any foreign market, indicate

          how the Commission could ensure that it has the ability to enforce the

          applicable provisions of the federal securities laws. 

          Question 123:  Should the Commission require access providers to

          transmit orders only to foreign markets that are located in countries

          that have entered into arrangements with the Commission to provide

          enforcement and information sharing assistance?

                         (ii) Conditions Relating to Type of Persons and

                              Securities

          Access providers could be limited to providing their services only to

     certain sophisticated U.S. institutional investors.  Another alternative

     could be to permit broker-dealer access providers to provide their services

     to all U.S. investors, but restrict the type of investors to which SIP

     access providers could provide their services.  The Commission is

     soliciting comment on whether both SIP and broker-dealer access providers

     should provide their services only to certain sophisticated U.S.

     institutional investors.  In addition, the Commission solicits comment on

     whether the additional customer protection requirements to which registered

     broker-dealers are subject should mean that broker-dealer access providers

     should be allowed to provide their services to all U.S. investors.

          Another issue to be considered is whether it would be appropriate to

     permit SIP and broker-dealer access providers to transmit orders from U.S.


                             ======END OF PAGE 195======





     persons to foreign markets only for foreign securities.  On the whole,

     transactions in securities of domestic issuers have a greater potential to

     affect the U.S. securities markets than transactions in securities of non-

     U.S. issuers, where the primary market is typically overseas.  Moreover,

     when a U.S. access provider is used to trade the securities of domestic

     issuers on a foreign market, the foreign market could be required to

     register as a U.S. exchange under Section 5 of the Exchange

     Act.<(246)> 

          Question 124:  If the Commission regulated access providers through

          the approach described above, should SIP access providers be limited

          to providing their services to sophisticated institutions or should

          they be allowed to provide any U.S. investor with the capability of

          directly trading on foreign markets as members?  If so, should broker-

          dealer access providers be subject to similar requirements?  

          Question 125:  If the Commission permits SIP access providers to offer

          their services only to broker-dealers and certain sophisticated

          institutions, how should this category of sophisticated institutions

          be defined?

          Question 126:  Should the Commission permit SIP and broker-dealer
                              

               <(246)>   U.S. courts have interpreted  the extraterritorial
                         application of  the Exchange Act  more expansively
                         when the  securities that  are the subject  of the
                         transaction are issued by  a U.S. corporation. See
                         ITT v. Cornfeld, 619 F.2d  909 (2d Cir. 1980); ITT
                         v.  Vencap, Ltd.,  519  F.2d 1001,  1017 (2d  Cir.
                         1975)  ("We believe  that  Congress  intended  the
                         Exchange Act to have  extraterritorial application
                         in order . . .  to protect the domestic securities
                         market   from  the  effects  of  improper  foreign
                         transactions  in  American securities.")  (quoting
                         Schoenbaum v.  Firstbrook, 405 F.2d  215, 206  (2d
                         Cir. 1968)).

                             ======END OF PAGE 196======





          access providers to transmit orders to foreign markets for the

          securities of U.S. issuers or only for the securities of non-U.S.

          issuers?

          Question 127:  Should the Commission limit the ability of SIP and

          broker-dealer access providers to transmit orders to foreign markets

          for the securities of non-U.S. issuers if the "principal market" for

          those securities is located in the United States?   If so, how should

          the Commission determine when the "principal market" of a non-U.S.

          security is located in the United States?

          Question 128:  If the Commission permits SIP and broker-dealer access

          providers to transmit orders to foreign markets only for securities of

          non-U.S. issuers, how should the Commission distinguish between U.S.

          and non-U.S. issuers?

                         (iii)     Recordkeeping, Reporting, Disclosure, and

                                   Antifraud Requirements

          Recordkeeping and reporting requirements, generally, are an important

     component of the Commission's oversight role.  Adequate trading records are

     invaluable to the Commission's efforts to enforce the antifraud provisions

     of the Exchange Act.  Without adequate records and reports, the Commission

     would be unable to effectively monitor, evaluate, and examine the

     activities of registered SIP and broker-dealer access providers.  

          If the Commission decides to adopt a regulatory framework for access

     providers, such recordkeeping and reporting requirements could be crucial

     elements in enhancing Commission oversight of their activities, and in

     identifying areas where surveillance is needed to detect fraudulent,

     deceptive, and manipulative practices.  Records and periodic reports could


                             ======END OF PAGE 197======





     also assist the Commission in gaining an understanding of the effects of

     foreign markets' activities in the United States and with U.S. persons. 

     For example, these recordkeeping and reporting requirements could be

     similar to the requirements currently imposed on broker-dealers under

     Exchange Act Rule 17a-23.<(247)>  Specifically, the Commission could

     require access providers to keep (i) records regarding the identity of

     their U.S. users; (ii) records regarding daily summaries of trading and

     time-sequenced records of each transaction effected through the access

     provider; (iii) information disseminated to U.S. investors, such as

     quotation and transaction information regarding foreign securities traded

     on foreign markets; and (iv) copies of the membership standards used by

     each foreign market to which the SIP provides the U.S. members of the

     market with the ability to trade directly.

          In addition, access providers could be required to file periodic

     reports.  Such periodic reports could contain information regarding (i) the

     types of securities for which orders are transmitted; (ii) the names of

     users of the access provider; and (iii) certain transaction information,

     such as the total volume, number, and monetary value of transactions for

     each foreign market to which orders are transmitted.

          If certain entities that provide U.S. investors with the ability to

     trade directly on foreign markets were required to register as SIPs, they

     would, by operation of Section 11A of the Exchange Act, be required to

     notify the Commission, and the Commission would be required to review, any

                              

               <(247)>   17 CFR 240.17a-23.   To the extent that  an access
                         provider that  is a U.S. broker-dealer  is already
                         subject to Rule 17a-23, that access provider would
                         not be subject to duplicative requirements.

                             ======END OF PAGE 198======





     limitations or prohibitions of access to the services offered by such

     SIPs.<(248)>  Pursuant to Section 11A, the Commission would be

     required to set aside any action only if it determined that such action was

     unfairly exclusionary.

          In addition to recordkeeping and reporting requirements, the

     Commission is soliciting comment on whether access providers could be

     required to make certain disclosures to U.S. investors.  Disclosure has

     always been a cornerstone of the Commission's efforts to protect investors. 

     The question becomes what types of specific disclosures are needed to

     ensure that U.S. persons have sufficient information regarding foreign

     securities traded on a particular foreign market through an access

     provider.  For example, SIP and broker-dealer access providers could be

     required to disclose information about the material risks of trading on

     foreign markets, as well as the risks of using their own facilities.  Such

     disclosure could include information about trading priorities on a foreign

     market and notification that the nature and timeliness of pre-trade and

     post-trade information provided by a foreign market differs from that
                              

               <(248)>   Exchange  Act  11A(b)(5),  15 U.S.C.  78k-1(b)(5).
                         The Senate Committee on Banking, Housing and Urban
                         Affairs report  on the Securities  Acts Amendments
                         of  1975 indicates  that  one of  the purposes  of
                         expanding  the  Commission's regulatory  authority
                         over  the processors  and  distributors of  market
                         information    was    "to   assure    that   these
                         communications  networks  are  not  controlled  or
                         dominated  by  any  particular market  center,  to
                         guarantee fair access to such systems . . . and to
                         prevent  any  competitive  restriction   on  their
                         operation  not  justified by  the purposes  of the
                         Exchange Act."   S. Rep.  No. 75, 94th  Cong., 1st
                         Sess. 9 (1975).  Under Section 11A(b)(5)(A) of the
                         Exchange Act, registered SIPs are required to file
                         notices of denial or limitation of access with the
                         Commission.  15 U.S.C. 78k-1(b)(5)(A).

                             ======END OF PAGE 199======





     provided by U.S. registered securities exchanges.  In addition, access

     providers could be required to disclose that there is no guarantee under

     U.S. law that clearance or settlement of securities trades will occur.  SIP

     and broker-dealer access providers could also be required to disclose

     system-related risks, including limitations affecting the access providers'

     capacity to disseminate timely information or to handle users' orders

     during peak periods.  

          The Commission could also consider specific antimanipulation rules for

     registered SIP and broker-dealer access providers in order to clarify the

     obligations imposed upon these entities under the antifraud provisions of

     the federal securities laws.  The Commission has promulgated rules

     applicable specifically to registered broker-dealers that prohibit them

     from engaging in manipulative, deceptive, or other fraudulent

     activities.<(249)>  It would initially appear that SIP and broker-

     dealer access providers should be similarly prohibited from engaging in

     fraudulent, deceptive, or manipulative activities.  For this reason, the

     Commission could consider the need for rules supplementing the general

     prohibition against fraud in Section 10(b) of the Exchange Act, and Rule

     10b-5 thereunder.<(250)>  For example, it could specifically

     prohibit access providers from distributing or publishing information that

     they have reasonable grounds to believe is fraudulent, deceptive, or

     manipulative, or from colluding to promote certain stocks without the

     knowledge of U.S. investors.  

          Question 129:  If the Commission decides to regulate access providers
                              

               <(249)>   See 17 CFR 240.15c1-2 through 240.15c1-9.

               <(250)>   15 U.S.C. 78j(b); 17 CFR 240.10b-5.

                             ======END OF PAGE 200======





          to foreign markets, should they be required to make and keep records? 

          What records should registered SIP and broker-dealer access providers

          be required to maintain?

          Question 130:  Should access providers be required to file periodic

          reports?  If so, what information should those contain?

          Question 131:  Should broker-dealer access providers be required to

          keep records of denials of access to their services?  Should they be

          required to notify the Commission of such denials of access?

          Question 132:  What types of risks should be disclosed to users of SIP

          and broker-dealer access providers?  For example, should SIP and

          broker-dealer access providers be required to disclose the listing and

          maintenance standards of foreign markets to which they transmit orders

          on behalf of U.S. persons?  What would be the costs associated with

          such a requirement?

          Question 133:  Should access providers be required to make disclosures

          to sophisticated institutions?

          Question 134:  What market information should SIP and broker-dealer

          access providers be required to provide to the users of their

          services?

               C.   Addressing the Differences Between U.S. and Foreign Markets'

                    Listed Company Disclosure Standards

          As the Commission develops an approach to the appropriate regulation

     of the U.S. activities of foreign markets, it must also address the issues

     that arise because most securities traded on foreign markets are not

     registered under the Securities Act or the Exchange Act, and the issuers of

     those securities do not file reports with the Commission.  Section 5 of the


                             ======END OF PAGE 201======





     Securities Act makes it unlawful for any person, through the use of

     interstate commerce or the mails, to offer or sell a security in a public

     distribution prior to the effective date of the registration

     statement.<(251)>  Unless an exemption applies, securities offered

     or sold in the United States by issuers (whether domestic or foreign) must

     be registered with the Commission pursuant to Section 5 of the Securities

     Act.<(252)>  In some cases, foreign securities issued abroad, but

     later sold in the United States, may be eligible for the exemption under

     Section 4(1) of the Securities Act for "transactions by any person, other

     than an issuer, underwriter or dealer."<(253)>  However, to the

     extent that a foreign issuer effects a distribution over the facilities of

     a foreign market, SIP access providers to that market could be required to

     ensure that U.S. investors may not purchase that security during the

     distribution, absent registration or an available exemption under the

     Securities Act.  Similarly, the Commission requests comment on whether

     broker-dealer access providers should be required to ensure that U.S.

     investors do not purchase the securities of a foreign issuer effecting a

     distribution on a foreign market, unless there is an effective registration
                              

               <(251)>   Securities Act 5, 15 U.S.C. 77e.

               <(252)>   For example, Section  3(a) of  the Securities  Act
                         enumerates 12 categories of exempted securities to
                         which  the registration requirements  of Section 5
                         do not  apply, including securities issued  by the
                         U.S.   Government,    religious   and   benevolent
                         organizations, savings and loan  associations, and
                         cooperative  banks.  15 U.S.C. 77c(a).  Securities
                         of foreign private  and sovereign issuers are  not
                         exempted securities.   In  addition, Section 4  of
                         the Securities Act sets forth a number of exempted
                         transactions.  15 U.S.C. 77d. 

               <(253)>   Securities Act 4(1), 15 U.S.C. 77d(1).

                             ======END OF PAGE 202======





     statement or an applicable exemption.  

           As noted, U.S. investors historically have been able to purchase

     unregistered securities traded on foreign markets by placing orders through

     one or more domestic and foreign broker intermediaries, which in turn have

     direct or indirect access to the foreign exchange or market.  U.S. and

     foreign broker-dealers are today providing certain U.S. investors with

     automated links to foreign markets.  As technology facilitates the ability

     of U.S. investors to conduct transactions directly on foreign securities

     exchanges and markets, the distinctions between the domestic and foreign

     trading markets may quickly disappear.  

          In the Exchange Act, Congress has set the threshold for requiring

     registration and reporting either upon a company's listing on a U.S.

     exchange<(254)> or, in the case of a class of equity securities,

     upon having at least 500 record holders (in the case of foreign issuers,

     300 of which are in the United States) and assets over a specified dollar

     amount.<(255)>  These disclosure requirements provide transparency

     with respect to the business, management, operating results and financial

     condition of the issuers of the traded securities.  This is different from

     the market transparency provided by the Commission's regulatory and

     disclosure requirements applicable to markets and their members.

          The Commission has accommodated the legitimate interest of foreign

     issuers whose shares come to be held in the United States by providing an


                              

               <(254)>   Section 12(a) of the Exchange Act.

               <(255)>   Section  12(g)  of  the Exchange  Act,  15  U.S.C.
                         78l(g),  and Rules  12g-1  and 12g3-2(a),  17  CFR
                         240.12g-1 and 240.12g3-2(a).

                             ======END OF PAGE 203======





     exemption from registration under Exchange Act Rule 12g3-2(b)<(256)>

     if those shares are not listed on a U.S. exchange or quoted on Nasdaq and

     if the issuer has not registered an offering of securities under the

     Securities Act.  These issuers need not register so long as they provide

     the Commission with the information that they make available to their

     securityholders in their home countries.  The exemption is grounded in the

     jurisdictional and comity concerns that the Commission could not require a

     foreign company to register and file reports if the company has not

     affirmatively taken steps to enter our markets, regardless of the level of

     interest by U.S. investors in the company's securities.

          These concerns directly relate to issues raised by the extensive

     trading in this country of unregistered foreign securities in the U.S.

     over-the-counter markets, bulletin boards, and alternative trading systems. 

     Despite the extensive U.S. ownership and trading in these foreign

     securities, registration under the Exchange Act is not required by virtue

     of the Rule 12g3-2(b) exemption.   

          As noted in Section IV.B., if the Commission decides to regulate

     certain domestic alternative trading systems as exchanges, foreign

     securities traded on those exchanges would have to be registered.  By

     excluding foreign markets from the definition of exchange, however, absent

     Commission action, Rule 12g3-2(b) would continue to provide an exemption

     for the foreign issuers of the securities traded on those markets from

     registration under the Exchange Act.  By facilitating U.S. investor access

     to foreign markets, the SIP or broker-dealer approach described above could

     promote a real time market in the United States for the securities of
                              

               <(256)>   17 CFR 240.12g3-2(b).

                             ======END OF PAGE 204======





     potentially thousands of foreign companies without those companies meeting

     U.S. disclosure and accounting standards.  The question thus becomes

     whether the access provided by SIPs to trading in foreign markets should be

     limited to securities that are registered with the Commission pursuant to

     Section 12 of the Exchange Act.  In addition, there is a question as to

     whether the Commission should also limit broker-dealer access providers to

     providing U.S. investors with access to securities trading in foreign

     markets that are registered under Section 12, or whether a distinction

     should be made between SIP access providers and broker-dealer access

     providers.  The Commission is soliciting comment on whether the approach

     described above adequately protects the interests of U.S. investors.

          Question 135:  Should direct trading in foreign listed companies be

          limited to those that satisfy U.S. disclosure standards in order to

          better protect U.S. investors?

          Question 136:  Is it sufficient to merely disclose to investors that

          the information available about a foreign security may significantly

          differ from the information that would be available about U.S.

          securities?  Do public policy concerns dictate that the Commission

          make distinctions based on whether investors receive adequate

          information?

          Question 137:  Are there circumstances under which unregistered

          foreign securities should be permitted to trade on foreign markets

          through an access provider?  For example, should the Commission

          establish some de minimis threshold for a foreign security based on

          the dollar value of the U.S. float or trading volume in that security,

          or on the relative percentage of U.S. float or trading volume compared


                             ======END OF PAGE 205======





          to that of the home or worldwide markets?

          Question 138:  Should the exemption from registration under Exchange

          Act Rule 12g3-2(b) be available if a significant portion of an

          issuer's float is traded in the United States?

          Question 139:  Given that broker-dealers currently trade unregistered

          securities for customers, should the Commission reconsider its

          approach to securities registration requirements in this context?  Are

          there other viable alternatives that would ensure adequate disclosure

          to U.S. investors trading on foreign markets?

          Question 140:  Is trading in unregistered foreign securities through

          an access provider to a foreign market appropriate if access is

          limited to sophisticated investors?  For example, should access

          providers be permitted to transmit orders for unregistered foreign

          securities to a foreign market on behalf of qualified institutional

          buyers as defined in Rule 144A of the Securities Act? 

          Question 141:  Are there uniform procedures that the Commission should

          impose on foreign markets or on access providers to assure that

          securities are not sold to U.S. investors in circumstances that result

          in a public distribution of securities in the United States that are

          not registered under the Securities Act?

          Question 142:  What are the consequences to SEC reporting companies if

          unregistered foreign securities listed on foreign markets are

          available to be purchased or sold through access providers?

          D.   Costs and Benefits of Revising Regulation of Foreign Market

               Activities in the United States

          Direct U.S. investor access to foreign markets could provide


                             ======END OF PAGE 206======





     significant benefits to U.S. investors.  Such access may provide these

     investors with entirely new investment opportunities, and may significantly

     reduce their transaction costs.  The Commission generally solicits comment

     on the expected costs and benefits of the three alternative approaches to

     regulating the activities of foreign markets in the United States, as

     discussed above.

          E.   Conclusion

          The increasing globalization of the securities markets has created new

     opportunities for U.S. investors.  The establishment of new securities

     markets coupled with the enhancement of corporate disclosure and trade

     transparency in many stock exchanges throughout the world has dramatically

     increased their range of viable investment opportunities.  At the same

     time, advancements in technology have made foreign investment opportunities

     more accessible and affordable to U.S. investors.  Although these are

     positive developments, they also raise concerns that the activities of

     foreign markets in the United States could adversely affect not only U.S.

     investors, but also the U.S. securities markets.  

          The Commission believes it is critical to address the regulatory

     issues raised by U.S. investors' use of technology to trade directly on

     foreign markets.  The Commission hopes to develop a consistent, long-term

     approach to address these issues, while ensuring that key protections for

     U.S. investors, as well as U.S. markets, are in place.  Discussed above are

     three alternatives.  The Commission is seeking comment on each of these

     alternatives, along with commenters' ideas about other viable alternatives. 



          Question 143:  Would any of the approaches described above provide an


                             ======END OF PAGE 207======





          effective means of addressing the issues raised by foreign market

          activities in the United States, including providing key protections

          for U.S. investors?  What would be the benefits of each approach? 

          What would be the drawbacks of each approach? 

     VIII.     Summary of Requests for Comment

          Following receipt and review of comments, the Commission will

     determine whether rulemaking or other action is appropriate.  Commenters

     are invited to discuss the broad range of concepts and approaches described

     in this release concerning the Commission's registration and oversight of

     national securities exchanges, alternative trading systems, and foreign

     market activities in the United States.  In addition to responding to the

     specific questions presented in this release, the Commission encourages

     commenters to provide any information to supplement the information and

     assumptions contained herein regarding the functioning of secondary

     markets, the roles of market participants, the advantages and disadvantages

     of the suggested reforms, the expectations of investors, and cross-border

     trading.  The Commission also invites commenters to provide views and data

     as to the cost and benefits associated with possible changes discussed

     above in comparison to the costs and benefits of the existing statutory

     framework.  In order for the Commission to assess the impact of changes to

     the Exchange Act's regulatory scheme, comment is solicited, without

     limitation, from investors, broker-dealers, exchanges, and other persons

     involved in the securities markets.  In sum, the Commission requests

     comment on the following questions:

     Question 1:  The Commission seeks comment on the concerns identified above

     and invites commenters to identify other issues raised by the current


                             ======END OF PAGE 208======





     approach to regulating alternative trading systems.

     Question 2:  Are the concerns raised in this release with regard to the

     operation of alternative trading systems under the current regulatory

     approach unique to such systems?  To what extent could these concerns be

     raised by broker-dealers that do not operate alternative trading systems,

     such as a broker-dealer that matches customer orders internally and routes

     them to an exchange for execution or a broker-dealer that arranges for

     other broker-dealers to route their customer orders to it for automated

     execution?

     Question 3:  What regulatory approaches would best address the concerns

     raised by the growth of alternative trading systems and the needs of the

     market?  Is the current approach the most appropriate one?

     Question 4:  What should be the objectives of market regulation?  Are the

     goals and regulatory structure incorporated by Congress in the Exchange Act

     appropriate in light of technological changes?  Are business incentives

     adequate to accomplish these goals?

     Question 5:  Are the regulatory categories defined in the Exchange Act

     sufficiently flexible to accommodate changes in market structure?  If not,

     what other categories would be appropriate?  How should such categories be

     defined?

     Question 6:  Can the Commission regulate markets effectively through

     standard-oriented regulation of the type described above?

     Question 7:  How could the Commission enforce compliance with the Exchange

     Act under such a standard-oriented approach?

     Question 8:  Is the current regulatory framework an effective form of

     oversight, in light of technological changes?  Are there other regulatory


                             ======END OF PAGE 209======





     techniques that would be comparably effective?  If so, would the

     implementation of such techniques be consistent with congressional goals

     reflected in the Exchange Act?

     Question 9:  Are there viable alternatives within the existing Exchange Act

     structure, other than those discussed below, that would address the

     concerns raised by the growth of alternative trading systems and

     congressional goals in adopting the Exchange Act?

     Question 10:  What types of alternative trading systems would it be

     appropriate to regulate in this manner?

     Question 11:  If the Commission decided to further integrate alternative

     trading systems into the NMS through broker-dealer regulation, should it

     require alternative trading systems to submit all orders displayed in their

     systems into the public quotation system?  If not, how should the

     Commission ensure adequate transparency? 

     Question 12:  If the Commission requires alternative trading systems to

     submit all orders displayed in their systems into the public quotation

     system, how can duplicate reporting by alternative trading systems and

     their participant broker-dealers be prevented?

     Question 13:  Are there other methods for integrating all orders submitted

     into alternative trading systems into the public quotation system?

     Question 14:  Are there any reasons that orders available in alternative

     trading systems should not be available to the public?

     Question 15:  If the Commission requires alternative trading systems to

     allow non-participants to execute against orders of system participants,

     how should it ensure that non-participants are granted equivalent access?  

     Question 16:  If the Commission requires alternative trading systems to


                             ======END OF PAGE 210======





     allow non-participants to execute against orders of system participants,

     how should it determine whether the fees charged to non-participants by

     such systems are reasonable and do not have the effect of denying access to

     orders? 

     Question 17:  Are there any reasons that non-participants should not be

     able to execute against orders of participants in alternative trading

     systems?

     Question 18:  Should the Commission require alternative trading systems to

     provide additional information (such as identifying counterparties) to

     their SRO in order to enhance the SRO's audit trail and surveillance

     capabilities?

     Question 19:  What other methods could the Commission use to enhance market

     surveillance of activities on alternative trading systems?

     Question 20:  Should SROs be required to surveil trading by their members

     in securities that are not listed or quoted on the market operated by that

     SRO?

     Question 21:  Should alternative trading systems be required to follow

     guidelines regarding the capacity and integrity of their systems?  If not,

     how should the Commission address systemic risk concerns associated with

     potentially inadequate capacity of alternative trading systems,

     particularly those systems with significant volume?

     Question 22:  With what types of standards regarding computer security,

     capacity, and auditing of systems, should alternative trading systems be

     required to comply?

     Question 23:  To what extent would complying with systems guidelines

     similar to those implemented by exchanges and other SROs require


                             ======END OF PAGE 211======





     modification to the current procedures of alternative trading systems? 

     What costs would be associated with such modifications?  How much time

     would be required to implement the necessary modifications and systems

     enhancements?  Please provide a basis for these estimates.

     Question 24:  Is access to alternative trading systems an important goal

     that the Commission should consider in regulating such systems?  If so, are

     there circumstances in which alternative trading systems should be able to

     limit access to their systems (for example, should the Commission be

     concerned about access to an alternative trading system that has arranged

     for its quotes to be displayed as part of the public quotation system)?

     Question 25:  If alternative trading systems were to continue to be

     regulated as broker-dealers and were subject to a fair access requirement,

     should the Commission consider denial of access claims brought by

     participants and non-participants in alternative trading systems?  If not,

     are there other methods that could adequately address such claims?  

     Question 26:  Are commenters aware of any unfair denials of access by

     broker-dealers operating alternative trading systems, where there were no

     alternative trading venues available to the entities denied access?

     Question 27:  Would enhanced surveillance of alternative trading systems by

     their SROs raise competitive concerns that could not be addressed through

     separation of the market and regulatory functions of the SROs?

     Question 28:  If alternative trading systems continue to be regulated as

     broker-dealers, are there other ways to integrate the surveillance of

     trading on alternative trading systems? 

     Question 29:  What is the feasibility of establishing an SRO solely for the

     purpose of surveilling the trading activities of broker-dealer operated


                             ======END OF PAGE 212======





     alternative trading systems, that does not also operate a competing market?

     Question 30:  If alternative trading systems continue to be regulated as

     broker-dealers, how can the Commission address anticompetitive practices by

     such systems?

     Question 31:  Would this approach be an effective means of addressing the

     issues raised by the growth of alternative trading systems?  What would be

     the benefits of such an approach?  What would be the drawbacks of such an

     approach?

     Question 32:  If the Commission reinterpreted the term "exchange," are the

     factors described above (i.e., (1) consolidating orders of multiple parties

     and (2) providing a facility through which, or setting conditions under

     which, participants entering such orders may agree to the terms of a trade)

     sufficient to include the alternative trading systems described above?

     Question 33:  Is broadening the Commission's interpretation of "exchange"

     to cover diverse markets, and then exempting all but the most significant

     of these new exchanges from registration, the most appropriate way to

     address the regulatory gaps discussed above and provide the Commission with

     sufficient flexibility to oversee changing market structures?

     Question 34:  Are there any other categories of alternative trading systems

     that have sufficiently minimal effects on the public secondary market that

     they should be treated as exempted exchanges?

     Question 35:  Should low impact markets be regulated as exempted exchanges,

     rather than as broker-dealers?  

     Question 36:  What measure or measures should be used in determining

     whether a market has a low impact?  What is the level above which an

     alternative trading system should not be considered to have a low impact on


                             ======END OF PAGE 213======





     the market?  At what level should an already registered exchange be able to

     deregister?

     Question 37:  Should an alternative trading system be considered to have a

     low impact on the market and be treated as an exempted exchange if it

     trades a significant portion of the volume of one security, even if the

     trading system's overall volume is low in comparison to the market as a

     whole? 

     Question 38:  In determining whether an alternative trading system has a

     low impact, what factors other than volume should the Commission consider? 

     Should this determination be affected if the operator of an alternative

     trading system was the issuer of securities traded on that system?   

     Question 39:  Should passive markets be regulated as exempted exchanges,

     rather than as broker-dealers?

     Question 40:  Are the requirements described above appropriate to ensure

     the integrity of secondary market oversight?  

     Question 41:  Should any other requirements be imposed upon exempted

     exchanges, such as requirements that an exempted exchange provide fair

     access or establish procedures to ensure adequate system capacity,

     integrity, and confidentiality?  

     Question 42:  Should requirements vary with the type of alternative trading

     system (e.g., should passive systems be subject to different conditions

     than systems exempted on the basis of low impact)?

     Question 43:  Should the Commission require that securities traded on

     exempted exchanges be registered under Section 12 of the Exchange Act? 

     Should different disclosure standards be applicable to such securities if

     they are only traded on such exchanges?


                             ======END OF PAGE 214======





     Question 44:  Should the Commission allow institutions to be participants

     on registered exchanges to the same extent as registered broker-dealers? 

     If so, should the Commission adopt rules allowing registered exchanges to

     have institutional participants, or should the Commission issue exemptive

     orders on a case-by-case basis, upon application for relief by registered

     exchanges?  

     Question 45:  Should the Commission allow exchanges to provide services

     exclusively to institutions?

     Question 46:  If the Commission allows institutions to participate in

     exchange trading, should the Commission view all entities that have

     electronic access to exchange facilities as "members" under the Exchange

     Act and then exempt exchanges from Section 6(c)(1)?

     Question 47:  Is it foreseeable that exchanges will wish to permit retail

     investors to be participants in their markets?  If so, should the

     Commission allow retail participation on registered exchanges to the same

     extent as registered broker-dealers?  

     Question 48:  Should the Commission allow registered exchanges to provide

     services exclusively to retail investors?

     Question 49:  Could exchanges have various classes of participants, as long

     as admission criteria and means of access are applied and allocated fairly? 

     Would it be in the public interest if new or existing exchanges sought to

     operate primarily or exclusively on a retail basis?  What would be the

     advantages and disadvantages if new or existing exchanges were to admit as

     participants only highly capitalized institutions or only highly

     capitalized institutions and broker-dealers?

     Question 50:  Should non-membership exchanges (including alternative


                             ======END OF PAGE 215======





     trading systems that may register as exchanges) be exempt from fair

     representation requirements?

     Question 51:  Should all exchanges be required to comply with Section

     6(b)(3) by having a board of directors that includes participant

     representation?  

     Question 52:  If not, are there alternative structures that would provide

     independent, fair representation for all of an exchange's constituencies

     (including the public)?

     Question 53:  Would the revised interpretation of "exchange" being

     considered by the Commission adequately and clearly include alternative

     trading systems that operate open limit order execution systems (even those

     that also provide brokerage functions)?

     Question 54:  In light of the decreasing differentiation between market

     maker quotes and customer orders in trading, should the Commission consider

     an "order" to include any firm trading interest, including both limit

     orders and market maker quotes?

     Question 55:  What should the Commission consider to be "material

     conditions" under which participants entering orders may agree to the terms

     of a trade?  For example, should an alternative trading system be

     considered to be setting "material conditions" when it standardizes the

     material terms of instruments traded on the market, such as standardizing

     option terms or requiring participants that display quotes to execute

     orders for a minimum size or to give priority to certain types of orders? 

     Question 56:  Is it appropriate for the Commission to consider the

     activities described above as broker-dealer activities?

     Question 57:  How should a revised interpretation of exchange adequately


                             ======END OF PAGE 216======





     and clearly distinguish broker-dealer activities, such as block trading and

     internal execution systems, from market activities?

     Question 58:  Are the distinctions discussed above accurate reflections of

     exchange and broker-dealer activities?  Are there other factors that may

     better distinguish a broker-dealer from an exchange? 

     Question 59:  How should a revised interpretation of the term "exchange"

     adequately and clearly distinguish broker-dealer activities, such as block

     trading and internal execution systems, from market activities? 

     Question 60:  What factors should the Commission consider in determining

     whether an organization of dealers is sufficiently "organized" to require

     exchange registration?

     Question 61:  Does the revised interpretation of "exchange" described above

     clearly exclude information vendors, bulletin boards, and other entities

     whose activities are limited to the provision of trading information?  How

     should the Commission distinguish between information vendors, bulletin

     boards, and exchanges?

     Question 62:  If the Commission expands its interpretation of "exchange,"

     should the Commission exempt interdealer brokers that deal only in exempted

     securities from the application of exchange registration and other

     requirements?

     Question 63:  How could the Commission define interdealer brokers in a way

     that would implement congressional intent not to regulate traditional

     interdealer brokers as exchanges, without unintentionally exempting other

     alternative trading systems operated by brokers?

     Question 64:  How could the Commission foster the continued trading of all

     securities currently traded on alternative trading systems if these systems


                             ======END OF PAGE 217======





     are classified as exchanges under the interpretation described above and

     some of these systems are required to register as national securities

     exchanges?  For example, what would be the effect on alternative trading

     systems that wish to trade securities exempted from registration under Rule

     144A if those systems are required to register as national securities

     exchanges? 

     Question 65:  How would the requirement to have rules in place for trading

     unlisted securities affect the viability of alternative trading systems

     that are required to register as national securities exchanges?

     Question 66:  Would the specifications in the OTC-UTP plan relating to the

     trading of Nasdaq/NM securities pose particular problems for systems that

     are required to register as national securities exchanges?

     Question 67:  Should the Commission extend UTP to securities other than NM

     securities, such as Nasdaq SmallCap securities?  What effect would an

     inability to trade Nasdaq SmallCap and other non-Nasdaq/NM securities have

     upon alternative trading systems that are required to register as national

     securities exchanges?

     Question 68:  What effect would the prohibition on UTP trading of newly

     listed stock until the day following an initial public offering have upon

     systems that are required to register as national securities exchanges?

     Question 69:  How should existing exchange rules designed to limit members

     from effecting OTC transactions in exchange-listed stock be applied, if the

     Commission's interpretation of exchange were expanded to include

     alternative trading systems and organized dealer markets?  What customer

     protection and competitive reasons might there be to preserve these rules

     if alternative trading systems are classified as exchanges? 


                             ======END OF PAGE 218======





     Question 70:  What effects would linking alternative trading systems to NMS

     mechanisms have on those systems?  For example, how would such linkages

     affect the ability of alternative trading systems to operate with trading

     and fee structures that differ from those of existing exchanges or to alter

     their structures?  To what extent could revision of the NMS plans alleviate

     these effects?

     Question 71:  Are there any insurmountable technical barriers to admission

     of alternative trading systems into the CTA, CQS, OPRA, or OTC-UTP plans?

     Question 72:  What costs are associated with the admission of new

     applicants to these plans?

     Question 73:  Are there any CTA, CQS, OPRA, or OTC-UTP plan rules that

     would prevent newly registered national securities exchanges from obtaining

     fair and equal representation on these entities?

     Question 74:  What effect would the admission of newly registered national

     securities exchanges to the CTA, CQS, OPRA, and OTC-UTP plans have upon the

     governance and administration of those plans?

     Question 75:  Do admissions fees for new participants required by the terms

     of the plans present a barrier to admission to the plans?  Do the plans'

     provisions that all participants are eligible to share in the revenues

     generated through the sale of data affect commenters' views on this issue?

     Question 76:  What effect would the admission of new, highly automated

     participants have upon the operation of the ITS?

     Question 77:  How would compliance with the current ITS rules and policies

     affect trading on alternative systems that may be regulated as exchanges? 

     How appropriate are these rules and policies for alternative trading

     systems? 


                             ======END OF PAGE 219======





     Question 78:  What costs would be associated with newly registered

     exchanges joining ITS? Would those costs represent a barrier for newly

     registered exchanges to join ITS?

     Question 79:  Are there any ITS plan rules or practices that would prevent

     newly registered national securities exchanges from obtaining fair and

     equal representation on the ITS?

     Question 80:  What effect would the admission of newly registered national

     securities exchanges to the ITS plan have upon the governance and

     administration of the plan?

     Question 81:  What effect would the requirements to impose trading halts or

     circuit breakers in some circumstances have upon alternative trading

     systems if such systems were regulated as exchanges?

     Question 82:  What impact would registration of an alternative trading

     system as an exchange have on the institutional participants of that

     trading system, including registered investment companies?

     Question 83:  If the Commission allows institutions to effect transactions

     on exchanges without the services of a broker, to what extent should an

     exchange's obligations to surveil its market and enforce its rules and the

     federal securities laws apply to such institutions?  

     Question 84:  How could an exchange adequately supervise institutions that

     effect transactions on an exchange without the services of a broker?

     Question 85:  What, if any, accommodations should be made with respect to

     an exchange's surveillance, enforcement, and other SRO obligations with

     respect to institutions that transact business on that exchange?

     Question 86:  How could institutions that directly access exchanges be

     integrated into existing systems for clearance and settlement?


                             ======END OF PAGE 220======





     Question 87:  Under what conditions should an entity be subject to both

     exchange and broker-dealer regulation?

     Question 88:  Should a dually registered entity be required to formally

     separate its exchange operations from its broker-dealer operations (e.g.,

     through use of separate subsidiaries)?

     Question 89:  Would this approach be an effective means of addressing the

     issues raised by the growth alternative trading systems?  What would be the

     benefits of such an approach?  What would be the drawbacks of such an

     approach?

     Question 90:  Would it be feasible for the Commission to expand the scope

     of rules eligible for expedited treatment pursuant to Section 19(b)(3)(A)

     without jeopardizing the investor protection and market integrity benefits

     of Commission oversight of exchange and other SRO rule changes?  If so, to

     what types of rule filings should immediate effectiveness, pursuant to

     Section 19(b)(3)(A), be extended?

     Question 91:  If the Commission expands the scope of rule filings eligible

     for treatment under Section 19(b)(3)(A) to include, for example, certain

     types of new products, what conditions or representations should be

     required of an SRO to ensure that the proposed rule change is eligible for

     expedited treatment under Rule 19b-4?

     Question 92:  Should the Commission exempt markets' proposals to implement

     new trading systems, separate from their primary trading operations, from

     rule filing requirements?  If so, should SROs be permitted to operate pilot

     programs under such an exemption if they trade the same securities, operate

     during the same hours, or utilize similar trading procedures as the SRO's

     main trading system?  Should there be a limit on the number of pilot


                             ======END OF PAGE 221======





     programs an SRO can operate under an exemption at any one time?  What other

     conditions should apply to such exemption?  

     Question 93:  Do differences between automated and non-automated trading

     require materially different types or degrees of surveillance or

     enforcement procedures?

     Question 94:  Which Exchange Act requirements applicable to registered

     exchanges, if any, could be minimized or eliminated without jeopardizing

     investor protection and market integrity?

     Question 95:  If an automated exchange contracts with another SRO to

     perform its day-to-day enforcement and disciplinary activities, should this

     affect the exchange's requirement to ensure fair representation of its

     participants and the public in its governance?

     Question 96:  If an exchange contracts with another entity to perform its

     oversight obligations, should that exchange continue to have responsibility

     under the Exchange Act for ensuring that those obligations are adequately

     fulfilled?

     Question 97:  What costs to investors and other market participants are

     associated with the current regulation of alternative trading systems as

     broker-dealers?  Specifically, what costs are associated with the potential

     denial of access by an alternative trading system?  

     Question 98:  What costs are associated with each of the alternatives for

     revising market regulation discussed above?  For example, would either of

     the two principal alternatives discussed in Section IV above impose costs

     by limiting innovation?  Would these costs be greater than those imposed by

     the current regulatory approach?

     Question 99:  What regulatory costs can be shared by markets operating


                             ======END OF PAGE 222======





     simultaneously as self-regulatory organizations, and what regulatory costs

     must be borne by each market individually?  What are the relative

     magnitudes of these costs (as a proportion of total costs)?

     Question 100:  Are there innovations or adjustments that can be made to

     market wide plans such as CQS, CTA and ITS that will lead to lower

     regulatory costs for exchanges under any of the alternatives for regulating

     domestic markets?

     Question 101:  Total regulatory costs vary with a variety of  factors

     (e.g., volume of trade, degree of technology applied in trade).  Of these

     factors, which are most relevant in considering the alternatives discussed

     above?  For example, recognizing that some market mechanisms may rely on

     some factors more than others, to what extent are regulatory costs greater

     for particular mechanisms than others?

     Question 102:  What costs are associated with the responsibilities of an

     SRO?  Will the costs to existing SROs be reduced by registering significant

     alternative trading systems as exchanges?   

     Question 103:  What regulatory burdens currently inhibit innovation of

     trading systems?  How will the alternatives discussed above change the

     incentives for innovation?   

     Question 104:  Will the alternatives discussed above impose costs on

     systems that differ depending on the nature of the trade?  For example,

     will the proposed regulatory revisions change the costs of trades directly

     between customers relative to the costs of trades between a customer and a

     dealer?   

     Question 105:  What regulatory approaches would best address the concerns

     raised by the development of automated access to foreign markets?  Would


                             ======END OF PAGE 223======





     these approaches differ if U.S. investors accessed foreign markets in ways

     other than those described above, such as through the Internet?  Are there

     any other alternative approaches that could be more appropriate?

     Question 106:  If the Commission were to rely solely on a foreign market's

     primary regulator, how could it address the investor protection and

     enforcement concerns discussed above?

     Question 107:  Should the Commission require foreign markets with only

     limited activities in the United States to register as national securities

     exchanges or obtain an exemption from such registration?  How would this

     affect U.S. persons trading directly on foreign markets?

     Question 108:  How can the Commission best achieve its goal of regulating

     the U.S. activities of foreign markets?  Commenters should take into

     consideration that foreign markets are regulated abroad, that there is a

     potential for international conflicts of law, and that the Commission has

     jurisdictional limits.  Given the difficulties of surveilling public

     networks such as the Internet, would an access provider approach be

     workable?

     Question 109:  What would be the best way for the Commission to regulate

     the limited U.S. activities of foreign markets that provide remote access

     to U.S. members?  

     Question 110:  When should an entity be required to register with the

     Commission as a non-exclusive SIP under Section 11A of the Exchange Act? 

     For example, should the activities described above require registration as

     a SIP?

     Question 111:  If the SIP approach were adopted, is it likely that U.S.

     members of foreign markets would wish to transmit their orders to such


                             ======END OF PAGE 224======





     markets through more than one SIP registered with the Commission?  If so,

     should all but one of those SIPs be exempt from registration?

     Question 112:  Under the SIP approach, should foreign markets that allow

     their U.S. members to transmit their orders solely through a registered SIP

     have a safe harbor from registration as national securities exchanges?

     Question 113:  What type of activities should a registered SIP be permitted

     to conduct on behalf of a foreign market without the SIP or the foreign

     market registering as an exchange?

     Question 114:  What types of automated broker-dealer systems, both

     operational and contemplated, would be encompassed within the above

     description of access providers to foreign markets?  How widespread are

     these activities?  

     Question 115:  Would the above description of broker-dealer access

     providers adequately and clearly exclude traditional brokerage activities,

     particularly handling the execution of customer orders on foreign markets? 

     If not, how should such activities be distinguished from traditional

     brokerage activities, particularly traditional cross-border activities? 

     Should U.S. broker-dealers that provide investors with access to foreign

     markets be subject to any additional requirements?

     Question 116:  Should foreign broker-dealers that provide U.S. investors

     with automated access to foreign markets be required to register as broker-

     dealers on the basis of that activity?

     Question 117:  What types of conditions, if any, should the Commission

     place on access providers if it were to pursue that approach?  

     Question 118:  If the Commission decides to regulate access providers to

     foreign markets, what criteria should the Commission use in determining


                             ======END OF PAGE 225======





     whether an exchange is a bona fide foreign market?  Should a market be

     required to have at least a majority of foreign members in order to be a

     bona fide foreign market?  Should the Commission exclude exchanges that

     provide terminals in the United States?   

     Question 119:  Should the Commission regulate as a U.S. exchange any market

     that, although organized and having its principal place of business outside

     of the United States, is under common control with or controlled by U.S.

     persons, or whose decisions regarding trading rules, practices, or

     procedures are made by U.S. persons?

     Question 120:  What factors should the Commission use in determining

     whether an exchange is operating a trading facility in the United States

     and is not a bona fide foreign market?  If exchange-owned terminals are

     located in the United States, should this constitute operating a trading

     facility in the United States?

     Question 121:  What effect would a reinterpretation of the term "exchange"

     under Section 3(a)(1) of the Exchange Act have on any Commission proposal

     to regulate SIP and broker-dealer access providers?

     Question 122:  If the Commission decides to regulate access providers to

     foreign markets, should the Commission require access providers to transmit

     orders only to foreign markets that are willing to share, and capable of

     sharing, information with the Commission in connection with investigations

     involving violations of U.S. securities laws?  If so, what standard should

     the Commission use in determining whether a foreign market would provide

     meaningful assistance to the Commission?  If commenters believe that SIP

     and/or broker-dealer access providers should be permitted to transmit

     orders to any foreign market, indicate how the Commission could ensure that


                             ======END OF PAGE 226======





     it has the ability to enforce the applicable provisions of the federal

     securities laws. 

     Question 123:  Should the Commission require access providers to transmit

     orders only to foreign markets that are located in countries that have

     entered into arrangements with the Commission to provide enforcement and

     information sharing assistance?

     Question 124:  If the Commission regulated access providers through the

     approach described above, should SIP access providers be limited to

     providing their services to sophisticated institutions or should they be

     allowed to provide any U.S. investor with the capability of directly

     trading on foreign markets as members?  If so, should broker-dealer access

     providers be subject to similar requirements?  

     Question 125:  If the Commission permits SIP access providers to offer

     their services only to broker-dealers and certain sophisticated

     institutions, how should this category of sophisticated institutions be

     defined?

     Question 126:  Should the Commission permit SIP and broker-dealer access

     providers to transmit orders to foreign markets for the securities of U.S.

     issuers or only for the securities of non-U.S. issuers?

     Question 127:  Should the Commission limit the ability of SIP and broker-

     dealer access providers to transmit orders to foreign markets for the

     securities of non-U.S. issuers if the "principal market" for those

     securities is located in the United States?   If so, how should the

     Commission determine when the "principal market" of a non-U.S. security is

     located in the United States?

     Question 128:  If the Commission permits SIP and broker-dealer access


                             ======END OF PAGE 227======





     providers to transmit orders to foreign markets only for securities of non-

     U.S. issuers, how should the Commission distinguish between U.S. and non-

     U.S. issuers?

     Question 129:  If the Commission decides to regulate access providers to

     foreign markets, should they be required to make and keep records?  What

     records should registered SIP and broker-dealer access providers be

     required to maintain?

     Question 130:  Should access providers be required to file periodic

     reports?  If so, what information should those contain?

     Question 131:  Should broker-dealer access providers be required to keep

     records of denials of access to their services?  Should they be required to

     notify the Commission of such denials of access?

     Question 132:  What types of risks should be disclosed to users of SIP and

     broker-dealer access providers?  For example, should SIP and broker-dealer

     access providers be required to disclose the listing and maintenance

     standards of foreign markets to which they transmit orders on behalf of

     U.S. persons?  What would be the costs associated with such a requirement?

     Question 133:  Should access providers be required to make disclosures to

     sophisticated institutions?

     Question 134:  What market information should SIP and broker-dealer access

     providers be required to provide to the users of their services?

     Question 135:  Should direct trading in foreign listed companies be limited

     to those that satisfy U.S. disclosure standards in order to better protect

     U.S. investors?

     Question 136:  Is it sufficient to merely disclose to investors that the

     information available about a foreign security may significantly differ


                             ======END OF PAGE 228======





     from the information that would be available about U.S. securities?  Do

     public policy concerns dictate that the Commission make distinctions based

     on whether investors receive adequate information?

     Question 137:  Are there circumstances under which unregistered foreign

     securities should be permitted to trade on foreign markets through an

     access provider?  For example, should the Commission establish some de

     minimis threshold for a foreign security based on the dollar value of the

     U.S. float or trading volume in that security, or on the relative

     percentage of U.S. float or trading volume compared to that of the home or

     worldwide markets?

     Question 138:  Should the exemption from registration under Exchange Act

     Rule 12g3-2(b) be available if a significant portion of an issuer's float

     is traded in the United States?

     Question 139:  Given that broker-dealers currently trade unregistered

     securities for customers, should the Commission reconsider its approach to

     securities registration requirements in this context?  Are there other

     viable alternatives that would ensure adequate disclosure to U.S. investors

     trading on foreign markets?

     Question 140:  Is trading in unregistered foreign securities through an

     access provider to a foreign market appropriate if access is limited to

     sophisticated investors?  For example, should access providers be permitted

     to transmit orders for unregistered foreign securities to a foreign market

     on behalf of qualified institutional buyers as defined in Rule 144A of the

     Securities Act? 

     Question 141:  Are there uniform procedures that the Commission should

     impose on foreign markets or on access providers to assure that securities


                             ======END OF PAGE 229======





     are not sold to U.S. investors in circumstances that result in a public

     distribution of securities in the United States that are not registered

     under the Securities Act?

     Question 142:  What are the consequences to SEC reporting companies if

     unregistered foreign securities listed on foreign markets are available to

     be purchased or sold through access providers?

     Question 143:  Would any of the approaches described above provide an

     effective means of addressing the issues raised by foreign market

     activities in the United States, including providing key protections for

     U.S. investors?  What would be the benefits of each approach?  What would

     be the drawbacks of each approach?





     By the Commission.





                                                  Jonathan G. Katz

                                                  Secretary



     Dated:  May 23, 1997 














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