SECURITIES AND EXCHANGE COMMISSION

             17 CFR Parts 202, 240, 242 and 249

             Release No. 34-40760; File No. S7-12-98

             RIN 3235-AH41

             Regulation of Exchanges and Alternative Trading Systems

             AGENCY:   Securities and Exchange Commission

             ACTION:   Final rules

             SUMMARY:  The Securities and Exchange Commission today is

             adopting new rules and rule amendments to allow alternative

             trading systems to choose whether to register as national

             securities exchanges, or to register as broker-dealers and

             comply with additional requirements under Regulation ATS,

             depending on their activities and trading volume.  The

             Commission is also adopting amendments to rules regarding

             registration as a national securities exchange, repealing

             Rule 17a-23, and amending the books and records rules by

             transferring the recordkeeping requirements from Rule 17a-23

             to Rules 17a-3 and 17a-4 as they apply to broker-dealer

             internal trading systems.  Finally, the Commission is

             excluding from the rule filing requirements for self-

             regulatory organizations certain pilot trading systems

             operated by national securities exchanges and national

             securities associations.  These rules will more effectively

             integrate the growing number of alternative trading systems

             into the national market system, accommodate the

             registration of proprietary alternative trading systems as

             exchanges, and provide an opportunity for registered

             exchanges to better compete with alternative trading

             systems.

             DATES:    Effective Date:  [Insert date 120 days after

             publication in the Federal Register], except 

             242.301(b)(5)(i)(D) and (E) and  242.301(b)(6)(i)(D) and

             (E), which shall become effective on April 1, 2000.

                       Compliance Date:  Prior to [insert date 120 days

             after publication in the Federal Register], the Commission

             will publish a schedule of those securities with respect to

             which alternative trading systems must comply with 

             242.301(b)(3) on [insert date 120 days after publication in

             the Federal Register] and those securities with respect to

             which alternative trading systems must comply with 

             242.301(b)(3) on [insert date 240 after publication in the

             Federal Register].  See Section VIII of this release.

             FOR FURTHER INFORMATION CONTACT:   Elizabeth King, Senior

             Special Counsel, at (202) 942-0140, Marianne Duffy, Special

             Counsel, at (202) 942-4163, Constance Kiggins, Special

             Counsel, at (202) 942-0059, Kevin Ehrlich, Attorney, at

             (202) 942-0778, Denise Landers, Attorney, at (202) 942-0137

             and John Roeser, Attorney, at (202) 942-0762, Division of

             Market Regulation, Securities and Exchange Commission, Stop

             10-1, 450 Fifth Street, N.W., Washington, D.C. 20549.  For

             questions or comments regarding securities registration

             issues raised in this release, contact David Sirignano,

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

             Corporation Finance, Securities and Exchange Commission,

             Stop 3-1, 450 Fifth Street, N.W., Washington, D.C. 20549.

             SUPPLEMENTARY INFORMATION:

             Table of Contents:

             I.                Introduction

                  Today the Securities and Exchange Commission

             ("Commission" or "SEC") is adopting a regulatory framework

             for alternative trading systems,[1] to strengthen the public

             markets for securities, while encouraging innovative new

             markets.  During the past three years, the Commission has

             undertaken a reevaluation of its regulatory framework for

             markets because of substantial changes in the way securities

             are traded.  Market participants have incorporated

             technology into their businesses to provide investors with

             an increasing array of services, and to furnish these

             services more efficiently, and often at lower prices.  The

             current regulatory framework, however, designed more than

             six decades ago, did not envision many of these trading and

             business functions.  In particular, market participants have

             developed a variety of alternative trading systems that

             furnish services traditionally provided solely by registered

             exchanges.

                  To better understand the questions raised by

             technological developments in the U.S. markets, in May 1997,

             the Commission published a concept release exploring ways to

             respond to the rapid technological developments affecting

             securities markets and, in particular, the growing

             significance of alternative trading systems ("Concept

             Release"). [2]  After taking into consideration the comments

             submitted in response to the Concept Release, in April 1998,

             the Commission proposed a new regulatory framework for

             alternative trading systems ("Proposing Release"). [3]

                  Alternative trading systems now handle more than twenty

             percent of the orders in securities listed on The Nasdaq

             Stock Market ("Nasdaq"), and almost four percent of orders

             in exchange listed securities.  These systems operate

             markets similar to the registered exchanges and Nasdaq.

             Over time, an alternative trading system may become the

             primary market for some securities.  Yet these markets are

             private, available only to chosen subscribers, and are

             regulated as broker-dealers, not in the way registered

             exchanges and Nasdaq are regulated.  This creates

             disparities that affect investor protection and the

             operation of the markets as a whole.

                  Our national market system, as it has evolved since

             1975, has sought the benefits of both market centralization

             -- deep, liquid markets -- and competition.  To achieve

             these benefits, the national market system has maintained

             equally regulated, individual markets, which are linked

             together to make their best prices publicly known and

             accessible.  Alternative trading systems have remained

             largely outside the national market system.  For example,

             the evidence in the Commissions report on the National

             Association of Securities Dealers, Inc. ("NASD") and Nasdaq

             suggested that widespread use of Instinet by market makers

             as a private market had a significant impact on public

             investors and the operation of the Nasdaq market.[4]

             Through Instinet, market makers were able to quote prices

             better than those made available to public investors.  This

             private market developed only because the activity on

             alternative trading systems is not fully disclosed, or

             accessible, to public investors.  Moreover, these trading

             systems have no obligation to provide investors a fair

             opportunity to participate in their systems or to treat

             their participants fairly.  These systems may also not be

             adequately surveilled for market manipulation and fraud.  In

             fact, market participants can manipulate the prices in the

             public securities markets through the use of alternative

             trading systems.[5]  In addition, alternative trading

             systems have no obligation to ensure that their systems are

             sufficient to handle rapid increases in trading volume as

             occurs in times of market volatility, and at times they have

             failed to do so.  Because of the increasingly important role

             of alternative trading systems, these differences are

             inconsistent with the national market system goals set forth

             by Congress in the 1975 amendments to the Securities

             Exchange Act of 1934 ("1975 Amendments")[6] and call into

             question the fairness of current regulatory requirements.

                  In 1996, Congress provided the Commission with greater

             flexibility to regulate new trading systems by giving the

             Commission broad authority to exempt any person from any of

             the provisions of the Securities Exchange Act of 1934

             ("Exchange Act") and impose appropriate conditions on their

             operation.[7]  This new exemptive authority, combined with

             the ability to facilitate a national market system, provides

             the Commission with the tools it needs to adopt a regulatory

             framework that addresses its concerns about alternative

             trading systems without jeopardizing the commercial

             viability of these markets.  In the Proposing Release, the

             Commission proposed ways to use these tools to adopt new

             rules and rule amendments designed to resolve many of the

             concerns raised by alternative trading systems, better

             integrate these systems into our national market system

             structure, and make the benefits of these systems available

             to more investors.

                  In response to its Proposing Release,[8] the Commission

             received seventy comment letters.[9]  Commenters generally

             supported the Commissions proposals and welcomed the

             regulatory flexibility these proposals offered.[10]  Many

             commenters agreed with the Commission that the regulatory

             structure needs to be modernized to better integrate

             alternative trading systems into the national market

             system.[11]  For example, several commenters expressed the

             view that, on balance, the proposed regulatory framework for

             alternative trading systems represented a preferable

             alternative to the current regulation of these systems as

             broker-dealers, which is not only inadequate for many

             alternative trading systems, but also results in disparate

             regulatory treatment of exchange markets and their

             alternative trading system competitors. [12]  Other

             commenters believed that the Commissions proposal was a

             step in the right direction, both from a competitive

             business perspective and from an investor protection and

             fair regulation perspective.   While some commenters thought

             that the Commission should continue the present framework

             for alternative trading systems,[13] most believed that the

             proposal provided a framework that could maintain a

             competitive balance among the markets offering services to

             investors.[14]  Other commenters were pleased by the

             Commissions determination to allow market participants to

             engage in business decisions regarding how to register with

             the Commission.[15]  Commenters also generally supported the

             Commissions proposal to allow for-profit exchanges,[16] and

             generally supported the proposed temporary exemption for

             pilot trading systems.[17]

                  The Commission believes that its regulation of markets

             should both accommodate traditional market structures and

             provide sufficient flexibility to ensure that new markets

             promote fairness, efficiency, and transparency.  In adopting

             a new regulatory framework for alternative trading systems

             today, the Commission has incorporated suggestions and

             responded to requests for clarification made by commenters.

             The Commission believes that this regulatory approach

             effectively addresses commenters concerns while carefully

             tailoring a regulatory framework that is flexible enough to

             accommodate the evolving technology of, and benefits

             provided by, alternative trading systems.

                  While the revised regulatory scheme implemented today

             is designed to address changes in the way securities are

             traded, the Commissions assessment of the impact that these

             systems may have on the trading of unregistered securities

             (i.e. of both domestic and foreign issuers), and of the

             appropriate regulatory posture to these developments, is

             still ongoing.  This matter and the broader issues involving

             recent trends and initiatives that give U.S. investors

             greater and more instantaneous access to foreign securities

             markets create tensions between competing Commission goals.

             The Commission, for example, wishes to foster developments

             that enable U.S. investors to execute securities trades more

             efficiently, but it also desires that foreign securities

             traded in U.S. markets have full and fair disclosure.  These

             tensions and issues will be addressed by the Commission in

             the future.

             II.  Executive Summary of Final Rules

                  The final rules seek to establish a regulatory

             framework that makes sense both for current and future

             securities markets.  This regulatory framework should

             encourage market innovation while ensuring basic investor

             protections.  The Commission continues to believe that the

             approach outlined in the Proposing Release will accomplish

             these goals.  In general, this approach gives securities

             markets a choice to register as exchanges, or to register as

             broker-dealers and comply with Regulation ATS.[18]  The

             Commission believes the framework it is adopting meets the

             varying needs and structures of market participants and is

             flexible enough to accommodate the business objectives of,

             and the benefits provided by, alternative trading systems.

             The principal components of this new framework are discussed

             below.

                  A.   New Interpretation of "Exchange"

                  A fundamental component of the new regulatory framework

             is new Rule 3b-16.  This rule interprets key language in the

             statutory definition of "exchange" under Section 3(a)(1) of

             the Exchange Act.[19]  Rule 3b-16 reflects a more

             comprehensive and meaningful interpretation of what an

             exchange is in light of todays markets.  Until now, the

             Commissions interpretation of the exchange definition

             reflected relatively rigid regulatory requirements and

             classifications for "exchange" and "broker-dealers."

             Advancing technology has increasingly blurred these

             distinctions, and alternative trading systems today are used

             by market participants as functional equivalents of

             exchanges.  Accordingly, the Commissions new interpretation

             of exchange contained in Rule 3b-16[20] encompasses these

             equivalent markets and the Commissions new general

             exemptive authority enables it to craft a new regulatory

             framework.

                  The statutory definition of "exchange" includes 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."[21]  In response to commenters concerns

             and suggestions, the Commission has carefully revised Rule

             3b-16 to define these terms to mean any organization,

             association, or group of persons that:  (1) brings together

             the orders of multiple buyers and sellers; and (2) uses

             established, non-discretionary methods (whether by providing

             a trading facility or by setting rules) under which such

             orders interact with each other, and the buyers and sellers

             entering such orders agree to the terms of a trade.[22]

                  Rule 3b-16 explicitly excludes those systems that the

             Commission believes perform only traditional broker-dealer

             activities.  The Commission modified these exclusions to

             address issues raised by commenters.  Rule 3b-16 now

             expressly excludes the following systems from the revised

             interpretation of "exchange": (1) systems that merely route

             orders to other facilities for execution; (2) systems

             operated by a single registered market maker to display its

             own bids and offers and the limit orders of its customers,

             and to execute trades against such orders; and (3) systems

             that allow persons to enter orders for execution against the

             bids and offers of a single dealer.[23]

                  B.   Exemption for Regulated Alternative Trading

                       Systems

                  The framework the Commission adopts today uses the

             Commissions new exemptive authority to allow most

             alternative trading systems to choose to be regulated either

             as exchanges or as broker-dealers.   Rule 3a1-1 exempts most

             alternative trading systems from the definition of

             "exchange," and therefore the requirement to register as an

             exchange, if they comply with Regulation ATS.  However, any

             system exercising self- regulatory powers, such as

             regulating its members or subscribers conduct when engaged

             in activities outside of that trading system, must register

             as an exchange or be operated by a national securities

             association.  This is because self-regulatory activities in

             the securities markets must be subject to Commission

             oversight under Section 19 of the Exchange Act.[24]  Thus

             any system exercising self-regulatory powers will not be

             permitted the option of registering as a broker-dealer.

                  In addition, the Commission can determine that a

             dominant alternative trading system should be registered as

             an exchange.  An alternative trading system would first have

             to exceed certain volume levels and the Commission, after

             notice and an opportunity for the alternative trading system

             to respond, would have to determine that an exemption from

             exchange regulation is not necessary or appropriate in the

             public interest or consistent with the protection of

             investors, taking into account the requirements of exchange

             registration and the objectives of the national market

             system.[25]  At this time, however, the Commission does not

             believe that it is necessary or appropriate under this

             provision that any alternative trading system register as an

             exchange.

                  C.   Regulation ATS

                  The Commission is adopting new Regulation ATS,

             substantially in the form proposed, to impose essential

             elements of market-oriented regulation on alternative

             trading systems.  This new regulation addresses the concerns

             raised by the market activities of alternative trading

             systems that choose to register as broker-dealers.  To allow

             new markets to start, without disproportionate burdens, a

             system with less than five percent of the trading volume in

             all securities it trades is required only to: (1) file with

             the Commission a notice of operation and quarterly reports;

             (2) maintain records, including an audit trail of

             transactions; and (3) refrain from using the words

             "exchange," "stock market," or similar terms in its name.

                  If, however, an alternative trading system with five

             percent or more of the trading volume in any national market

             system security chooses to register as a broker-dealer --

             instead of as an exchange -- the Commission believes it is

             in the public interest to integrate its activities into the

             national market system.  In addition to the requirements for

             smaller alternative trading systems, Regulation ATS requires

             alternative trading systems that trade five percent or more

             of the volume in national market system securities to be

             linked with a registered market in order to disseminate the

             best priced orders in those national market system

             securities displayed in their systems (including

             institutional orders) into the public quote stream.[26]

             Such alternative trading systems must also comply with the

             same market rules governing execution priorities and

             obligations that apply to members of the registered exchange

             or national securities association to which the alternative

             trading system is linked.[27]

                  In addition, alternative trading systems with twenty

             percent or more of the trading volume in any single

             security, whether equity or debt, would be required to: (1)

             grant or deny access based on objective standards

             established by the trading system and applied in a non-

             discriminatory manner; and (2) establish procedures to

             ensure adequate systems capacity, integrity, and contingency

             planning.  The Commission believes that these requirements

             will better integrate those significant alternative trading

             systems into national market system mechanisms.  Moreover,

             because alternative trading systems that choose to register

             as broker-dealers are not required to surveil activities on

             their markets, the Commission intends to work with the self-

             regulatory organizations ("SROs") to ensure that they can

             operate ongoing, real-time surveillance for market

             manipulation and fraud and develop surveillance and

             examination procedures specifically targeted to alternative

             trading systems they oversee.

                  D.   For-Profit Exchanges

                  In this release, the Commission also expresses its view

             that registered exchanges may structure themselves as for-

             profit organizations.  This will allow alternative trading

             systems, which are typically proprietary, to choose to

             register as exchanges without changing their organizational

             structure.  In addition, currently registered exchanges --

             which are all membership organizations -- could choose to

             demutualize.  This release provides guidance on ways for

             proprietary markets to meet their fair representation

             requirements as non-membership national securities

             exchanges.[28]

                  E.   Temporary Exemption from Rule Filing Requirements

                       for SROs Pilot Trading Systems

                  To help reduce competitive impediments to innovation by

             SROs, the Commission is allowing them to start new trading

             systems without preapproval by the Commission.  The

             Commission is adopting Rule 19b-5 to permit SROs, without

             filing for approval with the Commission, to operate new

             pilot trading systems for up to two years.  These pilot

             trading systems will be subject to specific conditions,

             including limitations on their trading volumes.[29]  The

             purpose of this new rule is to provide registered exchanges

             and national securities associations with a greater

             opportunity to compete with alternative trading systems

             registered as broker-dealers and with foreign markets.

             III. Rule 3b-16 under the Exchange Act

                  The Commission today is adopting new Rule 3b-16 under

             the Exchange Act.  This rule defines terms used in the

             statutory definition of "exchange," found in Section 3(a)(1)

             of the Exchange Act.[30]  The statutory definition of

             "exchange" includes 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."  The new

             rule interprets these terms to include any organization,

             association, or group of persons that:  (1) brings together

             the orders of multiple buyers and sellers; and (2) uses

             established, non-discretionary methods (whether by providing

             a trading facility or by setting rules) under which such

             orders interact with each other, and the buyers and sellers

             entering such orders agree to the terms of a trade.[31]

             This rule revises the current interpretation of the term

             "exchange," as set forth in the Delta Release.[32]

                  New Rule 3b-16 is an important element of the

             Commissions new regulatory framework for alternative

             trading systems.  As discussed above, the rapid growth and

             technological advancements of alternative trading systems

             have eroded the distinctions between the roles played by

             alternative trading systems and by traditional exchanges.

             Alternative trading systems today provide services more akin

             to exchange functions than broker-dealer functions, such as

             matching counterparties orders, executing trades, operating

             limit order books, and facilitating active price discovery.

             For many of these systems, regulation as a market more

             appropriately fits their economic functions.  Rule 3b-16

             defines terms in the statutory definition of exchange to

             include markets that engage in activities functionally

             equivalent to markets currently registered as national

             securities exchanges.  Moreover, because in some cases

             exchange regulation may better meet these systems business

             objectives, the Commission believes that alternative trading

             systems should have the option to register as national

             securities exchanges.[33]  The rule helps modernize the

             Commissions approach to these systems because it adapts the

             concept of what is "generally understood" to be an exchange

             to reflect changes in the markets brought about by automated

             trading.  In addition, in light of recent technological

             developments, Rule 3b-16 more closely reflects the statutory

             concept of "bringing together" buying and selling interests.

                  The Proposing Release sought comment on whether the

             proposed definition captures the fundamental features of an

             exchange as that term is generally understood today.  The

             Commission received several comments supportive of its

             proposed revision to the interpretation of "exchange."  For

             example, the NASD commented that this new definition "is not

             inappropriate, particularly with the express exclusion for

             internal broker-dealer systems."[34]  Other commenters also

             supported broadening the Commissions interpretation of what

             constitutes an exchange and agreed that the proposed rule

             accurately identified the fundamental features of a

             securities "exchange."[35]  On the other hand, some

             commenters questioned the basis and need for the Commission

             to move away from its interpretation in Delta.  The

             Commission responds to these comments below in Section VII.

                  Finally, one commenter expressed concern that the

             proposed revision to the Commissions interpretation of

             "exchange" would encompass every market participant

             providing electronic or other technologically advanced

             trading service.[36]  The Commission does not intend for the

             distinction between exchanges and broker-dealers to turn on

             automation, and does not believe that its revised

             interpretation of "exchange" has this effect.  In

             particular, the Commission notes that paragraph (a) of new

             Rule 3b-16 does not contain the word automation, but is

             instead descriptive of those activities the Commission

             considers to be the activities of a "market" where buyers

             and sellers meet and includes purely floor-based exchanges,

             as well as fully automated ones.  Moreover, paragraph (b)

             clearly excludes certain systems that -- even though

             automated -- are not exchanges, such as automated single

             dealer systems.

                  The language of Rule 3b-16 the Commission is adopting

             today modifies the language the Commission proposed in

             response to commenters suggestions and concerns, and their

             requests for clarification.  The discussion below is

             intended to further explain how the Commission envisions

             that its new interpretation of "exchange" will be applied

             and responds to specific requests for clarification by

             commenters.

                  A.   Brings Together the Orders of Multiple Buyers and

                       Sellers

                  In order to be covered by the definition in Rule 3b-16,

             a system must satisfy the first part of Rule 3b-16(a) --

             brings together the orders of multiple buyers and sellers.

             This emphasizes the concept of "bringing together purchasers

             and sellers of securities" set forth in the definition of

             "exchange" in Section 3(a)(1) of the Exchange Act.  While

             the intent is the same, the language in Rule 3b-16(a)(1) has

             been modified from the proposal to address the concerns of

             some of the commenters who requested that the definition be

             clarified.

                       1.   To Bring Together

                  The Commission is adopting the language "brings

             together" in Rule 3b-16, rather than "consolidates" as

             originally proposed.  While the Commission believes that

             "consolidates" and "brings together" have the same meaning,

             the latter more closely mirrors the language in the statute

             and is a plainer use of language.

                  A system brings together orders if it displays, or

             otherwise represents, trading interests entered on the

             system to system users.  These systems include consolidated

             quote screens, such as the system operated by Nasdaq.  A

             system also brings together orders if it receives

             subscribers orders centrally for future processing and

             execution.  For example, a limit order matching book that

             allows subscribers to display buy and sell orders in

             particular securities and to obtain execution against

             matching orders contemporaneously entered or stored in the

             system "brings together orders."  These activities are

             currently performed by systems that bring together orders

             internally for crossing[37] or matching,[38] as well as

             floor-based markets that impose trading rules.  In addition,

             interdealer brokers ("IDBs")[39] bring together orders,

             regardless of their level of automation.[40]  Accordingly, a

             system "brings together orders" when orders entered in the

             system for a given security have the opportunity to interact

             with other orders entered into the system for the same

             security.

                       2.   Multiple Buyers and Sellers

                  In addition, to satisfy paragraph (a)(1) of Rule 3b-16,

             a system must bring together orders of multiple buyers and

             multiple sellers.  The Commission proposed to use the term

             "multiple parties" in paragraph (a)(1) of Rule 3b-16, rather

             than the term "multiple buyers and sellers."  The Commission

             believes that this modification to the language proposed in

             Rule 3b-16 addresses the concerns of those commenters who

             requested that the Commission clarify that systems in which

             there is only a single seller, such as systems that permit

             issuers to sell their own securities to investors, would not

             be included within Rule 3b-16.  While such systems have

             multiple buyers (i.e., investors), they have only one seller

             for each security (i.e., issuers) and, therefore, do not

             meet the multiple buyers and sellers test.  An example of

             this type of system is CP Direct in which an issuer can

             offer to sell its commercial paper to the customers of CS

             First Boston. [41]  Another example of systems that do not

             meet the multiple buyers and sellers criteria are systems in

             which securities are offered by a single seller at

             successively lower prices.  In addition, systems designed

             for the purpose of executing orders against a single

             counterparty, such as the dealer operating a system, would

             not be considered to have multiple buyers and sellers.  Thus

             a single counterparty that buys and sells securities through

             a system, where other parties entering orders only execute

             against the single designated counterparty, would not meet

             the requirements of the first part of Rule 3b-16.[42]

             However, the mere interpositioning of a designated

             counterparty as riskless principal for settlement purposes

             after the purchasing and selling counterparties to a trade

             have been matched would not, by itself, mean that the system

             does not have multiple buyers and sellers.

                       3.   Definition of "Order"

                    Finally, the rule makes clear that, to be included

             within the definition in Rule 3b-16(a), a system must bring

             together participants "orders."  The term "order" is

             defined in paragraph (c) of Rule 3b-16 to include any firm

             indication of a willingness to buy or sell a security,

             whether made on a principal or agency basis.[43]  Firm

             indications of buying or selling interest specifically

             include bid or offer quotations, market orders, limit

             orders, and any other priced order.

                  Several commenters requested that the Commission

             clarify the proposed definition of "order."  One commenter

             expressed concern that the proposed definition of "order"

             was too broad and recommended that the revised

             interpretation of "exchange" be clarified to exclude trading

             systems that broadcast non-executable indicative quotations,

             and noted that IDBs frequently communicate an indicative

             price to a customer, which is merely a starting point for a

             negotiation of the final transaction price.[44]  The

             Commission notes that the term "order" is defined as "any

             firm indication of a willingness to buy or sell a security,

             . . . including any bid or offer quotation, market order,

             limit order, or other priced order."[45]  Whether or not an

             indication of interest is "firm" will depend on what

             actually takes place between the buyer and seller.

                  The label put on an order -- "firm" or "not firm" -- is

             not dispositive.  For example, a system claiming it displays

             only "indications of interest" that are not orders, may be

             covered by the new interpretation of "exchange" if those

             indications are, in fact, firm in practice.  In general, the

             Commission intends to read the definition of "order" broadly

             and will not consider systems to fall outside the definition

             in Rule 3b-16 based solely on a systems labeling of

             indications of interest as "not firm."  Instead, what

             actually takes place between the buyers and sellers

             interacting in a particular system will determine whether

             indications of interest are "firm" or not.  At a minimum, an

             indication of interest will be considered firm if it can be

             executed without the further agreement of the person

             entering the indication.  Even if the person must give its

             subsequent assent to an execution, however, the indication

             will still be considered firm if this subsequent agreement

             is always, or almost always, granted so that the agreement

             is largely a formality.  For instance, indications of

             interest where there is a clear or prevailing presumption

             that a trade will take place at the indicated price, based

             on understandings or past dealings, will be viewed as

             orders.

                  Generally, however, a system that displays bona fide,

             non-firm indications of interest -- including, but not

             limited to, indications of interest to buy or sell a

             particular security without either prices or quantities

             associated with those indications -- will not be displaying

             "orders" and, therefore, not fall within Rule 3b-16.

                  Nevertheless, the price or size of an indication of

             interest may be either explicit or may be inferred from the

             facts and circumstances accompanying the indication.  For

             example, an indication of interest will be considered to

             include a price if the system in which the indication of

             interest is entered defaults automatically to a price pegged

             to another market, index, rate, or other variable, or if the

             person entering such indication indicates that such person

             is interested in trading at a price pegged to another

             market, index, rate, or other variable, which includes

             "market" orders.

                  The same commenter expressed concern that the proposed

             definition of order could have the effect of including

             markets within the definition of "exchange" that quote

             prices over the telephone for a potential transaction.[46]

             As discussed above, whether or not a particular system is an

             exchange does not turn solely on the level of automation

             used:  "orders" can be given over the telephone, as well as

             electronically.

                  The Commission emphasizes that merely because a system

             "brings together orders of multiple buyers and sellers,"

             does not mean that the system is an exchange.  In order to

             fall within Rule 3b-16, a system must also satisfy the

             requirements in paragraph (a)(2).  Thus, whether or not an

             "order" is part of a system that falls within the new

             interpretation of "exchange" depends upon the activities of

             that system taken as a whole.  For example, a system could

             display subscribers "orders" to other market participants,

             but would not be encompassed by Rule 3b-16 if subscribers

             contacted each other and agreed to the terms of their trades

             outside of the system.[47]  Unless a system also establishes

             rules or operates a trading facility under which subscribers

             can agree to the terms of their trades, the system will not

             be included within Rule 3b-16, even if it brings together

             "orders."

                  Finally, the NYSE commented that the Commissions

             definition of "order" appeared to cover trading interest

             that, in the Order approving the Pacific Exchange ("PCX")

             Application of the OptiMark System ("OptiMark Order"), the

             Commission did not consider to be an order.  In the OptiMark

             Order, the Commission took the position that the profiles

             entered into OptiMark are not bids or offers under Rule

             11Ac1-1 ("Firm Quote Rule").[48]  The Commissions

             definition of "order" in paragraph (c) of Rule 3b-16 is

             intended to be broader than the terms bid and offer in the

             Firm Quote Rule.[49]  Therefore, it is possible for an

             indication of interest to be an "order" under Rule 3b-16,

             without being a bid or offer under the Firm Quote Rule.

                  B.   Established, Non-Discretionary Methods

                  In addition to bringing together the orders of multiple

             parties, to be included within Rule 3b-16, a system would

             have to use established, non-discretionary methods .  .  .

             under which such orders interact with each other and the

             buyers and sellers entering orders agree to the terms of the

             trade.  A system uses established non-discretionary methods

             either by providing a trading facility or by setting rules

             governing trading among subscribers.  The Commission intends

             for "established, non-discretionary methods" to include any

             methods that dictate the terms of trading among the multiple

             buyers and sellers entering orders into the system.  Such

             methods include those that set procedures or priorities

             under which open terms of a trade may be determined.  For

             example, traditional exchanges rules of priority, parity,

             and precedence are "established non-discretionary methods,"

             as are the trading algorithms of electronic systems.

             Similarly, systems that determine the trading price at some

             designated future date on the basis of pre-established

             criteria (such as the weighted average trading price for the

             security on the specified date in a specified market or

             markets) are using established, non-discretionary methods.

             A requirement that the trade subsequently be ratified does

             not avoid this element.  For example, a system that trades

             limited partnership units might use established, non-

             discretionary methods even though approval from the general

             partner is required prior to settlement.  Rules that merely

             supply the means of communication with a system (for

             example, software or hardware tools that subscribers may use

             in accessing a system), however, do not satisfy this element

             of Rule 3b-16.

                  In general, where customers of a broker-dealer exercise

             control over their own orders in a trading system operated

             by the broker-dealer, that broker-dealer is unlikely to be

             viewed as using discretionary methods in handling the order.

             An example of systems that the Commission believes do not

             use established, non-discretionary methods are traditional

             block trading desks.  Block trading desks generally retain

             some discretion in determining how to execute a customers

             order, and frequently commit capital to satisfy their

             customers needs.  For example, a block positioner may

             "shop" the order around in an attempt to find a contra-side

             interest with another investor.  In some cases, the block

             positioner may take the other side of the order, keeping the

             block as a proprietary position.  While block trading desks

             do cross customers orders, these crosses are not done

             according to fixed non-discretionary methods, but instead

             are based on the block trading desks ability to find a

             contra-side to the order.  It may cross two customer orders,

             or it may assemble a block of several customer orders with

             completion dependent on its willingness to take a

             proprietary position for part of the block.  Execution

             prices, size of the proprietary position and agency

             compensation may all be part of a single negotiated deal.

             Consequently, the Commission would not consider traditional

             block trading desks to be using established, non-

             discretionary methods and, therefore, they would not fall

             within Rule 3b-16.

                  In addition, systems that merely provide information to

             subscribers about other subscribers trading interest,

             without facilities for execution, do not fall within

             paragraph (a) of Rule 3b-16.  One commenter asked the

             Commission to clarify that such systems would not be viewed

             as exchanges.[50]  While such vendors may allow buyers and

             sellers to find each other, they do not provide a facility

             or set rules under which those orders interact with each

             other.  Accordingly, the Commission agrees with this

             commenter that such systems are not exchanges.

                  In contrast, when a customer gives a broker-dealer

             flexibility in how to handle an order, it relinquishes a

             degree of control over that order.  The Commission

             recognizes that broker-dealers exercising discretion or

             judgment over customer orders may use internal systems to

             trade and manage these orders.  The mere use of these

             systems does not make a broker an exchange, unless those

             systems themselves predetermine the handling and execution

             practices for the order, replacing the broker-dealers

             judgment and flexibility in working the order.

                  One commenter suggested that the lack of display of

             customer orders outside the broker-dealer should be

             determinative of whether the system was an exchange.[51]

             The Commission notes that it is possible for a system to use

             established, non-discretionary methods even if orders are

             not displayed.  For example, the OptiMark System -- by

             design -- does not display participants indications of

             interest.  There is, however, no discretion exercised by the

             operator of the OptiMark System; the trade optimization

             calculations are established, non-discretionary methods.

                  Finally, the Commission proposed to explicitly exclude

             from the revised interpretation of "exchange" trading

             systems that allow a single broker-dealer to internally

             manage its customers orders.[52]  The Commission was

             concerned that such systems might technically be covered by

             paragraph (a) of Rule 3b-16 if they occasionally crossed or

             matched customer orders.  Because the Commission believes

             that these systems have generally automated traditional

             brokerage functions, it proposed to clearly exclude them

             from the revised interpretation of "exchange."  Several

             commenters noted their agreement with the Commissions

             proposed exclusion of these internal broker-dealer systems

             from its reinterpretation of "exchange,"[53] but requested

             that the Commission clarify it.  In particular, the

             Securities Industry Association ("SIA") and The Bond Market

             Association ("TBMA") requested that the Commission clarify

             the intended meaning of the terms "predetermined procedures"

             and "communicated to customers" as used in the proposed

             exclusion.[54]

                  The Commission intended to exclude a number of

             different types of systems under this proposed exclusion.

             First, this exclusion was intended to cover internal systems

             operated by market makers to automate the management of

             their customer orders, including the display of customer

             limit orders, and to match those displayed orders with other

             customer orders.  The Commission is now adopting a more

             specific exclusion to cover these types of systems.

                  In addition, in large part, the Commission intended to

             exclude systems that automate the management of customer

             orders that require a broker-dealer to use its discretion.

             These types of systems would not be included within

             paragraph (a) of Rule 3b-16 because -- like traditional

             block trading desks -- they do not use established, non-

             discretionary methods.  The purpose of the proposed

             exclusion for internal broker-dealer systems was to exclude

             traditional internal systems created to increase efficiency

             rather than to provide a non-discretionary trading system

             for customers.  In light of the comments on the proposed

             exclusion for internal broker-dealer systems and the

             difficulty of distinguishing among internal systems on this

             basis, the Commission now believes it is better not to

             attempt to set specific requirements that internal broker-

             dealer systems must meet in order to be excluded from Rule

             3b-16.  Instead, the Commission is clarifying that trading

             systems that do not use established, non-discretionary

             methods fail to meet the two-part test in paragraph (a) and

             are, therefore, not included within the revised

             interpretation of "exchange."

                       1.   Established, Non-Discretionary Methods

                            Provided by a Trading Facility

                  As stated previously, a trading system that uses

             established, non-discretionary methods would include a

             traditional exchange floor where specialists are responsible

             for executing orders.  It would also include a computer

             system (whether comprised of software, hardware, protocols,

             or any combination thereof) through which orders interact,

             or any other trading mechanism that provides a means or

             location for the bringing together and execution of orders.

             For example, the Commission considers the use of an

             algorithm by an electronic trading system that sets trading

             procedures and priorities to be a trading facility that uses

             established, non-discretionary methods.

                  The Commission will attribute the activities of a

             trading facility to a system if that facility is offered by

             the system directly or indirectly (such as where a system

             arranges for a third party or parties to offer the trading

             facility).  Thus, if a system that brings together the

             orders of multiple parties arranges for a third party vendor

             to distribute software that establishes non-discretionary

             methods under which orders interact, that system will fall

             within Rule 3b-16.  Similarly, if a bulletin board operator

             contracted with another party to provide execution

             facilities for the bulletin board users, the bulletin board

             will be deemed to have established a trading facility

             because it took affirmative steps to arrange for the

             necessary exchange functions for its users.[55]  In

             addition, if an organization arranges for separate entities

             to provide different pieces of a trading system, which

             together meet the definition contained in paragraph (a) of

             Rule 3b-16, the organization responsible for arranging the

             collective efforts will be deemed to have established a

             trading facility.  For example, the arrangement between the

             Delta Government Options Corporation ("Delta"), RMJ Options

             Trading Corporation, and Security Pacific National Trust

             Company, as described in a 1990 Commission release,[56]

             would together meet the definition set forth in Rule 3b-16.

             Moreover, a trading system that falls within the

             Commissions interpretation of "exchange" in Rule 3b-16 will

             still be considered an "exchange," even if it matches two

             trades and routes them to another system or exchange for

             execution.  Whether or not the actual execution of the order

             takes place on the system is not a determining factor of

             whether the system falls under Rule 3b-16.

                       2.   Established, Non-Discretionary Methods

                            Provided by Setting Rules

                  Alternatively, a system may use established, non-

             discretionary methods through the imposition of rules under

             which parties entering orders on the system agree to the

             terms of a trade.  For example, if a system imposes

             affirmative quote obligations on its subscribers, such as

             obligations to post two-sided quotations or to post

             quotations no worse than the quotes subscribers post on

             other systems, the Commission will consider it to be using

             established, non-discretionary methods.

                  In addition, rules imposing execution priorities, such

             as time and price priority rules, would be "established,

             non-discretionary methods."  Similarly, a system that

             standardizes the material terms of instruments traded on the

             system, such as the system operated by Delta at the time the

             Commission published the Delta Release,[57] will be

             considered to use established, non-discretionary methods.

                  Similarly, Nasdaqs use of established, non-

             discretionary methods bring it within the revised

             interpretation of "exchange" in Rule 3b-16.  The NASD

             imposes basic rules by which securities are traded on

             Nasdaq.  Specifically, it imposes affirmative obligations on

             market makers in Nasdaq National Market ("Nasdaq NM") and

             SmallCap securities, including obligations to post firm and

             two-sided quotes.  It also operates the Small Order

             Execution System ("SOES") and SelectNet systems, requiring

             market makers to accept executions or orders for execution

             in these securities.  Through Nasdaq, market participants

             act in concert to centralize and disseminate trading

             interest and establish the basic rules by which securities

             are traded.  The Commission believes that Nasdaq performs

             what today is generally understood to be the functions

             commonly performed by a stock exchange.  Nasdaq, however, is

             currently registered as a securities information processor

             under Section 11A of the Exchange Act[58] and is operated by

             the NASD, a registered securities association under Section

             15A of the Exchange Act.[59]  Because the requirements

             currently applicable to a registered securities association

             are virtually identical to the requirements applicable to

             registered exchanges, the Commission does not believe it is

             necessary or appropriate in the public interest to require

             Nasdaq to register as an exchange.[60]  Under the rules the

             Commission is adopting today, however, Nasdaq could choose

             to register under Section 6 of the Exchange Act as a

             national securities exchange. [61]

                  C.   Systems Excluded From Rule 3b-16

                  The Proposing Release specifically excluded from the

             proposed, revised interpretation of "exchange" several types

             of activities that could be considered traditional brokerage

             activities: order routing systems, dealer quotation systems,

             and internal broker-dealer order management and execution

             systems.  Commenters widely agreed that automated broker-

             dealer functions should not be encompassed in the meaning of

             "exchange."[62]  The Commission agrees.  Commenters did,

             however, ask for clarification about the application of the

             exclusions in paragraph (b).  In particular, some commenters

             appeared to misunderstand Rule 3b-16 as requiring that a

             system fall within one of the exclusions in paragraph (b) in

             order to be outside of the revised interpretation of

             "exchange."  This was not the Commissions intent.  A system

             is not included within the revised interpretation of

             "exchange" if:  (1) it fails to meet the two-part test in

             paragraph (a) of Rule 3b-16; or (2) it falls within one of

             the exclusions in paragraph (b).

                  The Commission has included paragraph (b) of Rule 3b-16

             to explicitly exclude some systems that the Commission

             believes are not exchanges.  Paragraph (b) of Rule 3b-16

             expressly excludes:  (1) systems that merely route orders to

             other execution facilities; and (2) systems that allow

             persons to enter orders for execution against the bids and

             offers of a single dealer, and systems that automate the

             activities of registered market markers.

                  Two commenters asked the Commission to exclude from the

             revised interpretation of "exchange" all correspondent

             clearing relationships, as well as agreements among broker-

             dealers to handle their respective order flow.[63]  The

             Commission has excluded routing systems under Rule 3b-

             16(b)(1).  Whether or not correspondent clearing

             relationships are excluded, however, depends on the nature

             of the systems used in that relationship.  The Commission

             does not believe that systems operated by clearing firms

             should be excluded simply because their correspondents

             participate in them.  The Commission believes that such an

             exclusion would be overly broad.

                  One commenter questioned whether IDBs are the

             functional equivalent of internal broker-dealer systems and,

             therefore, should be excluded from Rule 3b-16.[64]  The

             Commission believes that most screen-based IDBs function by

             displaying, on an anonymous basis, the offers to buy and

             sell securities that are placed with them by subscribers.

             While typically a subscriber uses a telephone to place the

             orders and ordinarily use the telephone to request

             execution, multiple buyers and sellers are involved, and

             generally customers view some or all orders on screens.

             Thus, IDBs bring together the orders of multiple buyers and

             sellers.  Where an IDB has set procedures under which it

             executes subscriber orders against displayed or retained

             orders in a predetermined fashion, the methods by which

             these orders are brought together likely would be

             established and non-discretionary.  The Commission believes

             that IDBs that function in this fashion are covered by Rule

             3b-16.  If an IDB does not display orders or communicate

             them verbally to customers, and does not execute orders

             according to pre-determined, well-understood rules, it may

             not be covered by the rules the Commission is adopting

             today.  As a general matter, however, the Commission

             believes that most IDBs would be covered by the definition

             in Rule 3b-16(a) and not excluded by any of its exclusions.

                  In addition, one commenter recommended that any entity

             that has the discretion to commit capital to a trade be

             excluded from Rule 3b-16, because broker-dealers commit

             capital, but exchanges do not.[65]  The Commission generally

             views the willingness to predictably commit capital as a

             traditional broker-dealer activity.  For this reason it is

             explicitly excluding registered market maker and single

             dealer systems, which commit capital in all -- or almost all

             -- trades.  In addition, broker-dealers frequently commit

             capital as part of their block trading desk activities.  As

             discussed above, the Commission does not believe that

             traditional block trading desks are covered under paragraph

             (a) of Rule 3b-16.  However, the Commission does not believe

             that a system engaging in activities as a market should be

             excluded from the scope of Rule 3b-16 simply because the

             broker-dealer operating the system may participate as a

             dealer in that system.

                  Finally, one commenter asserted that "passive systems,"

             such as POSIT,[66] should be excluded from the Commissions

             revised interpretation of "exchange," because they do not

             have a traditional price discovery mechanism.[67]  The

             Commission, however, does not agree that systems like POSIT

             are simply an automation of traditional brokerage functions,

             but believes they are markets.  Like other markets,

             "passive" or derivative pricing systems bring together the

             orders of multiple buyers and sellers.  All subscribers

             enter orders,[68] which interact at pre-specified times.  In

             addition, "passive systems" establish non-discretionary

             methods under which subscribers agree to the terms of the

             trade.  Such systems cross orders at pre-established times

             during the day according to specified priorities, such as

             time priority.  While these orders are traded at a price

             that is not known at the time a subscriber enters an order,

             the parameters under which such price will be determined are

             established and not subject to discretion by the operator of

             the "passive system."  While these systems do not themselves

             have traditional price discovery mechanisms, they have the

             potential to -- and frequently do -- affect the markets from

             which their prices are derived.[69]  The Commission,

             however, agrees with this commenter that these systems do

             not raise the same concerns as alternative trading systems

             with price discovery mechanisms and, therefore, even if such

             systems have significant trading volume, if they choose to

             register as broker-dealers they are not required to meet the

             fair access and systems capacity requirements.[70]  The

             Commission, however, will monitor the activities of these

             passive systems and if concerns arise with regard to their

             activities will reconsider whether these requirements should

             apply.

                       1.   Order Routing Systems

                  The Commission proposed to exclude from proposed Rule

             3b-16 those trading systems that merely route orders to an

             exchange or broker-dealer for execution.  The only commenter

             to address this provision was the SIA, which expressed its

             support for this exclusion.[71]  The Commission is adopting

             the exclusion as proposed in Rule 3b-16(b)(1).  Examples of

             such systems include the New York Stock Exchanges

             ("NYSEs") and the American Stock Exchanges ("Amexs")

             Common Message Switch[72] and BRASS.[73]  Nasdaq, however,

             is not merely a routing system.  In addition to SelectNets

             routing capabilities, Nasdaq is a quotation facility,

             permits executions through its SOES system, and establishes

             rules for its members regarding the firmness of their bids

             and offers and how members deal with each other.

                  The Commission does not believe that these routing

             systems meet the two-part test in paragraph (a) of Rule 3b-

             16 because they do not bring together orders of multiple

             buyers and sellers.  Instead, all orders entered into a

             routing system are sent to another execution facility.  In

             addition, routing systems do not establish non-discretionary

             methods under which parties entering orders interact with

             each other.

                       2.   Dealer Systems

                  In the Proposing Release, the Commission discussed the

             application of proposed Rule 3b-16 to single dealer systems.

             Such systems automate the order 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.  Because single market maker

             systems merely provide a more efficient means of executing

             the trading interest of separate customers with one dealer,

             the Commission stated that they should not be considered

             exchanges.  Accordingly, the Commission proposed to

             explicitly exclude from proposed Rule 3b-16 those trading

             systems that display the quotations of a single dealer and

             allow persons to enter orders for execution against the

             dealers proprietary account, usually at the dealers quote.

             This exclusion was intended to encompass systems operated by

             third market makers,[74] as well as those systems operated

             by dealers, primarily in debt securities, who display their

             own quotations to customers and other broker-dealers on

             proprietary or vendor screens.

                   The Commission is today adopting paragraph (b)(2) of

             Rule 3b-16 to exclude systems that display quotes of a

             single dealer and allow persons to enter orders for

             execution against the bids and offers of a single dealer.

             If a market maker executes a customer order at the National

             Best Bid or Offer ("NBBO"), rather than at its displayed bid

             or offer, the Commission will consider the NBBO as the

             market makers quote for purposes of that trade.  As in the

             proposal, paragraph (b)(2) is intended to exclude from Rule

             3b-16 all dealers, including third market makers.

                  The Commission received two comment letters asking the

             Commission to reconsider its proposed exclusion of third

             market makers.[75]  These commenters disagreed with the

             Commissions distinction between third market makers and

             exchanges, and stated that these systems compete directly

             with the regional exchanges for order flow.  Consequently,

             these commenters suggested that the Commission include third

             market makers within its revised interpretation of

             "exchange."  As discussed in the Proposing Release, however,

             the Commission does not believe that a single dealer that

             automates its means of communicating trading interest to

             customers is a market.  Instead, such systems automate

             functions traditionally performed by dealers.

                  Accordingly, the exclusion the Commission is adopting

             today in paragraph (b)(2) of Rule 3b-16 is intended to cover

             systems operated by third market makers.  Because of the

             Commissions own rules and those of the SROs, a third market

             makers quote may not always reflect its own bids and

             offers, but may -- at times -- represent a customer limit

             order.  The Limit Order Display Rule[76] requires third

             market makers (among others) to display customer limit

             orders in a security that are at a price that would improve

             the bid or offer of such market maker in that security.  The

             Commission does not believe that a market maker engaging

             principally in the business of trading for its own account

             should be included within Rule 3b-16 solely because it is

             complying with the Limit Order Display Rule.  Consequently,

             in the Proposing Release the Commission stated that, for

             purposes of this exclusion, if a dealer displayed a customer

             order to comply with a Commission or SRO rule, that customer

             order would be considered to be the "dealers quote."[77]

             To ensure that Rule 3b-16 clearly excludes such dealers, the

             Commission is adopting paragraph (b)(2)(ii) of Rule 3b-16.

             Paragraph (b)(2)(ii) excludes a registered market maker that

             displays its own quotes and customer limit orders, and

             allows its customers and other broker-dealers to enter

             orders for execution against the displayed orders.  The

             exclusion also allows such a registered market maker, as an

             incidental activity resulting from its market maker status,

             to match or cross orders for securities in which it makes a

             market, even if those orders are not displayed.[78]

                  Two other commenters expressed their support for the

             single dealer exclusion.[79]  One of these commenters,

             however, suggested that the Commission modify the exclusion

             so that trading systems that display the quotes of a dealer

             and its affiliates and allow persons to execute against

             those quotes be excluded from Rule 3b-16.[80]  The

             Commission is adopting the exclusion from Rule 3b-16 for

             single dealer systems, but does not agree with this

             commenter that a dealers affiliates should be included in

             the exclusion.

                  In addition, one commenter requested that the

             Commission clarify whether the exclusion for dealer

             quotation systems would apply to systems that allow other

             broker-dealers to execute against a single dealers

             quotations.[81]  The Commission intends for this exclusion

             to cover dealer quotation systems that permit other broker-

             dealers to execute against the dealers quotations and

             realizes that its use of the term "customer" in the proposal

             would preclude this.  Accordingly, the Commission is

             adopting the exclusion in paragraph (b)(2) so that it

             encompasses single dealer systems that allow any person to

             enter orders for execution against that dealers quotes.[82]

             A single dealer system could also match orders that are not

             displayed to any person other than the dealer and its

             employees, provided this matching is only incidental to its

             primary activity as a dealer.[83]

                  D.   Examples of Systems Illustrating Application of

                       Rule 3b-16

                  The following examples are provided to illustrate

             various applications of Rule 3b-16.[84]  While these

             examples are intended to provide guidance, the application

             of Rule 3b-16 will be fact-specific.

                       1.   Examples of Systems Included Within Rule 3b-

                            16

                  a.        System A is a trading floor that maintains a

                 continuous two-sided auction market under a unitary

                 specialist system.  Through the use of an electronic

                 communication system, orders are transmitted from member

                 firms to the floor and execution reports are transmitted

                 from the floor to the member firms.  System A also has

                 an automated routing and small order execution system.

                 Price discovery occurs through the interaction of bids

                 and offers of market participants under the application

                 of System As rules of priority, parity, and precedence.

                 The specialists dealings are subject to compliance

                 obligations established by System A.  System A is

                 included under Rule 3b-16.

                  b.   System B allows participants to enter, replace, or

                 cancel limit orders prior to a pre-established auction

                 cutoff time.  Bids and offers (including price and size)

                 are displayed in the System Bs order book, which

                 participants can view on their screens.  After the

                 cutoff time, the system reviews all orders with respect

                 to each security and determines the price at which the

                 volume of buying interest is closest to the volume of

                 selling interest.  That price is the "auction price."

                 Participants that have entered bids at or above, and

                 offers at or below, the auction price receive an

                 execution at the auction price on the basis of time

                 priority up to the available size.  Matched orders are

                 executed by a registered broker-dealer.  System B is

                 included under Rule 3b-16.

                  c.        System C allows participants to enter limit

                 orders and matches those orders with other orders in

                 System C based on internal parameters.  System C

                 displays unmatched limit orders in the systems book on

                 an anonymous basis to all participants.  The broker-

                 dealer operating System C acts as a riskless principal

                 in executing all matched orders.   System C is included

                 under Rule 3b-16.

                  d.   System D limits participation to institutional

                 investors that trade illiquid restricted securities.  To

                 offer a security, a seller notifies System D as to the

                 security, the price and the amount offered.  After

                 System D accepts an order, it enters it into the system

                 where it is posted anonymously.  Prospective purchasers

                 may accept a posted order or seek to negotiate a

                 transaction by contacting System D.  System D

                 facilitates the purchase and sale of securities through

                 the system on an agency basis.  Participants enter a bid

                 or offer by calling a dedicated telephone number at

                 System D.  Once each side of the transaction agrees to

                 the terms of the trade, System D obtains necessary

                 documentation from the participants and reviews all the

                 documentation.  Once all the documentation has been

                 processed, System D notifies the parties setting the

                 transfer and settlement date, at which time System D

                 will coordinate the transfer of funds and the issuer is

                 notified to effect the transfer on its books.  System D

                 is included under Rule 3b-16.

                  e.        System E allows participants to enter orders

                 for securities by computer, facsimile, or telephone.

                 Those orders are not displayed to other participants.

                 System E crosses orders at specified times at a price

                 derived from another market such as the closing price, a

                 volume weighted average price, or the midpoint between

                 the closing bid and ask on the primary market.  System E

                 is included under Rule 3b-16, but would be exempt from

                 the requirements of Regulation ATS under Rule 301(a)(5)

                 if it is registered as a broker-dealer.

                  f.        System F displays, on an anonymous basis,

                 firm offers to buy and sell securities from its

                 participants.  Participants typically telephone an

                 employee of System F to place a bid or offer, which the

                 employee enters into the system for display to other

                 participants.  To execute against a bid or offer

                 displayed on the computer screen, a participant

                 telephones an employee at System F.  The employee is

                 required to execute the participants order against the

                 displayed order if it matches.  System F is included

                 under Rule 3b-16.  If System F allowed subscribers to

                 execute against a displayed order by sending a message

                 electronically, it would also be included under Rule 3b-

                 16.

                  g.   System G permits competing market makers to post

                 continuous two-sided quotes in certain securities.

                 Quotes are consolidated and disseminated to subscribers

                 electronically.  System G maintains and enforces rules

                 setting standards for the posting of quotes and

                 executions.  Trades are executed by subscribers calling

                 market makers outside the system and executing trades

                 based on quotes displayed in the system.  System G is

                 included under Rule 3b-16.

                  h.   System H is owned and operated by a bank.  System

                 H permits registered broker-dealers to place orders to

                 buy or sell securities at specified prices and sizes and

                 have those orders displayed to all users on an anonymous

                 basis.  Registered broker-dealers may trade both for

                 their own account or on an agency basis on behalf of

                 their customers.  System H automatically executes an

                 order if it matches an existing order.  If no match is

                 immediately available, System H displays the order on

                 the system on an anonymous basis to all users.  System H

                 is included under Rule 3b-16.

                  i.        System I permits participants to enter a

                 range of ranked contingent buy and sell orders at which

                 they are willing to trade securities.  These orders are

                 matched based on a mathematical algorithm whose

                 priorities are designed to achieve the participants

                 objectives.  System I does not display orders to any

                 participants.  System I is included under Rule 3b-16.

                       2.   Examples of Systems Not Included Within Rule

                            3b-16

                  a.        System J routes orders from broker-dealers to

                 registered exchanges or to other broker-dealers for

                 execution.  System J also routes execution reports back

                 to the broker-dealers that entered the orders.  System J

                 provides no facility for execution, but rather only acts

                 as a communications system for the transmission of

                 orders and execution reports.  System J falls within the

                 exclusion in paragraph (b)(1) of Rule 3b-16.

                  b.   System K displays a registered market makers

                 quotes in exchange-listed securities and permits

                 subscribers to submit orders for those securities to the

                 market maker.  Limit orders are displayed in the market

                 makers quote pursuant to requirements under the

                 Commissions order execution rules.  Market orders are

                 executed against the market makers quote or at the NBBO

                 or at a price better than the NBBO.  Limit orders are

                 held until marketable.  System K falls within the

                 exclusion in paragraph (b)(2) of Rule 3b-16.

                  c.        System L allows a dealer to disseminate its

                 proprietary quotations to its customers and permits

                 customers to transmit orders to buy from or sell to that

                 dealer at those quoted prices. System L is not included

                 under Rule 3b-16 because it falls within the exclusion

                 in paragraph (b)(2) of Rule 3b-16.

                  d.   System M is operated by a broker-dealer that makes

                 markets in Nasdaq securities.  System M permits the

                 broker-dealers customers, as well as other broker-

                 dealers (including correspondent broker-dealers with

                 whom it has a clearing arrangement) to send orders

                 electronically or by telephone to the broker-dealer.  An

                 order transmitted electronically goes directly to the

                 system server.  An order transmitted by phone is

                 received by an employee of the broker-dealer, who enters

                 it into the System M.  If it is a market order for a

                 Nasdaq security in which the broker-dealer makes a

                 market, System M checks to see if the order can be

                 crossed against a customer limit order held by the

                 broker-dealer.  If two customer orders cannot be

                 crossed, System M automatically executes the market

                 order against the firms inventory if the order size is

                 at or below certain parameters.  If the order size

                 exceeds those parameters, the market order will be

                 routed to a trader for manual execution against the

                 firms inventory, or other handling as the trader

                 determines.  If the order is for a security in which the

                 broker-dealer does not make a market, System M sends the

                 order to a market maker in the security or to another

                 market for execution.  System M falls within the

                 exclusions in paragraph (b)(1) and (b)(2) of Rule 3b-16.

                  e.        System N allows participants to post the

                 names of securities they wish to buy or sell.  Other

                 participants view this "bids wanted list" or "offers

                 wanted list" and place bids or offers for the specified

                 securities during a defined auction period.  The

                 participant who posted the security on the "bids wanted

                 list" or "offers wanted list" may either accept or

                 reject the best bid or offer at the close of the

                 auction.  System N is not included under Rule 3b-16

                 because there is only one seller.

                  f.        System O permits correspondent firms of a

                 broker-dealer to send orders electronically to that

                 broker-dealer.  The broker-dealer executes the orders

                 against its own inventory.  System O falls within the

                 exclusion in paragraph (b)(2)(i) of Rule 3b-16.

                  g.   System P is an Internet web site set up by an

                 issuer.  Through this web site, the issuer provides

                 information to prospective buyers and sellers of its

                 common stock.  Prospective buyers and sellers post their

                 identities, contact information, and the number of

                 shares offered or sought at a given price.  The issuer

                 makes that information, along with the date the

                 information was submitted, available to prospective

                 buyers and sellers.  The participants contact each other

                 outside of the web site to execute trades.  System P is

                 not included under Rule 3b-16 because it does not

                 establish non-discretionary methods under which buyers

                 and sellers interact.

                  h.   System Q is a screen-based system on which broker-

                 dealers post indications of interest to institutional

                 customers in the securities the broker-dealers wish to

                 trade and advertise trades they have recently conducted.

                 System R sets no requirements and provides no procedures

                 regarding whether or how posted quantities and prices of

                 securities can be executed.  System Q is not included

                 under Rule 3b-16 because it does not establish non-

                 discretionary methods under which buyers and sellers

                 interact.

                  i.        System R is an internal system operated by a

                 broker-dealer to display only to its registered

                 representatives the prices and sizes of securities

                 offered for sale by the firm in its capacity as a

                 dealer.  A registered representative can enter a buy

                 order, specifying price and size, on behalf of its

                 customer.  If the terms of the customers order match

                 the dealers posted offer, System R automatically

                 executes the order.  If the terms are different, System

                 R places the customers order on the screen for later

                 matching.  Assuming the matches of customer orders are

                 merely incidental relative to the dealers own trades,

                 System R falls within the exclusion in paragraph

                 (b)(2)(i) of Rule 3b-16.

                  j.        System S permits an issuer to post prices to

                 sell its own securities to a broker-dealers customers.

                 The issuer is under no obligation to post prices on the

                 system and may choose to do so at any time.  If a

                 customer accepts the posted price and size, System S

                 routes the order to the issuer who retains discretion to

                 accept or reject the trade.  If the posted price or size

                 is not accepted as posted, System S automatically alerts

                 the issuer that further negotiation is necessary.

                 System S is not included under Rule 3b-16 because it has

                 only one seller and, therefore, fails to meet the

                 "multiple buyers and sellers requirement."

                  k.   System T facilitates the clearance and settlement

                 of securities products.  Participating IDBs disseminate

                 and match trading interest through their own proprietary

                 trading screens to their own customers.  The

                 participating IDBs then submit matched transactions

                 between their customers to System T for clearance and

                 settlement.  The IDBs screens are not linked together

                 and the IDBs interact only with those dealers using the

                 system.  The customers orders interact only with the

                 quote of the IDB of which they are a customer and do not

                 interact with the other customer orders of that IDB.

                 Dissemination and execution of orders by the IDBs is

                 governed solely by their rules and not by System T.[85]

                 System T is not included under Rule 3b-16.

                  E.   Exemption from the Definition of "Exchange"

                  Section 36 of the Exchange Act[86] gives the Commission

             broad authority to exempt any person, security, or

             transaction from provisions of the Exchange Act and the

             rules thereunder.  Such an exemption may be subject to

             conditions.  Using this authority, the Commission is

             adopting Rule 3a1-1.[87]  This rule exempts from the

             definition of "exchange": (1) any alternative trading system

             that complies with Regulation ATS;[88] (2) any alternative

             trading system that under Rule 301(a) of Regulation ATS is

             not required to comply with Regulation ATS;[89] and (3) any

             alternative trading system operated by a national securities

             association.[90]  Finally, as described more fully

             below,[91] paragraph (b)(1) of Rule 3a1-1 also conditions an

             alternative trading systems exemption on the absence of a

             Commission determination that the exemption in a particular

             case is not "necessary or appropriate in the public interest

             or consistent with the protection of investors."[92]

                  The Commission has determined that this exemption is in

             the public interest and will promote efficiency,

             competition, and capital formation because it has the effect

             of providing alternative trading systems with the option of

             positioning themselves in the marketplace as either

             registered exchanges or as broker-dealers.  The Commission

             believes that allowing alternative trading systems to make a

             business decision about how to register with the Commission

             will continue to encourage the development of new and

             innovative trading facilities.  The Commission has also

             determined that this exemption is consistent with the

             protection of investors because investors will benefit from

             conditions governing an alternative trading system, in

             particular Regulation ATSs enhanced transparency, market

             access, system integrity, and audit trail provisions.

                  Moreover, because national securities associations are

             subject to requirements virtually identical to those

             applicable to national securities exchanges,[93]  Rule 3a1-1

             also exempts from the definition of "exchange" any

             alternative trading system operated by a national securities

             association.[94]  The Commission believes that the

             regulation of alternative trading systems operated by a

             national securities association is adequate, and therefore,

             that such systems should not be required to register either

             as exchanges, or as broker-dealers and comply with

             Regulation ATS.  Consequently, trading systems operated by

             national securities associations may continue to operate as

             they do now.

                  Finally, in response to a commenters request that the

             Commission clarify that the exemption from the definition of

             "exchange" provided in Rule 3a1-1(a)(2) includes broker-

             dealers that are excluded from the scope of Regulation ATS

             by Rule 301(a),[95] the Commission is adding paragraph

             (a)(3) to Rule 3a1-1.  The Commission intended for broker-

             dealers that perform only activities delineated in Rule

             301(a) to be exempt from the definition of exchange under

             Rule 3a1-1, and is making this clear by adding this new

             paragraph.[96]

                  The Commission intends for the exemption provided by

             Rule 3a1-1 to make clear that alternative trading systems

             that register as broker-dealers and comply with Regulation

             ATS not be regulated as national securities exchanges.  The

             Commission believes that the requirements in Regulation ATS

             as adopted will address the market-like functions of

             alternative trading systems without imposing requirements

             applicable to exchanges that might not fit comfortably with

             certain alternative trading systems structures and

             businesses.

                  In the Proposing Release, the Commission requested

             comment on whether an exclusion from the definition in Rule

             3b-16 for alternative trading systems that register as

             broker-dealers and comply with the provisions of Regulation

             ATS would be preferable to the exemption under Rule 3a1-1.

             Several commenters expressed a preference for an exclusion,

             rather than an exemption.[97]  Most of these commenters were

             concerned that foreign regulators would view these systems,

             currently registered as broker-dealers, as exchanges if they

             were now exempted from the definition of exchange rather

             than excluded from it.  The Commission believes that its new

             framework being adopted today represents a carefully

             balanced approach to the regulation of markets that is

             grounded in the particular statutory structure of the

             Exchange Act.  First, the Commission notes that its

             exemption for alternative trading systems applies to the

             definition of an exchange.  By exempting alternative trading

             systems from this definition, the Commission is making clear

             its view that these systems should not be treated as

             exchanges under the Exchange Act or in any other context.

             Moreover, the Commission does not intend its interpretation

             of exchange to be used outside of the Exchange Act context.

             The Commission strongly cautions against applying this

             interpretation in other contexts where its effects will

             differ from those under the Exchange Act.  The Commission

             also believes that application in another context of only

             one element of the structure adopted today would be

             inappropriate and would seriously call into question the

             validity of the interpretation in that context.

                  Another concern raised by at least one commenter was

             that investors could be influenced in how they view a

             trading system, if such trading system is included within

             the Commissions interpretation of "exchange."[98]  The

             Commission believes that investors views of systems are

             shaped more by the functions those systems perform than by

             the way they are classified.  The Commission also believes

             that the enhanced regulation of alternative trading systems

             that choose to remain registered as broker-dealers that is

             provided by Regulation ATS provides more protection for the

             investors who use these systems.

                  In the Proposing Release, the Commission also requested

             comment on the scope, form, and conditions of the exemption

             in Rule 3a1-1.  Commenters generally approved of the

             Commissions proposal to allow alternative trading systems

             the choice to register as exchanges or be exempt from the

             definition of "exchange" by registering as broker-dealers

             and complying with Regulation ATS.[99]  One commenter

             questioned whether national securities exchanges would have

             the choice to register as alternative trading systems, in

             effect ceasing to act as SROs and electing instead to be

             regulated as a broker-dealer under Regulation ATS.[100]  The

             Commission believes that, as a general matter, national

             securities exchanges do have this choice under the rules the

             Commission is adopting today.[101]  Any national securities

             exchange making this choice would, of course, be required to

             give up its SRO functions and privileges, and to register as

             a broker-dealer and become a member of a national securities

             association or other SRO.[102]  That organization would then

             act as the SRO for this alternative trading system.  If a

             national securities exchange chose, as part of this

             restructuring, to allow its members to form their own

             national securities association to operate this new

             alternative trading system, that alternative trading system

             would be run directly by a national securities association,

             and, as stated above, would be regulated in a manner that

             was equivalent to being regulated as a national securities

             exchange.[103]

                  F.   Commissions Authority to Require Registration as

                       an Exchange

                  Rule 3a1-1(b) contains an exception to the exemption

             from the exchange definition.  Under this exception, the

             Commission effectively may require a trading system that is

             a substantial market (as set forth in the rule) to register

             as a national securities exchange if it finds in a

             particular case that it is necessary or appropriate in the

             public interest or consistent with the protection of

             investors.[104]  In particular, the Commission could deny or

             withhold exemptive status from a trading system that

             otherwise meets the exemptive conditions under Rule 3a1-

             1(a).  Although the standard for denying or withholding the

             exemption is based on objective factors, the Commission has

             discretion whether to initiate any process to consider

             whether to revoke a particular entitys exemption under the

             rule.

                  Specifically, under Rule 3a1-1(b), if an organization,

             association, or group of persons meets certain, specified

             volume levels, the Commission could consider whether

             registration as an exchange is necessary.  The Commission

             will not consider making an assessment whether a particular

             system should register as an exchange unless that system,

             during three of preceding four calendar quarters had: (1)

             Fifty percent or more of the average daily dollar trading

             volume in any security and five percent or more of the

             average daily dollar trading volume in any class of

             security; or (2) Forty percent or more of the average daily

             dollar trading volume in any class of securities.  The

             Commission would also provide such a system with notice and

             an opportunity to respond before determining that exemption

             from registration as an exchange is not appropriate in the

             public interest.  In making that determination, the

             Commission would take into account the requirements for

             exchange registration under Section 6 of the Exchange Act

             and the objectives of the national market system under

             Section 11A of the Exchange Act.  For example, it may not be

             consistent with the protection of investors or in the public

             interest for a trading system that is the dominant market,

             in some important segment of the securities market, to be

             exempt from registration as an exchange if competition

             cannot be relied upon to ensure fair and efficient trading

             structures in that case.  In that case it may be necessary

             for the Commissions greater oversight authority over

             registered exchanges to apply.[105]  As another example, if

             the Commission believed that an exemption under Rule 3a1-1

             for a particular trading system that meets the volume

             thresholds would create systemic risk or lead to instability

             in the securities markets infrastructure, it could

             determine that an exemption from registration as an exchange

             was not appropriate in the public interest or consistent

             with the protection of investors.

                  The Commission believes that there are alternative

             trading systems operating today that exceed the volume

             levels in paragraph (b)(1) of Rule 3a1-1.  However, the

             Commission does not believe at this time that there are any

             alternative trading systems -- given their current

             operations -- for which the exemption from the definition of

             exchange in paragraph (a) of Rule 3a1-1 is not appropriate.

                  In addition, under Section 19(c)(3) of the Exchange

             Act,[106] the Commission has the authority to promulgate

             rules for the de-registration of an exchange.  In order to

             ensure a smooth transition for exchanges that wish to de-

             register and become registered broker-dealers subject to

             Regulation ATS, the Commission will consider promulgating

             de-registration rules.  Such rules would also give the

             Commission the opportunity to formally consider whether

             certain exchanges should be prohibited from de-registering,

             just as Rule 3a1-1(b) gives the Commission the opportunity

             to consider whether certain alternative trading systems

             registered as broker-dealers should be compelled to register

             as exchanges.

             IV.  Regulation of Alternative Trading Systems

                  Securities markets have become increasingly

             interdependent. The use of technology permits market

             participants to link products, implement complex hedging

             strategies across markets and across products, and trade on

             multiple markets simultaneously.  While these opportunities

             benefit many investors, they may also create misallocations

             of capital, widespread inefficiency, and trading

             fragmentation if markets are not coordinated.  In addition,

             a lack of coordination among markets has the potential to

             increase system-wide risks.  Congress adopted the 1975

             Amendments, in part, to address these negative effects of

             potentially fragmented markets.[107]  The Commission

             believes that it is consistent with Congress goals to

             integrate significant alternative trading systems into the

             national market system.

                  In the 1975 Amendments, Congress specifically endorsed

             the development of an national market system, and sought to

             clarify and strengthen the Commissions authority to promote

             the achievement of such a system.[108]  Because of

             uncertainty as to how technological and economic changes

             would affect the securities markets, Congress explicitly

             rejected mandating specific components of an national market

             system.[109]  Instead, Congress recognized that the

             securities markets dynamically change and, accordingly,

             granted the Commission broad authority to oversee the

             implementation, operation, and regulation of the national

             market system in accordance with Congressional goals and

             objectives.[110]

                  Congress identified two paramount objectives in the

             development of an national market system:  the maintenance

             of stable and orderly markets with maximum capacity, and the

             centralization of all buying and selling interest so that

             each investor has the opportunity for the best possible

             execution of his or her order, regardless of where the

             investor places the order.[111]  In addition, Congress

             directed the Commission to remove present and future

             competitive restrictions on access to market information and

             order systems, and to assure the equal regulation of

             markets, exchange members, and broker-dealers effecting

             transactions in the national market system.[112]  In

             particular, Congress found that it was in the public

             interest to assure "fair competition . . . between exchange

             markets and markets other than exchange markets."[113]

                  To further national market system goals, Congress

             granted the Commission broad authority to make rules,

             including those to:  (1) prevent the use and publication of

             deceptive trade and order information; (2) assure the

             prompt, accurate, and reliable distribution of quotation and

             transaction information; (3) enable non-discriminatory

             access to such information; and (4) assure that all broker-

             dealers transmit and direct orders for securities in a

             manner consistent with the operation of an national market

             system.[114]  Moreover, Congress recognized that in order to

             implement national market system goals, the Commission would

             need to classify markets, firms, and securities and

             facilitate the development of "subsystems within the

             national market system."[115]

                  The Commission believes the rules it is adopting today

             advance national market system goals. At present,

             alternative trading systems are not fully integrated into

             the national market system, leaving gaps in market access

             and fairness, systems capacity, transparency, and

             surveillance.  These concerns, together with the increasing

             significance of alternative trading systems, call into

             question the fairness of current regulatory requirements,

             the effectiveness of existing national market system

             mechanisms, and the quality of public secondary markets.

             Under the rules the Commission is adopting today,

             alternative trading systems that have the most significant

             effect on our markets will be required to integrate their

             trading into national market system mechanisms.  Alternative

             trading systems may choose to register either as national

             securities exchanges or as broker-dealers.  Systems that

             elect broker-dealer regulation will be integrated into the

             national market system under Regulation ATS if they have

             significant trading volume.[116]  Discussed in Section IV.A.

             below are the requirements for alternative trading systems

             that choose to register as broker-dealers and comply with

             Regulation ATS.  Any alternative trading system that

             registers as a national securities exchange will be

             obligated -- as currently registered exchanges are -- to

             participate in the national market system mechanisms.

             Section IV.B. contains a discussion of the requirements

             applicable to alternative trading systems that choose to

             register as exchanges.

                  A.   Regulation ATS

                       1.   Scope of Regulation ATS

                            a.   Definition of Alternative Trading System

                  The Commission proposed to define the term "alternative

             trading system" as any system that: (1) constitutes,

             maintains, or provides a marketplace 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 under

             Exchange Act Rule 3b-16;[117] and (2) does not set rules

             governing the conduct of subscribers other than the conduct

             of such subscribers trading on such organization,

             association, person, group of persons, or system, or

             discipline subscribers other than by exclusion from

             trading.[118]  This proposed definition would have the

             effect of precluding any trading system that performs self-

             regulatory functions from opting to register as a broker-

             dealer, rather than as an exchange.  Such a system would

             consequently be required to register as an exchange or be

             operated by a national securities association.  Nothing,

             however, would prevent a registered exchange from giving up

             its self-regulatory functions and choosing instead to comply

             with Regulation ATS.[119]

                  The Commission received only one comment on this

             proposed definition. This commenter suggested that the

             proposed definition for alternative trading systems was too

             complex and should instead, simply be defined as an exchange

             that does not set conduct rules or discipline

             subscribers.[120]  Under the framework the Commission is

             adopting today, an alternative trading system is exempt from

             the definition of an exchange if it registers as a broker-

             dealer and complies with Regulation ATS.[121]

                  Because the Commission continues to believe that any

             system that uses its market power to regulate its

             participants should be regulated as an SRO, the Commission

             is adopting the definition of alternative trading system as

             proposed.  The Commission would consider a trading system to

             be "governing the conduct of subscribers" outside the

             trading system if it imposed on subscribers, as conditions

             of participation in trading, any requirements for which the

             trading system had to examine subscribers for compliance.

             In addition, if a trading system imposed as conditions of

             participation, directly or indirectly, restrictions on

             subscribers activities outside of the trading system, the

             Commission believes that such a trading system should be a

             registered exchange or operated by a national securities

             association.  For example, the Commission would not consider

             a trading system to be an alternative trading system, as

             defined in Rule 300(a), if that trading system prohibited

             subscribers from placing orders on its system at prices

             inferior to those subscribers place on other systems.  The

             Commission believes such rules should only be imposed and

             enforced by regulatory bodies because of the potential that

             they may be applied for anti-competitive purposes.  The

             Commission does not intend for this limitation to preclude

             an alternative trading system from imposing credit

             conditions on subscribers or requiring subscribers to submit

             financial information to the alternative trading system.

                            b.   Exclusion of Trading Systems Registered

                    as Exchanges or Operated by a National

                    Securities Association

                  The Commission proposed to exclude from the scope of

             Regulation ATS certain alternative trading systems that are

             subject to other appropriate regulations.  In particular,

             Rule 301(a) would exclude alternative trading systems (1)

             registered as exchanges, (2) exempt from exchange

             registration based on limited volume,[122] or (3) operated

             by a national securities association.  These systems are

             subject to regulation as markets under other provisions of

             the Exchange Act.  The Commission is adopting these

             exclusions as proposed.

                            c.   Exclusion of Alternative Trading Systems

                    Trading Solely Government and Related

                    Securities

                    (i)  Discussion

                  In addition, the Commission proposed that any

             alternative trading system that trades only government

             securities,[123] Brady Bonds, and repurchase and reverse

             repurchase agreements involving government securities or

             Brady Bonds be excluded from the scope of Regulation ATS, as

             long as the alternative trading system is registered as a

             broker-dealer. The Commission believes that alternative

             trading systems trading only government securities raise

             several of the structural issues raised by alternative

             trading systems trading equity and other debt securities.

             Nevertheless, the Commission recognizes that government

             securities are subject to other forms of regulation that

             help to ensure that those markets are fair and orderly.  In

             particular, government securities broker-dealers are

             currently regulated jointly by the Commission, U.S.

             Department of the Treasury ("Treasury"), and federal banking

             regulators, under the Exchange Act (particularly the

             provisions of the Government Securities Act of 1986) and the

             federal banking laws.[124]  Unlike surveillance of trading

             in equities and other instruments traded primarily on

             registered exchanges,[125] surveillance of trading in

             government securities is coordinated among the Treasury, the

             Commission, and the Board of Governors of the Federal

             Reserve System.

                  The Commission is adopting this proposed exclusion from

             Regulation ATS with some modifications.[126]  Specifically,

             the Commission is eliminating Brady Bonds from the types of

             securities an alternative trading system can trade and fall

             within this exclusion.  The Commission received no comments

             specifically addressing the trading of Brady Bonds by

             alternative trading systems.  Based on information the

             Commission has available about trading on alternative

             trading systems, however, the Commission is not aware of any

             systems trading Brady Bonds that do not also trade other

             non-government securities, most typically other emerging

             market debt.  Accordingly, no alternative trading systems

             trading Brady Bonds would have been exempt under the

             proposals.  Further, the Commission does not treat Brady

             Bonds in the same manner as government securities in other

             contexts.  Moreover, the significance of Brady Bonds in the

             market is diminishing.

                  In addition, the Commission is expanding the exclusion

             in two respects.  First, the Commission is adding commercial

             paper[127] and certain options on government securities[128]

             to the types of securities alternative trading systems may

             trade without being subject to Regulation ATS.  The

             Commission believes this expansion is appropriate because

             commercial paper does not require registration even as a

             broker-dealer, and because the term "government securities"

             includes certain options on government securities for

             purposes of Sections 15C and 17A of the Exchange Act.[129]

             Second, the Commission is expanding this exclusion from

             Regulation ATS to include alternative trading systems that

             are banks and that trade solely government securities,

             repurchase and reverse repurchase agreements on government

             securities, certain options of government securities, and

             commercial paper because of banks traditional role in the

             government securities market.[130]

                    (ii) Response to Commenters

                  The Commission solicited comment on whether it was

             appropriate to exclude from the regulatory framework for

             alternative trading systems those alternative trading

             systems trading solely government and other related

             securities.  Of those commenters who addressed this issue,

             most were in favor of excluding such systems.  Most of these

             commenters agreed with the Commission that alternative

             trading systems trading government securities are subject to

             their own specialized oversight structure and, therefore,

             were appropriately excluded from the scope of the

             Commissions proposal.[131]  Only one commenter opposed the

             proposed exclusion of alternative trading systems that trade

             government securities.[132]

                  One commenter suggested that the Commission exclude

             alternative trading systems that trade government securities

             from the definition in Rule 3b-16, rather than exclude them

             from Regulation ATS.  This commenter stated that if these

             alternative trading systems were classified as exchanges

             that fact would be cited by proponents of a narrow

             interpretation of the Treasury Amendment to the Commodity

             Exchange Act, potentially resulting in a broad definition of

             "board of trade" beyond its intended meaning as a

             traditional organized exchange.[133]  As stated earlier, the

             Commission believes that it would be inappropriate and

             without a reasoned basis to transfer part or all of its

             determination regarding regulation to other statutory

             contexts.[134]  The Commissions reinterpretation of

             "exchange" is grounded on its decision to use its exemptive

             authority to allow alternative trading systems to choose to

             be regulated as broker-dealers.  The Commissions

             reinterpretation of exchange should not be relied upon by

             other regulators to interpret other, potentially more

             restrictive statutory schemes.

                  In addition, this same commenter encouraged the

             Commission to consider the effects of the proposed rules on

             banks that operate alternative trading systems.  In

             particular, this commenter noted that the exclusion for

             alternative trading systems that trade government securities

             applied only if the alternative trading system registered as

             a broker-dealer, not if the alternative trading system were

             a bank.[135]  The Commission did not intend to require banks

             trading government securities to register as broker-dealers

             and, therefore, Rule 301(a)(4), as adopted, excludes from

             Regulation ATS alternative trading systems that trade

             government securities if these systems are registered as

             broker-dealers or are banks.

                  Several commenters raised questions about the

             application of Regulation ATS to alternative trading systems

             that trade not only government securities, but also other

             types of securities.[136]  One commenter asked the

             Commission to extend the proposed exemption for alternative

             trading systems that trade only government securities and

             other related securities to all trading in those securities.

             This commenter stated that broker-dealers that trade

             government securities, as well as other securities and

             financial instruments, should not be required to restructure

             their operations to avail themselves of an exclusion for

             government securities activities.[137]

                  The Commission does not believe that an alternative

             trading systems government securities trading will be

             subject to more burdensome regulation if it is conducted in

             the same system as trading in other securities, than if it

             is conducted in a separate and, therefore, excluded system.

             Accordingly, the exclusion applies to systems that only

             trade government and other related securities.

                  Government securities are not "covered securities"[138]

             and, therefore, are not subject to the transparency

             requirements of Regulation ATS.  In addition, an alternative

             trading system is only required to comply with the fair

             access requirements for those securities (or categories of

             securities) in which it represents twenty percent or more of

             the total volume.  The fair access requirement does not

             apply to government securities regardless of whether

             government securities trading is conducted in the same

             alternative trading system as securities subject to the fair

             access requirements or in a separate alternative trading

             system.  Finally, the capacity, integrity, and security

             requirements would never be triggered by an alternative

             trading systems government securities trading.  If,

             however, the trading in other securities on that same system

             exceeds the twenty percent threshold, an alternative trading

             system in which government securities are traded would have

             to meet the capacity, integrity, and security standards.

             Nevertheless, it seems unlikely that an alternative trading

             system would choose to create a separate alternative trading

             system for its government securities trading solely for the

             privilege of trading government securities on a system with

             lesser capacity, integrity, and security than the system on

             which other securities are traded.  Therefore, the

             Commission does not believe that it will be necessary, as a

             practical matter, for an alternative trading system to

             restructure its system to avail itself of the government

             securities exclusion.

                  Another commenter asked that the Commission expressly

             confirm that the exclusion from the scope of Regulation ATS

             for systems trading government and related securities does

             not preclude such an alternative trading system from

             offering services involving products other than

             securities.[139]  In response, the Commission has clarified

             that to be excluded from the scope of Regulation ATS an

             alternative trading system need only limit its securities

             activities to government securities, Brady Bonds, repurchase

             and reverse repurchase agreements on such instruments, and

             commercial paper.

                  Finally, this commenter suggested that the Commission

             adopt rules to permit government securities alternative

             trading systems to trade other fixed income securities on a

             limited pilot basis.  This commenter argued that, without

             such a limited exemption, Regulation ATS would have a

             chilling effect on the ability of government securities

             alternative trading systems to introduce technological

             innovation, and that such a provision would raise no

             significant investor protection concerns.[140]  The

             Commission, however, does not believe that allowing one

             category of alternative trading systems (i.e., those trading

             government securities) to trade other types of fixed income

             securities where the regulation and surveillance is

             different, without complying with Regulation ATS is

             appropriate.  The notice and recordkeeping requirements

             under Regulation ATS are limited and should not interfere

             with market participants ability to test new, innovative

             systems.

                            d.   Alternative Trading Systems Trading Non-

                    Government Debt Securities

                    (i)  Discussion

                  The Commission proposed that alternative trading

             systems that trade debt securities (other than those trading

             government and other related securities) be subject to

             Regulation ATS, if they choose not to register as exchanges.

             Under Regulation ATS, these systems would be required to

             file a notice with the Commission, maintain an audit trail,

             periodically report certain information to the Commission,

             and ensure that they have adequate safeguards to protect

             subscribers confidential trading information.  In addition,

             alternative trading systems with twenty percent or more of

             the trading volume in a particular category of debt would

             have to meet the fair access and systems capacity,

             integrity, and security standards.[141]  The Commission

             solicited comment on what categories of debt would be

             appropriate for this purpose and what sources of debt

             transaction volume information is available.  Specifically,

             the Commission solicited comment on whether the following

             categories would be appropriate: mortgage and asset-backed

             securities, municipal securities, corporate debt securities,

             foreign corporate debt securities, and sovereign debt

             securities.

                  The Commission is adopting the proposal to include

             alternative trading systems that trade fixed income

             securities within its new regulatory framework.  With

             respect to the fair access and systems capacity, integrity

             and security requirement, the rules as adopted require

             alternative trading systems with twenty percent or more of

             the volume in municipal securities, investment grade

             corporate debt securities, and non-investment grade

             corporate debt securities to comply with the fair access and

             systems capacity, integrity, and security requirements.

             Accordingly, the Commission is adopting rules to define

             these three categories of debt securities.  The Commission

             is deferring any action on requiring alternative trading

             systems that trade foreign corporate debt or foreign

             sovereign debt to comply with the fair access and systems

             capacity, integrity, and security requirements.

                  For municipals, the Commission is incorporating into

             Regulation ATS the definition of municipal securities in

             Section 3(a)(29) of the Exchange Act.[142]  A debt security

             (other than an exempted security) with a fixed maturity of

             at least one year will be considered investment grade

             corporate debt if it is rated in one of the four highest

             ratings categories by at least one Nationally Recognized

             Statistical Ratings Organization,[143] and will be

             considered non-investment grade corporate debt if it is not

             so rated.[144]  The Commission believes that these

             categories are widely recognized as relatively distinct

             markets within the debt market as a whole and, while not

             encompassing all forms of debt securities, will ensure that

             alternative trading systems that provide markets for

             significant segments of the debt market take adequate

             measures for systems capacity, integrity, and security, as

             well as provide fair access.

                  While the Commission is adopting rules to establish the

             appropriate categories for debt securities, the volume-based

             rules with respect to all categories, except municipal

             securities, will not become effective until volume

             information is available in a format that will enable

             alternative trading systems to determine their relative

             volume.  Volume data for municipal securities is available

             and being published through the Municipal Securities

             Rulemaking Boards ("MSRB") Daily Volume Price Reports.  On

             August 24, 1998, the MSRB started producing a Combined Daily

             Report to summarize both intra-dealer and customer

             transactions of municipal securities that are traded four or

             more times per day pursuant to Rule G-14.  This report is

             made available through data vendors, such as Bloomberg, by

             approximately 6:00am each business day.[145]  Among other

             information, the Combined Daily Report provides total volume

             data against which alternative trading systems that trade

             municipal securities can measure their compliance

             obligations under Regulation ATS.

                  Volume data for the remaining two categories --

             investment grade and non-investment grade corporate debt --,

             however, is not currently compiled or published so that

             alternative trading systems can determine their obligations

             under Regulation ATS.  In order to allow time for logistical

             arrangements to make such data available, the Commission

             will not make these fair access and systems capacity,

             integrity and security provisions of Regulation ATS

             effective until April 1, 2000.[146]

                                 (ii) Response to Commenters

                  Some commenters thought that the Commission should

             exclude debt securities entirely from Regulation ATS.[147]

             On the other hand, several commenters supported the

             Commissions proposal to include alternative trading systems

             that trade debt securities.[148]  The Commission believes

             that many of the same concerns about the trading of equity

             securities on alternative trading systems apply equally to

             the trading of fixed income securities on alternative

             trading systems.  Specifically, it is important that markets

             with significant portions of the volume in particular

             instruments have adequate systems capacity, integrity, and

             security, regardless of whether those instruments are equity

             securities or debt securities.  Similarly, as electronic

             systems for debt grow, it will become increasingly important

             for the fair operation of our markets for market

             participants to have fair access to significant market

             centers in debt securities.  One of the consequences of the

             growing role of alternative trading systems in the

             securities markets generally is that debt securities are

             increasingly being traded on these systems, similar to the

             way equity securities are traded.  This change in the market

             requires appropriate measures for markets for debt.

                  Two commenters suggested that the Commission exempt or

             exclude alternative trading systems trading municipal

             securities for the same reasons that it proposed to exclude

             alternative trading systems that trade government

             securities.[149]  For example, one commenter asserted that

             the municipal securities market is overseen not only by

             securities regulators, but also by the federal banking

             regulators.  This commenter also pointed out that the

             Commission had proposed excluding municipal securities in

             the Concept Release and stated that the Commission should

             have maintained this approach in the Proposing Release.[150]

             Although the Commission did solicit comment in the Concept

             Release on whether alternative trading systems trading

             municipal securities should be excluded from any proposed

             new regulatory framework, the Commission has concluded that

             it would not be appropriate to do so.

                  There are substantial differences between the oversight

             of the government securities market and the municipal

             securities markets, and between government securities

             instruments and municipal securities instruments.  For

             example, municipal securities are far more varied products

             than government securities.  While traditional general

             obligation bonds issued by municipalities are more akin to

             government securities in that they are backed by the full

             faith and credit of the issuing taxing authority, revenue

             bonds, which bear greater resemblance to privately issued

             bonds due to their ties to specific revenue sources, are

             riskier products.[151]  Most municipal bonds are rarely

             traded.  The market for government securities, on the other

             hand, is deep and liquid.[152]  Therefore, alternative

             trading systems that may develop for municipal securities

             may have widely different qualities than those for

             government securities.  Moreover, regulation of the

             government securities market is shared by the Federal

             Reserve Board, the Treasury Department and the Commission

             and other bank regulators, while oversight of the municipal

             securities market is assigned to the Commission and the

             MSRB.  For these reasons, the Commission believes it would

             not be appropriate to exempt alternative trading systems

             that trade municipal securities from Regulation ATS.

                  Only one commenter directly addressed the Commissions

             request for comment on possible categories of debt.

             Although TBMA encouraged the Commission to exclude

             alternative trading systems trading debt securities from

             Rule 3b-16,[153] it stated that, if the Commission chose to

             go forward with the proposal, it "believes that the proposed

             categories reflect a reasonable indication of how market

             participants view and trade debt securities."[154]

                  Several commenters recommended that the Commission

             consider the clearing agencies as a source of information on

             the trading volume in the debt market. [155]  One commenter

             also noted that for municipal securities, the MSRBs

             transaction reporting requirements could be a good source

             for volume information.[156]  As discussed above, the

             Commission plans to use the MSRBs transaction reporting

             program as a basis for volume in the municipal securities

             market.

                            e.   Exemptions from Certain Requirements of

                                 Regulation ATS Pursuant to Application

                                 to the Commission

                   The Commission today is also adopting a provision to

             allow the Commission, upon application by an alternative

             trading system, to exempt by order such alternative trading

             system from one or more of the requirements of Regulation

             ATS.[157]  The Commission expects to issue such an order

             only under unusual circumstances, and only after determining

             that such an order is consistent with the public interest,

             the protection of investors and the removal of impediments

             to, and the perfection of the mechanisms of, a national

             market system.

                  While the Commission believes that the requirements it

             is adopting under Regulation ATS are appropriate for all

             alternative trading systems operating today, the Commission

             is aware that a system may develop in the future to which

             these requirements may not be appropriate, and they could

             hinder the development of specialized trading systems.  For

             example, the Commission could consider exempting an

             alternative trading system that limited participation only

             to investment companies with similar investment strategies,

             such as index funds, from the transparency

             requirements.[158]

                       2.   Requirements for Alternative Trading Systems

                            Subject to Regulation ATS

                  Discussed below are the requirements for alternative

             trading systems subject to Regulation ATS.

                            a.   Membership in an SRO

                  Because alternative trading systems that choose to

             register as broker-dealers will not themselves have self-

             regulatory responsibilities, the Commission believes it is

             important for such systems to be members of an SRO.  For

             this reason, the Commission proposed to require alternative

             trading systems subject to Regulation ATS to be members of

             an SRO.

                  Most alternative trading systems are currently

             registered as broker-dealers and, therefore, are also

             members of an SRO.[159]  The Commission understands some

             alternative trading systems may have concerns about SROs

             abusing their regulatory authority for competitive reasons.

             While the Commission understands that SROs operate competing

             markets and, therefore, have potential conflicts of interest

             in overseeing alternative trading systems, the Commission

             believes these conflicts can be minimized using the

             Commissions oversight.[160]  The Commission considers it

             part of its own oversight responsibility over SROs to

             prevent and take the necessary steps to address any such

             actions by SROs.[161]  Further, an alternative trading

             system that wishes to avoid potential conflicts of interest

             altogether may choose to register as an exchange.  The

             Commission also notes that Section 15A of the Exchange Act

             would permit an association of brokers and dealers to

             establish an SRO that does not operate a market.[162]  Such

             a national securities association could be established

             solely for purposes of overseeing the activities of

             alternative trading systems.  Of course, this association

             must be able to effectively conduct its SRO

             responsibilities.

                  The Commission expects SROs to effectively surveil

             trading that occurs on alternative trading systems by

             integrating alternative trading system trading data into the

             SROs existing surveillance systems.  SROs should also

             incorporate relevant information regarding the entities

             trading on such systems into their existing surveillance

             programs.  The enhanced recordkeeping requirements for

             alternative trading systems will aid SRO oversight

             considerably in this regard.[163]

                  The Commission believes it is appropriate to continue

             to require alternative trading systems that register as

             broker-dealers to be SRO members and is, therefore, adopting

             this requirement as proposed.[164]

                            b.   Notice of Operation as an Alternative

                                 Trading System and Amendments

                  The Commission proposed to require an alternative

             trading system registered as a broker-dealer to file a

             notice with the Commission before commencing operation,

             amendments to this notice in the event of material changes,

             and a notice when an alternative trading system ceases

             operation.  The Commission is adopting these requirements as

             proposed.

                  More specifically, under Regulation ATS, alternative

             trading systems are required to file an initial operation

             report with the Commission on Form ATS at least twenty days

             prior to commencing operation.[165]  Alternative trading

             systems operating currently must file Form ATS within twenty

             days of the effective date of these final rules.[166]  Form

             ATS requests information about the alternative trading

             system, including a detailed description of how it will

             operate, its prospective subscribers, and the securities it

             intends to trade.  In addition, the alternative trading

             system is required to describe its existing procedures for

             reviewing systems capacity, security, and contingency

             planning.  Alternative trading systems are currently

             required to report most of this information on Part I of

             Form 17A-23, which the Commission proposed to repeal.[167]

             Form ATS is not an application and the Commission would not

             "approve" an alternative trading system before it began to

             operate.  Form ATS is, instead, a notice to the Commission.

                  An alternative trading system is also required to

             notify the Commission of material changes to its operation

             by filing an amendment to Form ATS at least twenty calendar

             days prior to implementing such changes.[168]  One commenter

             requested that the Commission provide more specific guidance

             as to what would be considered a "material change."[169]  As

             discussed in the Proposing Release, material changes to an

             alternative trading system include any change to: the

             operating platform,  the types of securities traded, or the

             types of subscribers.  The Commission notes that currently

             all alternative trading systems implicitly make materiality

             decisions in determining when to notify their subscribers of

             changes.

                  In addition to reporting material changes at least

             twenty days before implementation, alternative trading

             systems are required to notify the Commission in quarterly

             amendments of any changes to the information in the initial

             operation report that have not been reported in a previous

             amendment.[170]  Finally, if an alternative trading system

             ceases operations, it is required to promptly file a notice

             with the Commission.[171]  Under Regulation ATS, the initial

             operation report, any amendments, and the report filed when

             an alternative trading system ceases operation will be kept

             confidential.

                  In the Proposing Release,[172] the Commission requested

             comment on the notice requirements and Form ATS.  The

             Commission specifically requested comment on whether such

             requirements would be burdensome for alternative trading

             systems, and if so, whether the burden is inappropriate.

             The Commission also sought comment on the frequency of

             filings and whether more or less frequent filings would be

             preferable.  Finally, the Commission sought comment on

             whether it would be appropriate to permit or to require

             electronic filing of Form ATS and all subsequent amendments.

                  Most of the commenters did not comment directly on the

             notice requirements or Form ATS.  One commenter recommended

             that the Commission allow for filing of the initial

             operation report on Form ATS within twenty days after

             commencing operation, rather than twenty days before

             commencing operation as proposed.[173]  This commenter

             stated that such a change would ease the regulatory burden

             on new systems that often have uncertain timelines and would

             avoid the possibility that a new trading system would be

             prevented from operating solely because of the need to wait

             for a twenty-day regulatory time period to run.

                  The Commission, however, believes that twenty days is a

             short enough period of time that alternative trading systems

             would not be inconvenienced by the requirement.  If a system

             were only required to provide notice after it commenced

             operations, the Commission would have no notice of potential

             problems that might impact investors before the system

             begins to operate.  The Commission also notes that currently

             broker-dealer trading systems have an identical requirement

             to file Form 17A-23 with the Commission twenty days prior to

             commencing operation.  The Commission knows of no broker-

             dealer trading system that was unable to start operating

             because of the twenty day period. Consequently, the

             Commission believes the Rule, as adopted, is a reasonable

             means for the Commission to carry out its functions and

             imposes no unnecessary burdens on respondents.

                  The Commission also requested comment on whether the

             information in Form ATS should remain confidential.  Two

             commenters supported the Commissions proposal to keep

             confidential the information contained in Form ATS,[174] and

             one commenter encouraged the public availability of filed

             information.[175]  The Commission continues to believe that

             notice reports filed with the Commission and the alternative

             trading systems SRO pursuant to Regulation ATS should be

             kept confidential.  Information required on Form ATS may be

             proprietary and disclosure of such information could place

             alternative trading systems in a disadvantageous competitive

             position.  Further, because the Commission wishes to

             encourage candid and complete filings in order to make

             informed decisions and track market changes, preserving

             confidentiality provides respondents with the necessary

             comfort to make full and complete filings.  Finally, based

             on the Commissions experience with Rule 17a-23 filings, the

             Commission believes that confidentiality is appropriate.

                  Finally, the Commission solicited comment on the

             possibility of permitting Form ATS to be filed

             electronically.  Several commenters supported the acceptance

             of electronic filings by the Commission as a way to reduce

             the regulatory burden of filing Form ATS and in light of the

             technological nature of alternative trading systems.[176]

             The Commission agrees that electronic filing is an important

             goal and plans to work toward it.  Currently, however, legal

             and technological limitations -- primarily relating to

             security and authentication -- make an electronic filing

             system infeasible.  At this time, the Commission is capable

             of, and plans to, provide alternative trading systems with

             the ability to access Form ATS and Form ATS-R on-line,

             through the Commissions web site, so that the form can be

             downloaded.  Alternative trading systems would then have to

             submit these forms to the Commission by mail or facsimile.

             Ultimately, the Commission anticipates that current

             technological barriers will be overcome, and a system able

             to electronically accept Forms ATS and ATS-R will be

             available.

                            c.   Market Transparency

                                 (i)  Importance of Market Transparency

                  In 1997, the Commission implemented 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 ECNs.[177]

             The rules permit an ECN to fulfill these obligations on

             behalf of market makers or specialists using its system, by

             submitting the ECNs best priced market maker or specialist

             quotations to an SRO for inclusion into public quotation

             displays ("ECN Display Alternative").[178]

                  Since the Order Handling Rules were implemented, the

             spread between bids and offers in covered securities has

             narrowed dramatically.[179]  This has benefited investors,

             including retail investors, who have enjoyed significant

             cost savings when trading covered securities.[180]

                  These rules, however, were not intended to fully

             coordinate trading on alternative trading systems with

             public market trading.[181]  While these rules have helped

             integrate orders on certain alternative trading systems into

             the public quotation system, they only disclose the orders

             market makers and specialists enter into ECNs, unless the

             system voluntarily undertakes to disclose institutional

             prices. [182]  In many cases, institutional orders, as well

             as other non-market maker orders, remain undisclosed to the

             public. [183]  Moreover, it is voluntary for an ECN to

             reflect the best priced quotations in the public quotation

             system on behalf of market makers and specialists that

             participate in its system.

                  Because certain 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-

             five years ago when it noted that an essential purpose of a

             national market system:

                  [I]s 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.[184]

                                 (ii) Integration of Orders into the

                                      Public Quotation System

                  Alternative trading systems are becoming increasingly

             popular venues for trading securities.  Because these

             systems are not registered exchanges and do not participate

             in the national market system, there is a possibility that

             our securities markets could become less transparent over

             time.[185]  The Commission believes that it is inconsistent

             with congressional goals for an national market system if

             the best trading opportunities are made accessible only to

             those market participants who, due to their size or

             sophistication, can avail themselves of prices in

             alternative trading systems.  The vast majority of investors

             may not be aware that better prices are disseminated to

             alternative trading system subscribers and many do not

             qualify for direct access to these systems and do not have

             the ability to route their orders, directly or indirectly,

             to such systems.  As a result, many customers, both

             institutional and retail, do not always obtain the benefit

             of the better prices entered into an alternative trading

             system.  As the American Association of Individual Investors

             pointed out, "[s]imply stated, investors benefit, as do

             markets, from knowing the full array of best-priced orders

             from all sources. . . .  It is in the best interests of

             individual investors that alternative trading systems

             disseminate best-priced orders into quotation systems that

             are available to the public."[186]

                                      (A)  New Requirements for

                                           Alternative Trading Systems

                  The Commission is adopting Exchange Act Rule 301(b)(3)

             to further enhance transparency of orders displayed on

             alternative trading systems, and to ensure that publicly

             displayed prices better reflect market-wide supply and

             demand.  Specifically, this rule requires alternative

             trading systems with five percent or more of the trading

             volume in any "covered security"[187] to publicly

             disseminate their best priced orders in those securities.

             These orders will then be included in the quotation data

             made available to quotation vendors by national securities

             exchanges and national securities associations.[188]  Only

             those orders that are displayed to more than one alternative

             trading system subscriber would be subject to the public

             display requirement.  As discussed in Section IV.A.2.c.iii.

             below, alternative trading systems are also required to

             provide all registered broker-dealers with access to these

             displayed orders.

                  Importantly, the public display requirement in Rule

             301(b)(3) applies only to orders in "covered securities."

             The term "covered securities" includes only exchange-listed,

             Nasdaq NM, and Nasdaq SmallCap securities.  Accordingly,

             alternative trading systems trading equity securities not

             included within the definition of "covered security," or

             debt securities, would not be subject to the public display

             requirement under Regulation ATS.

                  In the Proposing Release, the Commission proposed a

             public display requirement substantially similar to the one

             it is adopting today.  The proposal, however, would have

             only required alternative trading systems to publicly

             display their best priced orders in a covered security when

             the system represents ten percent of the trading volume in

             that security.  The Commission decided instead to adopt a

             five percent threshold in light of the comment letters, many

             of which supported the public display requirement and

             recommended that the volume threshold be lower than ten

             percent.

                  In the Proposing Release, the Commission proposed that

             the display requirement be applied on a security-by-security

             basis and would not have required an alternative trading

             system to publicly display orders for any securities in

             which its trading volume accounted for less than ten percent

             of the total volume for such security.  The Commission,

             however, requested comment on whether an alternative trading

             system should be required to display the best priced orders

             in all securities traded in its system, if it reaches the

             volume threshold in a specified number or percentage of the

             securities it trades.

                  After considering the comments on the issue, the

             Commission is adopting the security-by-security approach as

             proposed.  Although a system that trades more than the

             volume threshold in a substantial number of securities could

             be considered a significant market whose best prices in all

             securities should be transparent, for now the Commission has

             decided to take the security-by-security approach with a

             lower volume threshold (five percent) than proposed.  The

             security-by-security approach, among other things, will more

             readily enable the phase-in of securities subject to the

             transparency requirements as discussed below.

                  The Commission emphasizes that, as proposed, Rule

             301(b)(3) only requires alternative trading systems to

             publicly display subscribers orders that are displayed to

             more than one other system subscriber.  Thus, if an

             alternative trading system, like some crossing systems, by

             its design does not display orders to other subscribers, the

             rules do not require those orders to be integrated into the

             public quote stream.[189]  Similarly, if a portion of a

             subscribers order is not displayed to other alternative

             trading system subscribers, that hidden portion is not

             subject to the public display requirement in Rule 301(b)(3).

             Thus, the Commissions rules allow institutions and non-

             market makers to guard the full size of their orders by

             using the "reserve size" features offered by some

             alternative trading systems, which allow subscribers to

             display orders incrementally.  For example, a subscriber

             that wishes to sell 100,000 shares of a given security could

             place its order in an alternative trading system and specify

             that only 10,000 shares are to be displayed to other

             alternative trading system subscribers at a time.  In this

             instance, Rule 301(b)(3) requires that only 10,000 shares be

             reflected in the public quote.  The ability to continue to

             control how much of their own orders to reveal was a concern

             of several institutions who commented.[190]  Finally,

             alternative trading systems are not required to provide to

             the public quote stream orders displayed to only one other

             alternative trading system subscriber, such as through use

             of a negotiation feature.

                  The Commission believes that in light of the

             significant trading volume on some alternative trading

             systems, integration of institutional and non-market maker

             broker-dealer orders into the national market system is

             essential to prevent the development of a two-tiered market.

             Trading anonymity will be preserved because an alternative

             trading system will comply with any public display

             requirement by identifying itself, rather than the

             subscriber that placed the order.  Thus, the Commissions

             proposal, much like the ECN Display Alternative, is designed

             to preserve the benefits associated with anonymity.

             Moreover, the Commission believes that the continued ability

             of institutions to retain their anonymity and to use

             features within alternative trading systems to shield the

             full size of their orders gives institutions the ability to

             keep their full trading interest private.  The Commission

             recognizes that anonymity is often important to

             institutional investors so that when they are unwinding or

             building security holdings they do not signal their trading

             strategy and negatively impact their own market

             position.[191]

                  Requiring alternative trading systems to furnish to the

             public quotation system the full size of the best displayed

             buy and sell orders will ensure that the public quote better

             reflects true trading interest in a particular security.

             Furthermore, the Commission believes that institutional

             investors orders entered into alternative trading systems

             provide valuable liquidity, and that displaying such trading

             interest will substantially strengthen the national market

             system.  Moreover, this public display requirement levels

             the playing field between market makers -- who, when they

             send customer limit orders to ECNs, the ECN must publicly

             display that order --  and those ECNs, who do not have to

             display customer limit orders sent directly to the ECN.

                  In order to monitor the effects of the public display

             requirement, however, the rules will permit affected

             alternative trading systems to phase-in institutional orders

             in covered securities.[192]  Before [insert date 120 days

             after publication in the Federal Register], the Commission

             will publish a schedule for the phase-in of individual

             securities.  Fifty percent of the securities subject to the

             transparency requirement will be phased-in on [insert date

             120 days after publication in the Federal Register] and the

             remainder of the securities will be phased-in on [insert

             date 240 days after publication in the Federal

             Register].[193]

                                      (B)  Response to Comments

                  The Commission requested comment on whether a ten

             percent volume threshold would effectively ensure that

             alternative trading systems comprising a significant

             percentage of the market are subject to basic market

             transparency requirements.  The commenters that responded to

             this issue were split on whether a ten percent volume

             threshold was too high or too low, although most felt it was

             too high and should be lowered.[194]  A few commenters,

             however, stated that they believed the volume thresholds

             were too low.[195]

                  As discussed above, the transparency requirement the

             Commission is adopting in Rule 301(b)(3) obligates an

             alternative trading system to disseminate into the public

             quote the best priced orders in each covered security in

             which the trading on such system represents more than five

             percent of total trading volume.  The Commission is

             persuaded by commenters that stated that a ten percent

             threshold would exclude trading on too many alternative

             trading systems.  The Commission believes that lowering the

             threshold to five percent will provide more benefits to

             investors, promote additional market integration, and

             further discourage two-tier markets.  At the same time, the

             Commission believes that those alternative trading systems

             with less than five percent of the volume would not add

             sufficiently to transparency to justify the costs associated

             with linking to a market.

                  The Commission requested comment on whether an

             alternative trading system should be required to display the

             best priced orders in all securities traded in its system,

             if it reaches the volume threshold in a specified number or

             percentage of the securities it trades.  Of those commenters

             addressing this issue, most were in favor of display of the

             best priced orders in all securities traded on an

             alternative trading system once that alternative trading

             system exceeded the volume threshold in some fixed number of

             securities. [196]  The NYSE stated that if an alternative

             trading system developed a "general presence" in the market,

             for example by reaching the volume threshold in ten or more

             securities, that alternative trading system should display

             the best priced orders in all securities it trades.  One

             commenter, however, specifically opposed the display of all

             securities traded on an alternative trading system rather

             than mandating display on a security-by-security basis.[197]

             This commenter also noted that even display on a security-

             by-security basis may capture a system that trades a

             significant amount of one security, despite the fact that

             that security was a minor part of the overall trading in the

             system.  As discussed above, however, the Commission is

             adopting the rule as proposed.

                  The Commission also requested comment on whether

             alternative trading systems should be required to display

             the full size of the best priced order, even if the full

             size is hidden from alternative trading system subscribers

             through use of a "reserve size" or similar feature.  All

             commenters directly addressing this issue[198] stated that

             the reserve feature should be maintained, especially if the

             Commissions rules as adopted required displayed

             institutional orders to be integrated into the public

             quotation stream.  The Commission agrees that the reserve

             features are critical to institutions ability to minimize

             the market impact of their orders.  Further, when orders are

             not displayed to anyone, the Commissions concerns about a

             two-tiered market -- where some market participants have

             information others do not -- are absent.  Accordingly, Rule

             301(b)(3) only requires alternative trading systems to

             publicly disseminate the best priced orders that are

             displayed to other alternative trading system subscribers.

                  The Commission requested comment on whether it would be

             more appropriate to adopt an alternative to Rule 301(b)(3)

             that would permit, but not require, the public display of

             the best-priced institutional orders displayed in a high

             volume alternative trading system.  Under this alternative,

             an alternative trading system meeting the requirements of

             Rule 301(b)(3)(i) would only be required to provide to a

             national securities exchange or national securities

             association the best-priced orders in covered securities

             displayed in the alternative trading system by any broker or

             dealer and by any other subscriber that elects to make its

             orders available for public display.  The Commission

             requested comment on whether such an alternative would

             sufficiently address the Commissions concerns with

             transparency and fragmentation in the markets.  The

             Commission is concerned, however, that this alternative

             could exacerbate the competitive disparities between broker-

             dealers and ECNs.  Under the Order Handling Rules, different

             order display requirements are imposed on limit orders

             received by a market maker and forwarded to an ECN, than are

             imposed on orders entered directly into an ECN.  One

             commenter expressed concern that this differential treatment

             could serve as a disincentive for customers to place orders

             with a broker-dealer that acts as a market maker in a

             security.[199]

                  Most commenters that expressed support for the display

             of institutional and non-market maker broker-dealer orders

             did so because the display of these orders would increase

             transparency and liquidity in the market.  The Investment

             Company Institute ("ICI") stated that it would support the

             display of institutional orders because it believed display

             of those orders would improve the overall transparency and

             liquidity of the market.  This support, however, was

             contingent upon the continued availability of the "reserve"

             feature offered by some alternative trading systems.[200]

             Another commenter, similarly, supported disclosure of

             institutional orders because displayed orders "are good for

             markets," and stated that there was no cause for concern

             that requiring institutions to display in the public

             quotation stream would lead to a decrease in orders

             displayed through alternative trading systems.  In fact,

             this commenter stated its belief that the opposite would

             occur, and pointed to the proliferation of ECNs as

             evidence.[201]  The NYSE also commented that requiring

             display of institutional orders in the market would add

             transparency and liquidity.  The NYSE added that it strongly

             believes all orders of high volume alternative trading

             systems, including orders of 10,000 shares or more, should

             be required to be publicly displayed.[202]  Ashton suggested

             that orders of up to 10,000 shares on all alternative

             trading systems should be fully displayed, and orders

             exceeding 10,000 shares should have at least 10,000 shares

             publicly displayed.  Ashton stated that it believed this

             would strike the appropriate balance between displaying such

             orders and minimizing their market impact.[203]

                  The commenters who opposed display of non-market maker

             broker-dealer and institutional orders did so because of the

             market impact they felt such orders would have if displayed.

             Instinet stated that requiring the display of institutional

             orders would have several negative effects on the market.

             In particular, Instinet claimed that public display of

             institutional orders could have a "significant negative

             impact" on the price and volatility of a security, would

             divert this order flow to entities not subject to Regulation

             ATS or to offshore markets, and would curtail the ability of

             institutions to manage the securities transactions of the

             individual investors for whom they act as proxy.[204]

             Instinet also stated that institutional and other non-market

             maker investors do not perform specialized market functions,

             and therefore should not be subject to mandatory display in

             the public quotation system.  Finally, Instinet stated it

             believed that customers should be able to determine the

             transparency of their orders whether they were placed with a

             "traditional brokerage firm" or a firm "that offers both

             traditional and electronic execution opportunities."[205]

                  The Commission is not persuaded by commenters that

             suggest that institutions currently willing to use

             alternative trading systems to display their orders to other

             alternative trading system subscribers, including other

             institutions, market-markers, and broker-dealers, will be

             less willing to use alternative trading systems that must

             display those orders to the public market.  Our reasons are

             as follows.  The primary group of market participants that

             will benefit from the public display of institutional orders

             is retail investors.  Retail investors are not currently

             alternative trading system subscribers.  To avoid market

             impact, institutions try to avoid signaling other

             institutions and market professionals, not retail investors.

             Almost all market professionals and a significant number of

             institutions already subscribe to alternative trading

             systems.  Thus, the Commission believes that the additional

             exposure to the market should not affect institutions

             behavior in their use of alternative trading systems.

             Moreover, to the extent that institutions want to display

             small sized orders in the public market, rather than their

             entire order, they will still be able to make use of an

             alternative trading systems "reserve size" feature.  This

             will enable institutions to avoid exposing the total size of

             their order to the public market.

                  The Commission also received numerous comment letters

             from institutions who expressed similar concerns.  Some of

             these commenters appeared to be concerned that they might be

             forced to display all orders sent to alternative trading

             systems, even those orders, or those portions of orders,

             that are not displayed to any other alternative trading

             system subscribers. [206]  To the extent that these letters

             are concerned with "full disclosure," that concern is

             misplaced.  Instead, the Commission proposed, and is

             adopting, a public display requirement that applies only to

             those orders (or those portions of orders) that alternative

             trading system subscribers have already decided to display

             to the large number of other alternative trading system

             subscribers.  Institutions will remain free to use a reserve

             feature, if an alternative trading system has one, to not

             display full size of their orders to other alternative

             trading system subscribers.  That non-display of total order

             size will also apply if that order is displayed in the

             public quote.

                  Other commenters generally expressed concerns similar

             to those expressed by Instinet, emphasizing concerns about

             best execution for institutional orders, and expressing

             concern about increased market volatility. [207]  The

             Commission believes that display of institutional orders in

             the public quote stream will not harm best execution -- if

             anything -- best execution will be enhanced as all market

             participants will have an opportunity to execute against

             these orders.  The Commission also believes that the

             experience with display of market maker orders under the

             Order Handling Rules suggests that display of institutional

             orders will not lead to increased market volatility.  Many

             of the largest market participants already have access to

             alternative trading system institutional orders; therefore,

             their display in the public quote stream should not

             necessarily lead to increased market volatility.  It will,

             however, allow those market participants who do not have

             access to these alternative trading systems to have the

             opportunity to execute against these orders.

                  Some of the letters the Commission has received since

             the beginning of November also express a concern that if

             institutional orders were publicly displayed, institutions

             would lose their anonymity.[208]  The Commission did not

             propose, nor is it adopting, any requirement that would

             jeopardize an institutions anonymity.  Similar to the way

             in which ECNs currently display orders in the public quote,

             alternative trading systems would display their best priced

             orders in the public quote, but would not indicate which of

             their subscribers had entered the order.

                  In addition, a number of institutional commenters

             suggested if Nasdaq had implemented its proposed limit order

             file, they would not oppose a requirement that alternative

             trading systems publicly display institutional orders, if

             those orders represent the best priced order in the

             alternative trading system they use.[209]  Unfortunately,

             none of these commenters explained why they would be willing

             to publicly display their orders through a Nasdaq sponsored

             central limit order file, but not publicly display orders

             they have chosen to display to other alternative trading

             system subscribers.

                  Finally, one commenter expressed concern that the order

             display rule would mean that retail investors would

             increasingly observe trades taking place below the bid and

             above the ask, and would be frustrated by their lack of

             access to these trades.[210]  Because certain institutions

             orders will now be displayed in the public quote, however,

             retail investors will have access to them.  The lack of

             access retail investors currently have to alternative

             trading systems is one of the reasons the Commission

             believes that the display of institutional orders in the

             public quote stream is particularly important.  In addition,

             this commenter stated that requiring public display of

             institutional orders would tilt the playing field in favor

             of dealers who do not have to display institutional

             orders.[211]  Under the Order Handling Rules, however market

             makers are required to display all customer limit orders

             that improve their quote.

                  For these reasons, the Commission agrees with those

             commenters who believe that institutional orders that are

             displayed to subscribers of an alternative trading system

             should be integrated into the public quotation system if

             they represent the top of the book in the alternative

             trading system.[212]  The Commission believes that any

             market impact that results from such display will be

             vitiated by the retention of the reserve feature, as

             discussed above.  The Commission notes that such

             institutional orders are currently displayed to the

             subscribers of alternative trading systems, who may number

             in the thousands.  These subscribers are often the market

             makers and other active traders in the security.  As a

             result, prices displayed only on alternative trading systems

             are immediately known to key market players who can adjust

             their trading to take advantage of their information

             advantage.  Moreover, the Commission believes that these

             orders will provide enhanced transparency and liquidity when

             integrated into the public quotation stream, and will

             further curtail the development of a two-tiered market.

                  Nonetheless, the Commission is concerned about

             commenters statements that institutions may react to the

             transparency requirement by shipping more orders upstairs or

             overseas.  The Commission intends to closely monitor the

             impact of this requirement, and will modify it if harm

             appears to result.

                                 (iii)Access to Publicly Displayed Orders

                                           (A)  Application of Access

                                                Requirements under

                                                Regulation ATS

                  The Commission believes that in addition to the display

             of better alternative trading system prices in the public

             quotation system, the availability of such trading interest

             to public investors is an essential element of the national

             market system.  Therefore, the Commission proposed that

             alternative trading systems afford all non-subscriber

             broker-dealers equivalent access to the alternative trading

             system orders displayed in the public quote, similar to the

             manner in which ECNs currently comply with the ECN Display

             Alternative under the Quote Rule.[213]  The Commission

             agrees with those commenters who stressed the importance of

             equivalent access for non-participants and who stated that

             simply requiring alternative trading systems to display

             prices in the public quotation system does not go far enough

             to facilitate the best execution of customer orders without

             a mechanism to access orders at those prices.[214]

             Accordingly, the Commission is adopting the requirement as

             proposed.[215]  Specifically, with respect to any security

             in which an alternative trading system is required to

             publicly display its best priced orders because it has five

             percent or more of all trading in that security, such

             alternative trading system must provide for members of the

             SRO with which it is linked the ability to effect a

             transaction with those orders.  As discussed above, the

             Commission is phasing in the public display

             requirement.[216]  In addition, alternative trading systems

             are not required to provide access to a security until the

             public display requirement is effective for that

             security.[217]

                  The Commission believes that non-subscribing broker-

             dealers should be able to execute against those alternative

             trading system orders that are publicly displayed to the

             same extent as if that price had been reflected in the

             public quote by a national securities exchange or national

             securities association.  Thus, an alternative trading system

             should respond to orders entered by non-participants no

             slower than it responds to orders entered directly by

             subscribers.  The Commission believes that, under current

             NASD rules, any alternative trading system that allows non-

             subscribing broker-dealers to execute against publicly

             displayed alternative trading system orders in the same

             manner as ECNs linked to the Nasdaq market currently do

             would comply with this requirement.  The NASD does not

             currently require ECNs to automatically execute orders sent

             to the ECN through the NASDs SelectNet linkage with the

             ECN.  Any SRO to which alternative trading systems may be

             linked, may determine that it is necessary for the fair and

             orderly operation of its market to require that publicly

             displayed alternative trading system orders be subject to

             automatic execution.  Any such proposed rule change, of

             course, would be have to be filed with the Commission by the

             SRO, published for comment, and approved by the Commission.

             The Commission would not approve any such SRO rule unless it

             finds that such rule is consistent with the Exchange Act.

                                      (B)  Response to Comments

                  The Commission asked for comment on whether alternative

             trading systems should be required to provide non-

             subscribers with equivalent access to displayed orders.

             Several commenters responded to this issue.  Most of these

             commenters stated that non-subscribers should be given

             equivalent access.[218]  Only one commenter cautioned

             against granting such access.  This commenter argued that

             alternative trading systems and traditional broker-dealers

             engage in the same business and, therefore, it would impede

             innovation as well as be unfair to require fair access to

             trading opportunities on alternative trading systems when

             the Commission is not proposing to require such access to

             more traditional broker-dealers.[219]  The Commission does

             not believe that alternative trading systems and traditional

             broker-dealers engage in the same business.[220]  As

             discussed above, the Commission believes that the public

             display of orders on alternative trading systems that are

             currently displayed only to the subscribers of those

             alternative trading systems will improve the public

             securities markets.  Without a mechanism to access these

             orders, any public display requirement is insufficient.

             Accordingly, the Commission is adopting the fair access

             requirement.

                  In the Proposing Release, the Commission also stated

             that it believes that for an alternative trading system to

             comply with this equivalent execution access requirement,

             the publicly displayed alternative trading system orders

             would need to be subject to automatic execution through

             small order execution systems operated by the SRO to which

             the alternative trading system is linked.  One commenter

             strongly urged the Commission to eliminate the automatic

             execution access requirements from its proposal.  This

             commenter was opposed to such a linkage, because it believed

             it would effectively eliminate pure agency brokers from

             markets in covered securities, because brokers would be

             required to commit capital if automatic execution resulted

             in multiple executions against client orders.  This

             commenter also noted that the Commissions Order Handling

             Rules do not require automatic execution, but require only

             that response times for non-subscriber trade requests are no

             slower than response times for subscribers, and believed

             this to be a more balanced approach to execution access

             issues. [221]  Similarly, American Century, while supporting

             equivalent access to non-subscribers, stated that automatic

             execution access requirements were risky as well, because of

             the possibility of double execution.[222]  The Commission

             does not expect -- by operation of its rules alone -- that

             alternative trading systems will be subject to automatic

             execution through SROs small order execution systems.

             Nevertheless, the Commission believes that an SRO to which

             an alternative trading system is linked should be able to

             establish rules regarding how that alternative trading

             system is integrated into its market.   The Commission notes

             that any change to SRO rules regarding automatic execution

             would have to be approved by the Commission after notice and

             the opportunity for the public to comment, and subject to

             Commission review for competitive fairness and consistency

             with the Exchange Act.

                  In addition, the Commission asked if there was a

             feasible way to allow market-wide interaction without

             linkage to SRO order execution systems, and whether there

             was a feasible way to grant equivalent non-subscriber access

             to institutions that are not broker-dealers.

                                 (iv) Execution Access Fees

                                           (A)  Limitations on

                                                Alternative Trading

                                                System Fees Charged to

                                                Non-Subscribers

                  In the Proposing Release, the Commission stated that an

             alternative trading systems fee schedules should not be

             used to circumvent the ability of non-participants to access

             a systems publicly displayed orders.[223]  Because

             reasonable fees are a component of equal access, the rules

             the Commission is adopting today prohibit an alternative

             trading system from setting fees that are inconsistent with

             the principle of equivalent access to the alternative

             trading system quotes by members of the SRO to which the

             alternative trading system is linked.  The rules also

             require an alternative trading system to comply with the

             rules or standards governing fees established by the

             national securities exchange or national securities

             association through which non-subscribers have access.[224]

                  The Commission believes that fees charged by an

             alternative trading system would be inconsistent with

             equivalent access if they have the effect of creating

             barriers to access for non-subscribers.  As the Commission

             stated in adopting the Order Handling Rules, any ECN fees

             should be similar to the communications or systems charges

             imposed by various markets.[225]  In addition, the

             Commission believes that the national securities exchange or

             national securities association to which the alternative

             trading system provides the prices and sizes of its best

             priced orders should have further authority to assure that

             fees charged by alternative trading systems to non-

             subscribers are disclosed or otherwise consistent with fees

             typically charged by the members of the exchange or

             association for access to displayed orders.  There are a

             number of ways the exchange or association could address the

             issue of fees charged by alternative trading systems.  For

             example, subject to Commission review and approval, an

             exchange or association could establish a standard for what

             constitutes a fair and reasonable fee for non-subscriber

             access to an alternative trading system, consistent with the

             effective operation of the self regulatory organizations

             market and the Commissions equivalent access requirement.

             The exchange or association may also require alternative

             trading system fees to be charged in a manner consistent

             with the exchanges or associations market, such as

             requiring the fee to be incorporated in the displayed quote.

                  At such time as quotations in the national market

             system are reflected in decimals rather than in fractions,

             the Commission will reconsider the rules limitation on

             alternative trading systems charging fees only as permitted

             by the national securities exchange or national securities

             association to which they are linked.  At that time, the

             Commission will also consider whether alternative trading

             systems should be permitted or required to reflect any fee

             charged in their quotations.

                  Any rules the exchange or association develops will of

             course need to be consistent with the goals of promoting

             competition and protecting investors.  The Commission

             encourages SROs that accept alternative trading system

             quotes to work with alternative trading systems to develop

             uniform standards regarding display and execution access by

             SRO members to alternative trading systems linked to the

             SRO.[226]  In addition, to foster equivalent access to

             alternative trading systems for exchange-listed securities,

             the Commission expects Intermarket Trading System ("ITS")

             participants to modify ITS Plan requirements where necessary

             to accommodate alternative trading system participation in

             the markets of ITS participants, and access to those

             alternative trading systems through ITS.  If the SROs and

             ITS participants cannot come to terms with affected

             alternative trading systems within a reasonable time, the

             Commission will consider exercising its authority to mandate

             the necessary linkages.

                                      (B)  Response to Comments

                  The Commission requested comment on the fees that

             alternative trading systems should be permitted to charge

             non-subscribers under the proposed rules.  In addition, the

             Commission requested comment on whether there were

             alternatives for assuring fair execution access for non-

             subscribers other than limiting fees, or another test for

             determining whether non-subscriber fees assure equal access.

                  Ten comment letters addressed the issue of fees charged

             by alternative trading systems for access by non-

             subscribers.  Of these, seven were generally in favor of

             permitting alternative trading systems to charge some fee to

             non-subscribers, [227] two were opposed,[228] and one felt

             the issue needed to be addressed in a separate release by

             the Commission.[229]

                  Most of the commenters who were in favor of allowing

             fees stated that fees should be "reasonable," or should not

             exceed the fees typically charged to subscriber broker-

             dealers.  The NASD, while not opposing such fees, stated

             that the Commission should reconsider the benchmark for an

             alternative trading systems fees, because it believed that

             for many alternative trading systems, non-subscriber orders

             were of primary importance.  Because of this, the NASD

             stated that any fees should be set at the low end of the

             threshold, rather than at the level that a "substantial

             proportion" of an alternative trading systems broker-dealer

             customers were paying.  The NASD supported permitting SROs

             to regulate fees, so that such issues could be discussed at

             the SRO level.  The NASD also recommended that the

             Commission discuss "the practical issues related to billing

             disputes and refusals to trade," because billing disputes

             have led to locked and crossed markets.[230]  Finally, the

             NASD asked the Commission to address the best execution

             obligations of market participants when a fee is not

             included in the publicly displayed price of an order.  A

             broker-dealers duty of best execution requires it to seek

             the most favorable terms reasonably available under the

             circumstances for a customers transaction.  While price is

             the predominant element of best execution, the traditional

             non-price factors of executions should also be

             considered.[231]

                  Instinet commented that market forces should determine

             the appropriate fees that broker-dealers can charge for

             their services.  Consequently, Instinet opposed any proposal

             to limit (or eliminate entirely) access fees charged by a

             broker-dealer subject to Regulation ATS if the rules of the

             national securities exchange or association to which the

             broker-dealer is linked limits (or prohibits) such fees.

             The Commission will, of course, review any proposed SRO

             rules relating to access fees.  To be approved by the

             Commission, any such rules must be necessary to maintain

             consistency within the SROs market, as well as being

             designed to promote just and equitable principles of trade,

             to promote fair competition, to facilitate transactions in

             securities, and, in general, to protect investors and the

             public interest.[232]  Instinet also stated, however, that

             it would urge the Commission to ensure that all public

             execution access fee requirements were handled in such a way

             that all orders integrated into the public quote stream were

             treated consistently, and so that all broker-dealers were

             able to set appropriate fees for the services they

             performed, subject to SRO rules.[233]

                  American Century stated that all market participants

             who posted bids and offers, not just alternative trading

             systems, should be permitted to charge fees.  American

             Century recommended that participants who provide liquidity

             be permitted to charge a fee for that liquidity, and that

             those who took liquidity should pay fees.[234]  OptiMark

             stated that the Commission should consider what economic

             incentive it would be creating by permitting alternative

             trading systems that register as broker-dealers to charge

             fees, but not permitting those that register as exchanges to

             do so.[235]

                  The Commission also requested comment on whether fees

             should be included in the price of an order quoted to the

             public, particularly once orders are quoted in decimals.  In

             this regard, the NYSE and the Chicago Stock Exchange ("CHX")

             stated that fees made it difficult to determine the true

             cost of executing an order and indicated that this would

             change if fees could be included in the quote.[236]  As

             discussed above, when quotations in the national market

             system are reflected in decimals rather than fractions, the

             Commission will reconsider whether alternative trading

             systems should reflect any fees charged in their quote, and

             if so, whether they should be subject to SRO requirements.

                                 (v)  Amendment to Rule 11Ac1-1 under the

                                      Exchange Act

                  The Commission also proposed an amendment to Rule

             11Ac1-1 under the Exchange Act.[237]  The amendment would

             expand the ECN Display Alternative to allow alternative

             trading systems that display orders and provide equal

             execution access to those orders under Rule 301(b)(3) of

             Regulation ATS to fulfill market makers and specialists

             obligations under the Quote Rule.  Only two comment letters

             addressed the proposed amendment to the Quote Rule, both of

             which supported it. [238]

                  The Commission is adopting the amendment to the Quote

             Rule as proposed.[239]  The Quote Rule currently requires

             all market makers and specialists to make publicly available

             any superior prices that it privately offers through ECNs.

             The ECN Display Alternative in the Quote Rule permits an ECN

             to fulfill these obligations on behalf of market makers and

             specialists using its system by submitting the ECNs best

             market maker or specialist priced quotation to an SRO for

             inclusion into the public quotation.[240]  Todays amendment

             to the Quote Rule is intended to expand the ECN Display

             Alternative to allow alternative trading systems that

             display orders and provide equal execution access to those

             orders under Rule 301(b)(3) of proposed Regulation ATS to

             fulfill market makers and specialists obligations under

             the Quote Rule.

                            d.   Fair Access

                                 (i)  Importance of Fair Access

                  The Exchange Act requires registered exchanges and

             national securities associations to consider the public

             interest in administering their markets and to establish

             rules designed to admit members fairly.[241]  These

             requirements are intended to ensure that markets treat

             investors and other market participants fairly.[242]

             Alternative trading systems that choose to register as

             exchanges will be subject to these requirements.  Under the

             current regulatory approach, however, there is no mechanism

             to prevent unfair denials or limitations of access by

             alternative trading systems or regulatory oversight of such

             denials or limitations of access.  Access to alternative

             trading systems may not be critical 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 a significantly large

             percentage of the volume of trading, unfairly discriminatory

             actions hurt investors lacking access to the system.

                  Fair treatment by alternative trading systems of

             potential and current subscribers is particularly important

             when an alternative trading system captures a large

             percentage of trading volume in a security, because viable

             alternatives to trading on such a system are limited.

             Although the Commission is adopting rules to require

             alternative trading systems with significant trading volume

             to publicly display their best bid and offer and provide

             equal access to those orders,[243] direct participation in

             alternative trading systems offers benefits in addition to

             execution against the best bid and offer.  For example,

             participants can enter limit orders into the system, rather

             than just execute against existing orders on a fill-or-kill

             basis.  Participants in an alternative trading system can

             view all orders, not just the best bid or offer, which

             provides important information about the depth of interest

             in a particular security.  Participants also have access to

             unique features of alternative trading systems, such as

             "negotiation" features, whereby one participant can send

             orders to another participant proposing specific terms to a

             trade, without either participant revealing its identity.

             Some alternative trading systems also allow participants to

             enter "reserve" orders which hide the full size of an order

             from view.  Because of these advantages to participants in

             an alternative trading system, access to the best bid and

             offer through an SRO is an incomplete substitute.

             Therefore, the rules the Commission is adopting today

             require most alternative trading systems that are registered

             as broker-dealers and that have a significant percentage of

             overall trading volume in a particular security to comply

             with fair access standards, as described in more detail

             below. [244]

                                 (ii) Fair Access Requirement

                  The Commission is adopting Exchange Act Rule 301(b)(5)

             to ensure that qualified market participants have fair

             access to the nations securities markets.  As the

             Commission proposed, an alternative trading system

             registered as a broker-dealer and subject to Regulation ATS

             will be required to establish standards for access to its

             system and apply those standards fairly to all prospective

             subscribers, if the alternative trading system, during four

             of the preceding six months, accounts for twenty percent or

             more of the trading volume.[245]  This twenty percent volume

             threshold will be applied on a security-by-security basis

             for equity securities.[246]  Accordingly, if an alternative

             trading system accounted for twenty percent or more of the

             share volume in any equity security, it must comply with the

             fair access requirements in granting access to trading in

             that security.

                  For debt securities, the Commission proposed that if an

             alternative trading system accounted for twenty percent or

             more of the volume in any category of debt security, the

             alternative trading system would be subject to the fair

             access requirements in granting access to trading in

             securities in that category.  The Commission solicited

             comment on the appropriate categories of debt securities.

             Specifically, the Commission asked whether categories such

             as mortgage and asset-backed securities, municipal

             securities, corporate debt securities, foreign corporate

             debt securities, and foreign sovereign debt securities would

             be appropriate.  After considering the comments, the

             Commission is adopting rules that require alternative

             trading systems with twenty percent or more of the volume in

             municipal securities, investment grade corporate debt

             securities, and non-investment grade corporate debt

             securities to meet the fair access requirements with respect

             to that category.  The Municipal Securities Rulemaking

             Boards transaction reporting plan now provides information

             on the aggregate trading in municipal securities.[247]  The

             fair access requirement will be effective for alternative

             trading systems with twenty percent or more of the volume in

             municipal securities on [insert date 120 days after

             publication in the Federal Register].

                  Because similar information for investment grade and

             non-investment grade corporate debt, however, is not

             currently available, the fair access requirements in Rule

             301(b)(5)(D) and (E) will not be made effective until April

             1, 2000 with the expectation that further information will

             be available at that time.[248]  The Commission is deferring

             action on the system reliability standards for alternative

             trading systems trading a substantial portion of the market

             in foreign corporate debt and foreign sovereign debt until

             such time as reliable data is available by which alternative

             trading systems may determine their relative portion of the

             market.

                  The Commission is excluding from the fair access

             requirement those alternative trading systems that match

             customer orders for securities with other customer orders,

             at prices for those same securities established outside such

             system.[249]  Thus, regardless of their trading volume,

             systems that, for example, match customer orders prior to

             the market opening and then execute those orders at the

             opening price for the securities are not required to comply

             with the fair access requirement.  In addition, systems that

             match unpriced orders at the mid-point of the bid and ask,

             or at a value weighted average or prices on another market

             are not subject to the fair access requirements.  The

             Commission, however, would not consider an alternative

             trading system to be excluded from the fair access

             requirements in paragraph (b)(5) of Rule 301 if that system

             priced any security traded on that system using prices

             established outside such system for instruments other than

             the particular security being executed.  Therefore, a system

             would not be excluded if it traded options or other

             derivatives based on prices established on the primary

             market for the underlying security.

                  Alternative trading systems subject to this fair access

             requirement must comply with the requirements in paragraph

             (b)(5)(ii) of Rule 302.  Specifically, these alternative

             trading systems must establish standards for granting access

             to trading on their systems,[250] and maintain these

             standards in their records.[251]  An alternative trading

             system must apply these standards fairly and is prohibited

             from unreasonably prohibiting or limiting any person with

             respect to trading in any equity securities, or in certain

             categories of debt securities, when that trading exceeds the

             twenty percent volume threshold.  For example, the

             Commission will consider it a denial of access by an

             alternative trading system if the alternative trading system

             refuses to open an account for a customer, thereby denying

             that customer the use of its trading facilities.[252]  In

             addition, if an alternative trading system grants, denies or

             limits access to trading to any person, the alternative

             trading system is required to keep records of each action,

             including the reasons for such action.[253]  Each

             alternative trading system will also be required to provide

             a list of all grants, denials or limitations of access to

             the Commission on Form ATS-R each quarter.  For each grant,

             denial or limitation of access, alternative trading systems

             must provide the name of the person, nature and effective

             date of the decision, and any other information that the

             alternative trading system deems relevant.  For denials or

             limitations of access, alternative trading systems must

             provide information describing the reasons for the

             decision.[254]  For example, if an applicant has a relevant

             disciplinary history, has insufficient financial resources,

             or refuses to agree to abide by the rules of the alternative

             trading system, an alternative trading system should include

             such reasons in its filing with the Commission.  The

             Commission intends to enforce the fair access rules by

             reviewing these reports and investigating any possible

             violations of the rule.[255]

                  The fair access requirements the Commission is adopting

             today are based on the principle that qualified market

             participants should have fair access to the nations

             securities markets.  Alternative trading systems remain free

             to have reasonable standards for access.  Such standards

             should act to prohibit unreasonably discriminatory denials

             of access.  A denial of access is reasonable if it is based

             on objective standards.  For example, an alternative trading

             system may establish minimum capital or credit requirements

             for subscribers.[256]  Similarly, an alternative trading

             system may reasonably deny access to investors based on a

             relevant, unfavorable disciplinary history.  In addition, an

             alternative trading system could allow institutional

             subscribers the option of refusing to trade with broker-

             dealer subscribers, as long as the alternative trading

             system grants this option to subscribers based on objective

             and fairly applied standards.  Provided that these or other

             standards were applied consistently to all subscribers, an

             alternative trading system would be considered to be

             granting and denying access fairly.  A denial of access

             might be unreasonable, however, if it were discriminatorily

             applied among similar subscribers or if it were based solely

             on the trading strategy of a potential participant.

                  The proposed rules included a right of appeal to the

             Commission of any denial or limitation of access, as well as

             a requirement that an alternative trading system notify a

             person denied or limited access of their right of appeal.

             The Commission has decided not to adopt these provisions.

             The Commission is concerned that such a right of appeal

             would prove burdensome to the alternative trading system,

             the party denied or limited access, and Commission staff.

             In addition, commenters generally approved of the goals of

             fair access, but were not supportive of providing a right of

             appeal to the Commission.

                                 (iii)Response to Comments

                  Commenters who addressed the proposed fair access

             requirement generally agreed with the Commissions goal of

             ensuring that alternative trading systems with significant

             volume establish criteria for fairly determining access.

             [257]  Two commenters, for various reasons, did not believe

             that a requirement ensuring fair access by alternative

             trading systems was necessary.[258]  Another commenter

             argued that alternative trading systems that do not display

             to subscribers should not be required to grant access to

             non-subscribers.[259]

                  The Commission solicited comment on the level of volume

             at which fair access requirements should be applied.  Of

             those commenters who addressed the Commissions proposed

             threshold of twenty percent, three believed that the level

             should be raised,[260] two believed it should be

             lowered,[261] and one believed twenty percent was

             appropriate.[262]  One of the commenters that recommended

             the Commission lower the threshold from twenty percent

             stated that fair access should be ensured regardless of

             volume, because volume levels are subject to variation over

             time, and because unfair denials of access by even small

             systems could make access to quotes in illiquid securities

             particularly difficult.[263]

                  The Commission agrees with this commenter that fair

             access is an important element of fair markets.

             Nevertheless, in balancing the need for fair access with the

             costs that may be associated with such a requirement, the

             Commission believes that a twenty percent threshold strikes

             the right balance.  As discussed above, the rules the

             Commission is adopting today require that an alternative

             trading system subject to Regulation ATS comply with fair

             access requirements if, during at least four of the

             preceding six months, the alternative trading system

             accounted for twenty percent or more of the average daily

             share volume in any equity security or certain categories of

             debt.[264]

                  The Commission also requested comment on whether

             persons denied access to an alternative trading system

             should have the right to appeal this action to the

             Commission, what form the appeal should take, and what the

             appropriate standard for Commission review should be.  Five

             comment letters directly addressed the issue of appeal to

             the Commission of denials of access.

                  One commenter favored a right to appeal a denial of

             access, but stated that the appeal process should begin at

             the SRO level.[265]  This commenter stated that appeal to

             the Commission should occur only if the SRO fails to resolve

             the dispute.  Another commenter, similarly, stated that it

             believes denials or limitations of access should be handled

             through current SRO complaint and disciplinary procedures,

             rather than through procedures used to appeal SRO

             determinations to the Commission.  This commenter stated

             that it believes formal Commission procedures could blur the

             allocation of supervisory authority over broker-dealers and

             could lead to duplicative or inconsistent review proceedings

             in some cases.  Moreover, this commenter was concerned that

             a right to appeal to the Commission could lead to the

             frequent filing of frivolous or vexatious complaints against

             the broker-dealer, thereby impeding its ability to screen

             out potentially unqualified customers.[266]  As discussed

             above, the Commission has decided not to adopt the proposed

             right of appeal to the Commission.

                  One commenter opposed a right to appeal denial of

             access, on the basis that there was no need for it.  If,

             however, the Commission did implement its proposal to

             provide those denied access with the right to appeal to the

             Commission, this commenter recommended that the Commission

             ensure that this process did not become a means to dictate

             with whom a proprietary system may contract and that the

             allowable relief not be so expansive as to allow the

             Commission to alter the alternative trading systems

             published access standards.[267]

                            e.   Capacity, Integrity, and Security

                                 Standards

                  As discussed in the Proposing Release,[268] in November

             1989 and May 1991, the Commission published two policy

             statements regarding the use of technology in the securities

             markets.[269]  These policy statements established the

             automation review program and called for the SROs to

             establish, on a voluntary basis, comprehensive planning,

             testing, and assessment programs to determine systems

             capacity and vulnerability.  The Commission recommended that

             SROs: (1) establish current and future capacity estimates;

             (2) conduct capacity stress tests; and (3) obtain annual

             independent assessments of systems to determine whether they

             can perform adequately.[270]  In addition, the Commission

             staff conducts oversight reviews of the SROs systems

             operations.  All SROs currently participate in the

             Commissions automation review program, which has been a

             significant force in stimulating the SROs to upgrade their

             systems technology.[271]

                  The automation review program was established because

             of "the impact that systems failures have on public

             investors, broker-dealer risk exposure, and market

             efficiency."[272]  While this program did not directly apply

             to alternative trading systems, the Commission noted that

             all broker-dealers should engage in systems testing and use

             the policy statement as a guideline.[273]  Because some

             alternative trading systems now account for a significant

             share of trading in the U.S. securities markets, failures of

             their automated systems have as much of a potential to

             disrupt the securities markets as failures of SROs

             automated systems.  For this reason, the Commission proposed

             to require alternative trading systems with significant

             volume to meet certain systems capacity, integrity, and

             security standards. [274]  The proposed requirements were

             similar to those standards SROs currently follow under the

             automation review program.

                                 (i)  Application of Capacity, Integrity,

                                      and Security Standards

                  The Commission is adopting Exchange Act Rule 301(b)(6)

             to reduce the likelihood that alternative trading systems

             that play a significant role in our national market system

             will disrupt the securities markets due to failures of their

             automated systems.  This rule requires alternative trading

             systems trading twenty percent or more of the volume in any

             equity security or in certain categories of debt

             securities[275] to comply with standards regarding the

             capacity, integrity, and security of their automated

             systems.  As for the fair access requirements discussed

             above, the volume thresholds are on a security-by-security

             basis for equity securities.  Accordingly, if any one equity

             security traded on an alternative trading system accounts

             for more than twenty percent of the total share volume in

             that security during four of the preceding six months, the

             alternative trading system is required to meet the capacity,

             integrity, and security requirements for that security,

             although in practice this may cause compliance with the

             standards for all securities traded in that system.  With

             respect to debt securities, an alternative trading system is

             required to meet the systems capacity, integrity, and

             security standards if it trades twenty percent or more of

             the volume during four of the preceding six months in any of

             the following categories: municipal securities, non-

             investment grade corporate debt, and investment grade

             corporate debt.[276]

                  The Municipal Securities Rulemaking Boards transaction

             reporting plan now provides information on the aggregate

             trading in municipal securities.[277]  Because similar

             information for investment grade and non-investment grade

             corporate debt, however, is not currently available, the

             system capacity, integrity, and security requirements in

             Rule 301(b)(6)(D) and (E) will not be made effective until

             April 1, 2000.[278]  The Commission is  deferring action on

             the system reliability standards for alternative trading

             systems trading a substantial portion of the market in

             foreign corporate debt and foreign sovereign debt until such

             time as reliable data is available by which alternative

             trading systems may determine their relative portion of the

             market.

                  As for the fair access requirement, the Commission is

             excluding from the systems capacity, integrity, and security

             requirement those alternative trading systems that match

             customer orders for securities with other customer orders,

             at prices for those same securities established outside such

             system.[279]  Thus, regardless of their trading volume,

             systems that, for example, match customer orders prior to

             the market opening and then execute those orders at the

             opening price for the securities are not required to comply

             with these systems reliability requirements.  In addition,

             systems that match unpriced orders at the mid-point of the

             bid and ask, or at a value weighted average or prices on

             another market are not subject to the fair access

             requirements.  The Commission, however, would not consider

             an alternative trading system to be excluded from the

             requirements in paragraph (b)(6) of Rule 301 if that system

             priced any security traded on that system using prices

             established outside such system for instruments other than

             the particular security being executed.  Therefore, a system

             would not be excluded if it traded options or other

             derivatives based on prices established on the primary

             market for the underlying security.

                  An alternative trading system that meets these volume

             thresholds will be required to: (1) establish reasonable

             current and future capacity estimates; (2) conduct periodic

             capacity stress tests of critical systems to determine such

             systems ability to process transactions in an accurate,

             timely, and efficient manner; (3) develop and implement

             reasonable procedures to monitor system development and

             testing methodology; (4) review the vulnerability of its

             systems and data center computer operations to internal and

             external threats, physical hazards, and natural disasters;

             and (5) establish adequate contingency and disaster recovery

             plans.  An alternative trading system is required to meet

             these proposed standards with respect to all its systems

             that support order entry, order handling, execution, order

             routing, transaction reporting, and trade comparison in the

             particular security.[280]  In addition, alternative trading

             systems subject to this provision are required to notify the

             Commission staff of material systems outages and material

             systems changes.[281]  This information will enable

             Commission staff to better understand the operation of the

             alternative trading system and to identify potential

             problems and trends that may require attention.

                  Finally, under Regulation ATS, alternative trading

             systems that meet the volume levels set forth above are

             required to perform an annual independent review of the

             systems that support order entry, order handling, execution,

             order routing, transaction reporting and trade

             comparison.[282]  As discussed in greater detail in the

             Commissions May 1991 Policy Statement,[283] an independent

             review should be performed by competent, independent audit

             personnel following established audit procedures and

             standards.  If internal auditors are used by an alternative

             trading system to complete the review, these auditors should

             comply with the standards of the Institute of Internal

             Auditors and the Electronic Data Processing Auditors

             Association ("EDPAA").  If external auditors are used, they

             should comply with the standards of the American Institute

             of Certified Public Accountants ("AICPA") and the EDPAA.

                                 (ii) Response to Comments

                  In the Proposing Release,[284] the Commission requested

             comment on its proposal to require significant alternative

             trading systems to satisfy systems capacity, integrity, and

             security standards.  While most commenters did not

             specifically address this proposed requirement, those that

             did comment generally supported it.[285]

                  The Commission asked whether the twenty percent volume

             threshold proposed was appropriate.  In this regard, the

             NASD supported the twenty percent proposed volume

             threshold.[286]  Two other commenters, however, suggested

             that the Commissions proposed threshold was too low.[287]

             Specifically, one of these commenters argued that the

             Commission should raise the volume threshold from twenty

             percent to thirty-five percent to avoid including debt

             market participants with no significant role in price

             discovery.  This commenter stated that, given the

             decentralized and fungible nature of the debt markets, an

             alternative trading system trading debt securities would

             need twenty percent or more of the relevant market to

             materially affect the markets in the manner in which the

             Commission is concerned. [288]  Another commenter,

             similarly, suggested that these requirements not be imposed

             until an alternative trading system had forty percent of the

             market in any security.  In addition, before the capacity,

             integrity, and security requirements are triggered, this

             commenter recommended that any security (or category of

             debt) in which the alternative trading system reached forty

             percent of aggregate daily volume also represent twenty

             percent or more of the alternative trading systems overall

             trading activity.[289]  One commenter, however, argued that

             the Commissions proposed threshold was too high, and that

             it should instead be applicable to alternative trading

             systems with one percent of the consolidated volume in a

             category of equity securities, such as listed or Nasdaq

             securities.[290]

                  In addition, while the ICI stated its belief that

             competitive pressures will generally suffice to ensure that

             alternative trading systems have the capacity to execute

             trades in a timely manner, the ICI also stated that it would

             not oppose such requirements as long as the Commission

             applied them in a flexible manner and did not dictate how

             alternative trading systems structure their operations.[291]

                  The Commission believes that alternative trading

             systems that have a significant role in the marketplace

             should be able to handle reasonably foreseeable volume

             surges and be prepared for reasonably anticipated future

             volume increases.  As a result, the Commission continues to

             believe that the volume thresholds above are appropriate.

             Investors and other market participants increasingly rely on

             alternative trading systems to buy and sell securities.  The

             ability of these markets to meet the demands of market

             participants is directly related to the reliability of their

             automated systems.  The Commission realizes that alternative

             trading systems have significant business incentives to

             ensure that their systems have adequate capacity so that

             participants orders do not experience unnecessary delays.

             The systems capacity, integrity, and security rules are

             intended as a back-up to ensure that alternative trading

             systems that have a significant role in the market maintain

             sufficient systems and procedures to minimize the effects of

             potential systems problems in the secondary markets.

                            f.   Examination, Inspection, and

                                 Investigations of Subscribers

                  The Commission proposed that an alternative trading

             system be required to cooperate with the Commissions or an

             SROs inspection, examination, or investigation of the

             alternative trading system or any of the alternative trading

             systems subscribers.  Presently, the Commission has the

             authority to inspect and examine any member of any national

             securities exchange or any national securities association

             directly.  This is because all such members are broker-

             dealers.  Alternative trading systems, however, also could

             have certain other subscribers, such as institutions or

             individuals, to which the Commissions inspection authority

             does not extend.  Because alternative trading systems could

             be used by subscribers to manipulate the market in a

             security,[292] it is imperative that alternative trading

             systems cooperate in all inspections, examinations, and

             investigations.  Although neither the Commission nor the

             SROs has the authority to directly inspect non-broker-dealer

             subscribers of alternative trading systems, any relevant

             trading information involving such subscribers would be

             maintained by the alternative trading system under its

             recordkeeping requirements, and would be required to be made

             available upon request to its SRO or the Commission.  Under

             the rules the Commission is adopting today, an alternative

             trading systems exemption from exchange registration is

             conditioned on it cooperating with the Commissions or an

             SROs inspection, examination, or investigation of the

             alternative trading system or any of its subscribers. [293]

                            g.   Recordkeeping

                  The Commission proposed that alternative trading

             systems be required to keep certain records.  The Commission

             is adopting these recordkeeping requirements as proposed.

             As adopted, Regulation ATS requires alternative trading

             systems to make and keep the records necessary to create a

             meaningful audit trail.[294]  Specifically, alternative

             trading systems are required to maintain daily summaries of

             trading and time-sequenced records of order information,

             including the date and time the order was received, the

             date, time, and price at which the order was executed, and

             the identity of the parties to the transaction.  In

             addition, alternative trading systems are required to

             maintain a record of subscribers and any affiliations

             between subscribers and the alternative trading system.

             [295]  While some of the information that is required by the

             Regulation ATS will also be required under the NASDs Order

             Audit Trail System ("OATS"),[296] OATS is an NASD rule and

             does not cover all securities traded through alternative

             trading systems.

                  These recordkeeping requirements also require

             alternative trading systems to keep records of all notices

             provided to subscribers, including notices addressing hours

             of operation, system malfunctions, changes to system

             procedures, and instructions pertaining to access to the

             alternative trading system.[297]  In addition, alternative

             trading systems are required to keep documents made (if any)

             in the course of complying with the systems capacity,

             integrity, and security standards in Rule 301(b)(6).  These

             documents include all reports to an alternative trading

             systems senior management, and records concerning current

             and future capacity estimates, the results of any stress

             tests conducted, procedures used to evaluate the anticipated

             impact of new systems when integrated with existing systems,

             and records relating to arrangements made with a service

             bureau to operate any automated systems.  These records will

             allow the Commission to examine whether alternative trading

             systems are complying with the requirements under Proposed

             Rule 301(b)(6).  Finally, an alternative trading system

             subject to the fair access requirements discussed above is

             required to keep a record of its access standards.[298]

                  Regulation ATS requires that these records be kept for

             at least three years, the first two years in an easily

             accessible place.  Some records, such as partnership

             articles and articles of incorporation, must be kept for the

             life of the alternative trading system.[299]  Alternative

             trading systems are permitted to keep records in any form

             broker-dealers are permitted to keep records under Rule 17a-

             4(f) under the Exchange Act.[300]

                  The Commission recognizes that alternative trading

             systems subject to Regulation ATS are subject to the

             recordkeeping requirements for broker-dealers under Rules

             17a-3 and 17a-4 of the Exchange Act,[301] which may require

             that some of the same records be made and kept.  Regulation

             ATS does not require an alternative trading system to

             duplicate trading records maintained in the course of its

             normal recordkeeping operations, provided that the

             alternative trading system can sort and retrieve system

             records separately upon request.  In addition, as broker-

             dealers are currently permitted to do,[302] Regulation ATS

             permits an alternative trading system to retain a service

             bureau, depository, or other recordkeeping service to

             maintain required records on behalf of the alternative

             trading system as long as the designated party agrees to

             make the records available to the Commission upon

             request.[303]

                  The Commission solicited comment on these recordkeeping

             requirements.  In general, the comments received on this

             provision were mixed.  Two commenters supported requiring

             alternative trading systems to keep the records necessary to

             create a meaningful audit trail.[304]  On the other hand,

             one commenter expressed concern that the Commissions

             proposal would impose the same recordkeeping requirements on

             both small and large alternative trading systems.  Instead,

             this commenter argued that smaller systems should be subject

             to none or only minimal regulation generally, and that even

             the recordkeeping requirements may serve as a significant

             barrier to market entry and innovation.[305]

                  The Commission believes that, for the most part, the

             records it is requiring alternative trading systems to make

             and keep are records that alternative trading systems would

             otherwise keep as part of their business, and that therefore

             these requirements will not place undue burdens upon

             alternative trading systems.  In addition, the Commission

             believes that the highly automated nature of alternative

             trading systems will help facilitate the construction and

             maintenance of an audit trail.  The Commission also believes

             that these recordkeeping requirements are necessary to

             permit surveillance and examination to help assure fair and

             orderly markets.

                  One commenter recommended that an alternative trading

             systems records and reports only be available to an

             alternative trading systems SRO on a confidential, need-to-

             know basis.[306]  Regulation ATS provides that alternative

             trading systems are required to permit inspections and

             examinations of their records by the Commission or the SRO

             of which they are a member.[307]  The Commission noted in

             the Proposing Release that, while potential conflicts of

             interest in overseeing alternative trading systems may

             arise, the Commission believes these conflicts can be

             managed using the Commissions oversight authority.  The

             Commission also recognized that some market participants

             might be concerned that SROs could abuse their regulatory

             authority, but noted that the Commission has oversight

             responsibility over SROs to prevent such activity.  In this

             regard, the Commission expects SROs to carefully assess, and

             revise where necessary, their internal policies and

             procedures for protecting the confidentiality of sensitive

             information obtained in the course of fulfilling their SRO

             regulatory responsibilities.[308]

                  Finally, one commenter asked that the Commission

             consider the relationship of any new recordkeeping

             requirements with applicable SRO recordkeeping rules, such

             as the NASDs recently-adopted OATS.[309]  The Commission

             notes that, while some of the information required by

             Regulation ATS will also be required by SRO rules, such

             rules do not have the same scope and are not designed to

             meet the same goals.  Moreover, SRO rules may not apply to

             all alternative trading system activities.  In addition, the

             Commission is only requiring that records of certain

             information be made and kept, but is not dictating in what

             form those records are maintained.  This means that

             alternative trading systems have flexibility in how they

             comply with SRO and Commission rules.  Further, if

             duplicative rules exist, the same alternative trading system

             practices should serve to satisfy both sets of rules.

                            h.   Reporting and Form ATS-R

                  The Commission proposed that alternative trading

             systems be required to periodically report certain

             information about their activities.  The Commission is

             adopting these requirements as proposed.  Regulation ATS, as

             adopted, requires alternative trading systems to file with

             the Commission transaction reports within 30 calendar days

             of the end of each calendar quarter on Form ATS-R.[310]

             Specifically, Form ATS-R requires alternative trading

             systems to report total volume in terms of number of units

             traded and dollar value for the following categories of

             securities:  (1) listed equity securities, (2) Nasdaq NM

             securities, (3) Nasdaq SmallCap securities, (4) equity

             securities that are eligible for resale pursuant to Rule

             144A under the Securities Act of 1933,[311] (5) penny

             stocks, (6) equity securities not included in (1)-(5), (7)

             rights and warrants, (8) listed options, and (9) unlisted

             options.  In addition, alternative trading systems are

             required to report the total settlement value in U.S.

             dollars for:  (1) corporate debt securities (separately for

             investment grade and non-investment grade), (2) government

             securities, (3) municipal securities, (4) mortgage related

             securities, and (5) debt securities not included in (1)-(4).

             Alternative trading systems are required to file after-hours

             trading information in listed equity, Nasdaq NM, and Nasdaq

             Small Cap securities, as well as listed options.  This

             information will permit the Commission to monitor the

             trading on alternative trading systems.  In addition,

             alternative trading systems subject to the fair access

             requirements in Rule 301(b)(5), as discussed above,[312]

             must report quarterly on Form ATS-R the persons to whom they

             grant, deny or limit access to the alternative trading

             systems, as well as the date of the action, the effective

             date of the action, and the nature of the denials or

             limitations of access.

                  Because Rule 17a-23[313] will be eliminated, data filed

             by alternative trading systems on Form ATS-R will replace

             the information currently filed on Form 17A-23 by broker-

             dealers operating trading systems.  Unlike Part II of Form

             17A-23, Form ATS provides a template on which alternative

             trading systems are required to file the requested

             information with the Commission.  This template should allow

             alternative trading systems to file the required information

             in a more uniform format that will be more useful to the

             Commission.  For example, the Commission anticipates using

             this information to develop examination modules for the

             inspection of alternative trading systems.  The Commission

             also expects to use the information to further understand

             the effect of alternative trading systems on the securities

             markets.

                  Another difference between Part II of Form 17A-23 and

             Form ATS is that Form ATS requires alternative trading

             systems to provide information about the volume of

             particular types of securities that are not listed on an

             exchange or traded on Nasdaq.  These new reporting

             requirements on Form ATS-R will improve the quality of the

             data that the Commission has available to consider the

             effectiveness of its regulatory program.  Due to the highly

             automated nature of alternative trading system operations

             and the experiences with Rule 17a-23, the Commission does

             not anticipate that gathering and submitting the data

             required on Form ATS-R will be overly burdensome.

             Alternative trading systems are also required to make

             reports on Form ATS-R available to surveillance personnel of

             any SRO of which they are a member.[314]

                  The Commission solicited comment on the transaction

             reporting requirements and Form ATS-R.  In particular, the

             Commission solicited comment on the frequency and scope of

             transaction reporting requirements proposed in Regulation

             ATS.  No commenters responded to the Commissions request

             for comments on the information requested on Form ATS-R.

                  The Commission received no comments opposing the

             proposed reporting requirements.  Several commenters

             generally supported the Commissions proposal to require

             alternative trading systems to report their trading

             volume.[315]  One commenter, however, commented that the

             Commission should require monthly reporting instead of the

             proposed quarterly reporting requirement.[316]  The

             Commission believes that quarterly reporting under

             Regulation ATS, as adopted, will provide sufficiently

             frequent reporting to the Commission.  In view of the

             Commissions desire to minimize respondent reporting

             burdens, the Commission believes that more frequent

             reporting would not provide materially improved investor

             protections.  Based on the Commissions experience with

             reporting requirements under Rule 17a-23, the Commission

             believes that a quarterly filing requirement of Form ATS-R

             is appropriate.

                  The Commission also requested comment on the

             appropriateness of permitting Form ATS-R to be filed

             electronically.  Two commenters thought that if the

             Commission were to accept filings electronically it would be

             faster and less expensive.[317]

                  Finally, one commenter recommended that an alternative

             trading systems records and reports only be available to an

             alternative trading systems SRO on a confidential, need-to-

             know basis.[318]  As described above with respect to the

             recordkeeping requirements,[319] the Commission believes

             that the separation between the market and regulatory

             functions of an SRO and the Commissions oversight of SROs

             are sufficient to maintain an appropriate level of

             confidentiality of, and access to, alternative trading

             system information.  The Commission believes that SROs need

             to have access to relevant information in order to carry out

             their oversight responsibilities.  The Commission expects

             that SROs will maintain and enforce appropriate internal

             policies and procedures to protect against misuse of such

             information.

                            i.   Procedures to Ensure Confidential

                                 Treatment of Trading Information

                  The Commission requested comment on proposed Rule

             301(b)(10) requiring alternative trading systems to have in

             place safeguards and procedures to protect trading

             information and to separate alternative trading system

             functions from other broker-dealer functions, including

             proprietary and customer trading.  The Commission did not

             propose specific procedures, but encouraged commenters to

             express their views on the requirements, including how to

             prevent the misuse by alternative trading systems of

             confidential customer information.  The Commission received

             only three comment letters which directly addressed this

             issue.  All supported the Commissions proposal, although

             one also requested clarification on what the confidentiality

             provisions covered.[320]

                  The rules the Commission is adopting today require

             alternative trading systems to have in place safeguards and

             procedures to protect trading information and to separate

             alternative trading system functions from other broker-

             dealer functions, including proprietary and customer

             trading.  The Commission believes that the sensitive nature

             of the trading information subscribers send to alternative

             trading systems requires such systems to take certain steps

             to ensure the confidentiality of such  information.  For

             example, unless subscribers consent, registered

             representatives of alternative trading systems should not

             disclose information regarding trading activities of such

             subscribers to other subscribers that could not be

             ascertained from viewing the alternative trading systems

             screens directly at the time the information is conveyed.

                  The Commissions concern regarding confidentiality grew

             out of its inspections of some ECNs, during which the

             Commission staff found that some of the broker-dealers

             operating ECNs used the same personnel to operate the ECN as

             they did for more traditional broker-dealer activities, such

             as handling customer orders that were received by telephone.

             These types of situations create the potential for misuse of

             the confidential trading information in the ECN, such as

             customers orders receiving preferential treatment, or

             customers receiving material confidential information about

             orders in the ECN.  The rules concerning confidentiality

             that the Commission is adopting today are designed to

             eliminate the potential for abuse of the confidential

             trading information that subscribers send to alternative

             trading systems.  The Commission recognizes that some

             alternative trading systems provide traditional brokerage

             services as well as access to their alternative trading

             systems.  The proposed rules are not intended to preclude

             these services; rather, they are designed to prevent the

             misuse of private customer information in the system for the

             benefit of other customers, the alternative trading system

             operator, or its employees.

                  Therefore, the Commission is adopting rules which

             require that:  (1) information, such as the identity of

             subscribers and their orders, be available only to those

             employees of the alternative trading system who operate the

             system or are responsible for its compliance with the

             proposed rules; (2) the alternative trading system has in

             place procedures to ensure that all its employees are unable

             to use any confidential information for proprietary or

             customer trading, unless the customer agrees; and (3)

             procedures exist to ensure that employees of the alternative

             trading system cannot use such information for trading in

             their own accounts.[321]

                  The Commission intends the rules to prevent the

             disclosure or the use of information about a customers

             trading orders.  Many of the alternative trading systems

             operating today are anonymous; one of the reasons ECNs are

             popular with investors is that they permit wide

             dissemination of orders but provide anonymity.  The broker-

             dealers operating these systems, under the rules the

             Commission is adopting today, cannot disclose any

             confidential customer information (including the identity of

             the subscriber entering an order) to other customers, or use

             that information for proprietary or agency trades.

                  The Commission expects that existing alternative

             trading systems will implement procedures such as these as

             quickly as possible, if they do not already have them in

             place.  These procedures should be clear and unambiguous and

             presented to all employees, regardless of whether they have

             direct responsibility for the operation of the alternative

             trading system.  Presently, many broker-dealers employ

             various means to ensure that sensitive information does not

             flow from one division to another.  These methods include

             physical separation, written procedures, separate personnel,

             and restricted access.  The Commission believes that

             firewalls such as these could be used by broker-dealers that

             operate alternative trading systems to ensure that sensitive

             information regarding the alternative trading system is

             contained in the proper unit of the broker-dealer.

                  The Commission is not adopting  specific procedures

             because it believes that the broker-dealers who operate the

             alternative trading systems are in the best position to know

             what procedures would best prevent abuses.  Experience has

             demonstrated, however, potential for abuse and the

             Commission regards these procedures as important.

                  B.   Registration as a National Securities Exchange

                  Trading systems that fall within Rule 3b-16 are only

             required to comply with Regulation ATS if they wish to be

             exempt from the definition of "exchange."  Such systems may

             choose instead to register as national securities exchanges.

             The Commission expects that some trading systems will find

             that registration as a national securities exchange provides

             attractive benefits that make this option more suitable to

             their business objectives.  In particular, registered

             exchanges enjoy more autonomy in their daily operations than

             do broker-dealers that are members of SROs.  Because any

             trading system that registers as an exchange would be an

             SRO, it would not be subject to oversight by a competing

             national securities exchange or national securities

             association.[322]  Similarly, as a national securities

             exchange, a trading system would be able to establish its

             own rules of conduct, trading rules, and fee structures for

             access.  An alternative trading system registered as a

             broker-dealer, on the other hand, would have to comply with

             the rules of the SRO to which it belongs, including any

             rules regarding fees or the automatic execution of orders.

                  In addition, systems that elect to register as

             exchanges may benefit from the added prestige and investor

             confidence associated with status as a registered exchange.

             Registered exchanges are also able to establish listing

             standards, which may promote investor confidence in the

             quality of the securities traded on the exchange.

             Registered exchanges may also become direct participants in

             the national market system mechanisms, such as the ITS,

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

             Quotation System ("CQS").  Direct participation in these

             systems may provide a higher degree of transparency and

             execution opportunities for subscribers to a trading system.

             As direct participants in the national market system

             mechanisms, registered exchanges are also entitled to share

             in the revenues generated by the national market system

             systems, such as revenue from CTA fees.  Moreover, as the

             Commission noted in the Proposing Release, only registered

             exchanges are eligible to be participants of the Options

             Clearing Corporation ("OCC").[323]  Consequently, any

             trading system that wants to trade standardized options

             issued by the OCC would have to register as an exchange and

             become a member of the OCC.

                  Finally, if a trading system chooses to register as an

             exchange, it could allow broker-dealers that are members of

             exchanges with off-board trading restrictions to trade

             certain securities on the trading system pursuant to

             unlisted trading privileges.  The Commission believes that

             if a trading system is registered and regulated as an

             exchange, it should be considered to be an exchange, rather

             than an over-the-counter market, for purposes of exchange

             off-board trading.[324]

                  As discussed in the Proposing Release, the Commission

             views certain obligations of exchanges as fundamental to

             fair and efficient operation in the marketplace and critical

             for the protection of investors.  The Commission did not

             propose any relief from the current obligations of

             registered exchanges under the Exchange Act.  Nevertheless,

             the Commission requested comment on whether any exemptions

             from exchange regulatory provisions would be necessary or

             appropriate to enable alternative trading systems to

             register as exchanges.  Commenters, however, generally

             thought that any trading system that chooses to register as

             an exchange should be subject to the same requirements as

             currently registered exchanges and cautioned the Commission

             against relieving registered exchanges from any requirements

             because of their for-profit structure.  Consequently, at

             this time the Commission has determined that those trading

             systems choosing to register as exchanges should satisfy all

             requirements that apply to national securities exchanges

             under the Exchange Act.[325]

                  Many, if not all, alternative trading systems currently

             operating are proprietary, rather than not-for-profit

             entities.  The Commission does not believe that there is any

             overriding regulatory reason to require exchanges to be not-

             for-profit membership organizations, and believes that

             alternative trading systems may retain their proprietary

             structure even if they choose to register as exchanges.  The

             Exchange Act does not require national securities exchanges

             to be not-for-profit organizations.  As the Commission

             stated in the Proposing Release, it believes that Congress

             clearly intended the 1975 Amendments to encourage innovation

             by exchanges and recognized that future exchanges may adopt

             diverse structures.[326]  The Commission believes that it is

             possible for a for-profit exchange to meet the standards set

             forth in Section 6(b) of the Exchange Act.

                  Any system meeting the definition set forth in Rule 3b-

             16 may apply for registration as a national securities

             exchange by filing an application with the Commission on

             Form 1.[327]  The Commission, in Rule 6a-1, set forth the

             procedure for filing such an application.[328]  All Exhibits

             must accompany Form 1, including audited financial

             statements prepared in accordance with United States

             Generally Accepted Accounting Principles.

                  The Commission has adopted an amendment to its Rules of

             Practice regarding the processing of filings.  Applications

             for registration as a national securities exchange, as well

             as applications for exemption from registration due to the

             limited volume of transactions, will not be considered filed

             until all necessary information, including financial

             statements and other required documents, have been furnished

             in the proper form.[329]  Further, under Section 6(b) of the

             Exchange Act, the Commission must make certain

             determinations before registering an exchange.[330]  In

             reviewing applications for registration as a national

             securities exchange, the Commission will not register an

             exchange unless it is satisfied that the exchange meets the

             requirements discussed below.

                       1.   Self-Regulatory Responsibilities

                  As a prerequisite for the Commissions approval of an

             exchanges application for registration, the exchange must

             be organized and have the capacity to carry out the purposes

             of the Exchange Act.  Specifically, an exchange must be able

             to enforce compliance by its members, and persons associated

             with its members, with the federal securities laws and the

             rules of the exchange.[331]  The Commission believes that

             the self-regulatory role of registered exchanges is

             fundamental to the enforcement of the federal securities

             laws.  Congress has delegated to the SROs certain quasi-

             governmental functions and responsibilities, and has charged

             the Commission with overseeing the SROs to make sure they

             have the ability and resources to comply with those

             obligations.  In this regard, the Commission believes that

             persons responsible for operating an SRO should not have a

             disciplinary history, and will seriously question the

             ability of an exchange to carry out its SRO functions if the

             founders or prospective managers of an applicant for

             registration as a national securities exchange are subject

             to a statutory disqualification, as that term is defined in

             Section 3(a)(39) of the Exchange Act.[332]  The Commission

             believes that persons who, for example, have willfully

             violated the federal securities laws or have been convicted

             within the past ten years of a felony or misdemeanor

             involving misappropriation of funds, or securities fraud,

             larceny, theft, robbery, extortion, or other related crimes

             would be inappropriate selections to fill the role of

             director, officer, or manager of an exchange.

                  An alternative trading system wishing to register as a

             national securities exchange may choose to set listing

             standards for its system.  If an applicant chooses to set

             listing standards, it must have written listing and

             maintenance standards, as well as an adequate regulatory

             staff to apply those standards.[333]  The applicant must

             also have rules restricting the listing of securities issued

             in a limited partnership rollup transaction.[334]  The

             ability to carry out these functions must be adequately

             represented on an exchanges application for registration

             before the Commission will register the exchange.

                  An applicant for registration as an exchange must also

             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 burdens on competition, among other

             things.[335]  For example, an exchange must maintain

             procedures to surveil for securities law violations, such as

             insider trading and manipulation on the exchange.  The

             Commission understands that surveillance procedures can vary

             and will depend on the nature of, and types of securities

             traded, on a particular exchange.  Thus, while the

             Commission will require all applicants for registration as

             an exchange to have adequate measures in place, they will

             not have to use the same procedures.  The Commission will

             also require an applicant for registration as a national

             securities exchange to show that it has sufficient

             resources, including both staff expertise and capital, to

             support its surveillance function.[336]  Consistent with

             these requirements, an applicant should, at a minimum,

             demonstrate that the officers charged with day-to-day

             management of the exchange are familiar with the federal

             securities laws and the role of a registered exchange as an

             SRO.  In addition, an applicant for registration as a

             national securities exchange must demonstrate that it has

             the capability to maintain an audit trail of the

             transactions on its system.  Furthermore, an applicant must

             establish rules providing for the allocation of fees for the

             use of its system.[337]

                  An exchange must also have general conflict of interest

             rules regarding, for example, trading on the exchange by its

             employees, owners, or exchange officials.  Moreover, an

             exchange must have rules that ensure that no members order

             is unfairly disadvantaged.  For example, if an exchange has

             priority rules, those rules need to treat all exchange

             members fairly.  Finally, an exchange must have rules

             establishing procedures for the clearance and settlement of

             trades effected on the exchange.  Alternatively, an exchange

             must have rules requiring members to make their own

             arrangements for clearance and settlement of trades.

                  While exchanges are required to enforce compliance by

             their 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 to particular SROs oversight of broker-dealers that

             are members of more than one SRO ("common members").[338]

             For example, 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.[339]  When an SRO has been named as a common

             members 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.[340]  Consistent with past Commission action, the

             Commission may continue to designate one SRO, such as the

             NASD or the NYSE, as the primary DEA for common members of

             exchanges.

                  In addition, the Commission has previously permitted

             existing SROs to contract with each other to allocate non-

             financial regulatory responsibilities. [341]  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.[342]  An

             SRO participating in a regulatory plan is relieved of

             regulatory responsibilities with respect to a broker-dealer

             member of such SRO, if those regulatory responsibilities

             have been designated to another SRO under the regulatory

             plan.  Alternative trading systems registered as exchanges

             would also be able to establish joint plans with respect to

             common members.

                  A registered exchange would  also be expected to

             maintain an audit trail of trading.  A fully automated

             exchange, however, can produce comprehensive, instantaneous

             automated records that can be monitored remotely.

             Therefore, fully automated exchanges might be able to

             contract with other SROs to perform certain oversight

             activities, while retaining ultimate responsibility for

             ensuring that these activities are performed.

                  Further, the Commission also believes that the ultimate

             responsibility for enforcement and disciplinary actions for

             violations relating to transactions executed in an SROs

             market or rules unique to that SRO should continue to be

             retained by that SRO.  In addition, these exchanges must

             establish a disciplinary process including appropriate

             sanctions for violations of the rules and a fair procedure

             for administering the disciplinary process.[343]  Existing

             exchanges generally employ personnel and establish extensive

             programs to fulfill this responsibility.    However, it may

             be possible for an exchange to contract with another SRO to

             perform its day-to-day enforcement and disciplinary

             activities.  Nevertheless, a registered exchange would

             retain ultimate responsibility for this function.[344]  In

             considering an exchanges application for registration the

             Commission will consider whether allowing the exchange to

             contract with another SRO to perform its day-to-day

             enforcement and disciplinary activities would be consistent

             with the public interest.

                       2.   Fair Representation

                  Section 6(b)(3) of the Exchange Act requires that

             registered exchanges 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 (2) "assure a fair

             representation of its members in the selection of its

             directors and administration of its affairs."[345]

                            (i)  Public Directors

                  Congress adopted the requirement that at least one

             director be representative of issuers and investors because

             of the publics interest in ensuring the fairness and

             stability of significant markets.[346]  Public

             representation on an exchanges board of directors helps to

             achieve this goal.  The Commission believes that, under this

             structure, representation of the public on an oversight body

             that has substantive authority and decision making ability

             is 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.[347]  Therefore, the Commission would

             expect alternative trading systems that apply for

             registration as exchanges to have public representation on

             their boards of directors.

                            (ii)  Fair Representation of Exchange Members

                  The second requirement, that of fair representation of

             an exchanges 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,

             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 exchanges authority to bring and

             adjudicate disciplinary procedures may be particularly

             important, because these actions can have significant and

             far-reaching ramifications for broker-dealers.

                  Historically, the fair representation requirement was

             one of the major obstacles to the regulation of alternative

             trading systems as exchanges because of the concern that it

             would be incompatible with their proprietary

             structures.[348]  In the Proposing Release, however, the

             Commission proposed to allow non-membership, for-profit

             alternative trading systems that choose to register as

             exchanges some flexibility in satisfying this "fair

             representation" requirement.

                  The Commission notes that it has not, in the past,

             interpreted an exchanges 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, PCX "electronic access

             members" ("ASAP Members") do not have voting rights, and

             therefore are not represented on the board of that

             exchange.[349]

                  More recently, the Commission approved the merger

             between the Amex and the NASD.  As a result of the merger,

             Amex, reorganized as New Amex LLC ("New Amex"), is now a

             subsidiary of the NASD.  In reviewing the merger, the

             Commission considered several fair representation issues.

             Specifically, the Commission considered, among other things,

             Amex member representation on the Board of Governors of New

             Amex, Amex member representation on the Board of the NASD,

             the voting rights of the Amex membership, and representation

             of the Amex membership in the disciplinary process.

                  The Commission found that the composition of the New

             Amex Board satisfied the fair representation requirement by

             providing the Amex membership with the opportunity to

             nominate four Amex floor governors to the New Amex

             Board.[350]  Further, the Commission found that the

             inclusion of one New Amex floor governor on the NASD

             Board[351] helped to fulfill the fair representation

             requirement by providing for New Amex input on the parent

             Board.[352]  In addition, the Commission believes that the

             fair representation requirement was furthered by the

             corporate governance provisions of New Amexs constitution

             that require the consent of either Amex (through a

             Membership vote), the Amex Committee (a committee designed

             specifically to represent the interests of the Amex

             membership), or both, in situations impacting certain

             membership interests or material market changes to New Amex.

             Lastly, the Commission found that the disciplinary

             procedures of New Amex met the fair representation

             requirement by providing for review of all disciplinary

             matters by a committee composed of both Amex members and

             public representatives.  Specifically, the Amex Adjudicatory

             Council, which is empowered to act for the full New Amex

             Board in reviewing appeals from disciplinary proceedings, is

             composed of three Public Members and three Floor Governors,

             all of whom are nominated by the Amex Nominating Committee

             (or by petition signed by twenty-five Members) and elected

             by a full Amex Membership vote.[353]

                  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.[354]  The Commission believes that

             other structures may also provide independent, fair

             representation for an exchanges constituencies in its

             material decision making processes if the exchange is not

             owned by its participants.  For example, a proprietary

             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 making rules for the exchange, and ensuring

             that the governance of such subsidiary equitably represents

             the exchanges participants.[355]  As another possibility,

             certain directors appointed to the board to represent the

             interests of trading members or participants could be

             limited to considering certain topics relating to system use

             and rules, while consideration of ownership issues could be

             restricted to board members representing the interests of

             the owners or stockholders.[356]

                  Some commenters expressed concern that the flexibility

             afforded alternative trading systems in complying with their

             "fair representation" requirement not extend so far as to

             result in unequal regulation of alternative trading systems

             registered as exchanges and traditional exchanges.  In

             addition, these commenters expressed concern that the

             efficiency of the markets not be compromised.[357]  American

             Century also expressed its support for structures in which

             an alternative trading systems board included both owners

             and participants.[358]  On the other hand, several

             commenters stated that members (or participants) of a

             proprietary exchange should not have any right to

             participate in the governance of the exchange and that

             imposing constraints on the manner in which alternative

             trading systems are governed may undermine the factors that

             lead to their efficiency and innovativeness.[359]

                  The Commission believes alternative trading systems

             should be required to assure fair representation of their

             members if they choose to register as exchanges.  As

             discussed above, registered exchanges have special

             responsibilities under the Exchange Act, regardless of

             whether they are not-for-profit or for-profit.  Accordingly,

             the Commission continues to believe that exchange

             participants -- including participants in a for-profit

             exchange -- need to have substantive input into disciplinary

             and other key processes to prevent these processes from

             being conducted in an inequitable, discriminatory, or

             otherwise inappropriate fashion.

                  The NASD asked the Commission to provide more specific

             guidance on the details of the flexibility the Commission

             proposes to allow alternative trading systems applying for

             registration as exchanges.[360]  The Commission has provided

             several examples of ways in which fair representation

             requirements can be met in non-traditional ways and believes

             that there may be other acceptable ways.  The Commission,

             however, does not believe it is necessary to specify in

             greater detail what types of structures would be acceptable

             to it.  What constitutes fair representation for a

             particular exchange will be determined in the context of

             that systems application for registration under Sections

             6(a) and 19(a) of the Exchange Act.  Under Section 19(a) of

             the Exchange Act, notice of an application for registration

             as an exchange is published for comment before

             approval.[361]  This will provide interested persons with

             notice of, and an opportunity to comment on, the manner in

             which a particular exchange proposes to meet its fair

             representation obligations.[362]

                       3.   Membership on a National Securities Exchange

                  An applicant for registration as a national securities

             exchange must have rules to admit members and persons

             associated with those members.[363]  Section 6(c)(1) of the

             Exchange Act[364] prohibits exchanges from granting new

             membership to any person not registered as a broker-dealer,

             or associated with a broker-dealer.    In the Concept

             Release, the Commission solicited commenters views on

             whether to allow institutional membership on national

             securities exchanges.  Because most commenters were opposed

             to institutional membership on exchanges, the Commission did

             not propose to exempt registered exchanges from the

             limitations in Section 6(c)(1).  Nevertheless, in the

             Proposing Release, the Commission asked for comment on

             whether institutions should be permitted to be members of

             national securities exchanges.

                  Most commenters expressing a view on institutional

             membership on registered exchanges agreed that such

             exchanges should be prohibited from having non-broker-dealer

             members.[365]  One commenter, however, believed that direct

             institutional access to exchanges is a choice that would

             benefit market participants by providing lower execution

             costs for the shareholders of institutional funds.  Although

             this commenter noted the Commissions concerns about the

             regulatory burden an institution might face if it chose to

             be a direct member of an exchange, it thought that

             membership should be a choice available to those

             institutions that feel they have the economies of scale to

             warrant direct access or believe that anonymity is worth the

             regulatory cost of membership.[366]

                  As discussed in the Proposing Release, the Commission

             believes that, in order to ensure the central goals of

             exchange regulation, direct institutional members or

             participants in exchanges would have to be subject to the

             majority of rules and regulations to which broker-dealers

             are currently subject.[367]  Moreover, because institutions

             that were granted exchange membership or direct access to

             exchanges would likely need to become members in one or more

             of the national clearance and settlement corporations in

             order to clear and settle their trades, these institutions

             would need to demonstrate and maintain financial

             creditworthiness.  Insufficient net capital and incomplete

             books and records could compromise financial soundness,

             audit trails, and other general risk management objectives

             that are critical to sound markets and clearance and

             settlement systems.  Consequently, the Commission would need

             to require non-broker-dealer institutions to comply with

             financial responsibility obligations, including the

             requirements to maintain certain minimum levels of net

             capital and appropriate books and records.[368]  Without

             such requirements, institutional membership on an exchange

             may also conflict with an exchanges obligation to have

             rules that foster the efficient clearance and settlement of

             securities transactions.

                  The Commission believes that non-broker-dealer

             institutions essentially would be required to comply with

             the same requirements imposed on registered broker-dealers

             and, therefore, undermine most benefits an institution

             receives by virtue of not registering as a broker-

             dealer.[369]  Thus, the Commission does not believe that

             allowing institutional membership on exchanges would be any

             less costly to an institution than establishing a broker-

             dealer affiliate, which can become a member in a registered

             exchange.  At the same time, it would impose ad-hoc

             regulatory burdens on the Commission and the exchanges as

             they tried to impose critical rules and regulations on

             institutions.  Further, the Commission does not believe that

             it is currently practical or serves the best interests of

             investors or the markets generally to allow non-broker-

             dealers to be members of national securities exchanges,

             because of the potential lack of regulatory oversight the

             Commission would have over these entities.  Therefore, just

             as currently registered exchanges are required to limit

             membership to broker-dealers, alternative trading systems

             that choose to register as exchanges would be prohibited

             from extending membership to non-broker-dealers.

                  Accordingly, the Commission believes that exchange

             membership should continue to be limited to registered

             broker-dealers and persons associated with registered

             broker-dealers in accordance with Section 6(c)(1) of the

             Exchange Act.[370]  Institutions, however, would be able to

             access alternative trading systems registered as exchanges

             through a registered broker-dealer member of such a trading

             system, including an affiliate of the institution.

             Institutions currently have efficient access to the NYSE

             through SuperDOT terminals given to them by NYSE

             members,[371] and the OptiMark System [372] will enable

             institutions to directly enter orders in the OptiMark System

             through use of an exchange member give-up. Access of this

             nature should not impose significant costs or burdens on

             institutions or on broker-dealers providing the access.  The

             Commission believes if institutions continue to have

             indirect access to exchanges, their needs can be met without

             compromising important regulatory objectives.

                  Finally, while the NASD agreed with the Commissions

             views that institutions should not be "members" of

             registered exchanges, it asked the Commission to provide

             guidance on whether a registered exchange may set up a

             broker-dealer subsidiary to provide sponsored access to

             retail and institutional customers.  Further, the NASD asked

             whether the registered exchange could be the SRO for its

             broker-dealer subsidiary.  The NASD believes that there is

             an inherent conflict of interest in such an arrangement and

             that the Commission should explain its views and provide

             SROs with guidance on the responsibilities for oversight of

             the broker-dealer in such circumstances.[373]

                  In this regard, a registered exchange is not explicitly

             prohibited from establishing a broker-dealer subsidiary

             through which it can provide sponsored access to its non-

             broker-dealer customers.  Nonetheless, the Commission

             recognizes concerns about the potential conflict of interest

             if a registered exchange were the SRO for its subsidiary,

             and believes that it may be difficult for an exchange to

             fulfill its obligations under Sections 6(b)(6), 6(b)(7), and

             19(g) with respect to such a subsidiary.[374]

                       4.   Fair Access

                  Sections 6(b)(2)[375] and 6(c)[376] of the Exchange Act

             prohibit registered exchanges from denying access to, or

             discriminating against, members.  The obligation to ensure

             fair access for members does not, however, restrict the

             authority of a national securities exchange to maintain

             reasonable standards for access.[377]  The securities

             industry and the general public need access to exchanges to

             ensure the best execution of orders.  Exchanges are venues

             for trading that should be open to all qualified persons.

             The Commission stated in the Proposing Release that

             alternative trading systems that register as exchanges would

             be required to comply with Section 6(b)(2) and Section 6(c)

             of the Exchange Act.  IBEX was the only commenter to express

             a view on this requirement and its comment was

             favorable.[378]  Thus, the Commission would require any

             alternative trading system registered as an exchange to

             ensure the fair access of registered broker-dealers.

                  In a similar vein, exchanges are prohibited from

             adopting any anti-competitive rules.[379]  To further

             emphasize the goal of vigorous competition, Congress

             requires the Commission to consider the competitive effects

             of exchange rules,[380] as well as the Commissions own

             rules.[381]  The fair access and fair competition

             requirements in the Exchange Act are intended to ensure that

             national securities exchanges treat investors and their

             participants fairly, consistent with the expectations of the

             investing public.  For example, as discussed above, an

             exchanges rules, including its rules of priority, must

             treat all members fairly.  Accordingly, before granting an

             application for registration as an exchange, the Commission

             would review the exchanges rules for compliance with these

             requirements.

                       5.   Compliance with ARP Guidelines

                  All national securities exchanges are expected to

             maintain sufficient systems capacity to handle foreseeable

             trading volume.  Applicants for registration as a national

             securities exchange must have adequate computer system

             capacity, integrity and security to support the operation of

             an exchange.  The Commission believes that adequate capacity

             is vital to the efficient operation of exchanges,

             particularly during periods of high volume or volatility,

             such as have been experienced in the past year.  To this

             end, all exchanges and the NASD currently participate in the

             Commissions automation review program ("ARP").[382]  Given

             the highly automated nature of most alternative trading

             systems, the Commission stated in the Proposing Release that

             it would expect any exchange applying for registration as a

             national securities exchange to comply with the policies and

             procedures outlined by the Commission in its policy

             statements concerning the automation review program,

             including cooperation with any reviews conducted by the

             Commission.  In this regard, the Commission would consider

             the resources and ability of an applicant for registration

             as an exchange to meet the standards set forth in the

             automation review program.  In particular, the Commission

             would consider whether the applicant had sufficient capital

             to maintain its automated systems, and staff with technical

             expertise.

                  The Commission received one comment letter addressing

             this issue.  The PCX commented that registered exchanges

             should only have to comply with the ARP guidelines if they

             reach the threshold level that triggers these requirements

             for alternative trading systems registered as broker-

             dealers.  The PCX noted that, although many exchanges do not

             account for twenty percent, or even ten percent, of the

             trading in ITS eligible equity securities, all exchanges are

             required to comply with the ARP guidelines.  The PCX

             commented that these regulatory requirements impose

             substantial costs on exchanges and that there is no basis

             for imposing these types of requirements on exchanges when

             such requirements are not imposed on alternative trading

             systems registered as broker-dealers that have substantially

             greater trading volume.[383]

                  The Commission notes that today it is adopting a

             requirement that alternative trading systems with twenty

             percent or more of the volume in any equity security, or

             certain categories of debt, comply with certain systems

             capacity, integrity, and security requirements.  While some

             registered exchanges may have less than twenty percent of

             the volume in similar securities, the Commission

             nevertheless believes that these exchanges direct

             participation in the national market system necessitates

             participation in the automation review program.  Moreover,

             while there are costs associated with capacity planning and

             testing, contingency planning, stress testing, and

             independent reviews, as well as ensuring that automated

             systems have sufficient capacity, these are costs that all

             highly automated business must bear and not merely

             regulatory costs.[384]  The Commissions ARP guidelines are

             intended only to ensure that short-term cost cutting by

             registered exchanges does not jeopardize the operation of

             the securities markets.

                       6.   Registration of Securities

                  Under the Exchange Act, securities traded on a national

             securities exchange must be registered with the Commission

             and approved for listing on the exchange.[385]  In addition,

             national securities exchanges are permitted to trade

             securities listed on other exchanges and Nasdaq pursuant to

             unlisted trading privileges ("UTP").[386]  These

             requirements ensure that investors have adequate information

             and that all relevant trading activity in a security is

             reported to, and surveilled by, the exchange on which it is

             listed.  The Commission discussed in the Proposing Release

             that an alternative trading system choosing to register as

             an exchange would be subject to these requirements and would

             be required to have rules for trading the class or type of

             securities it seeks to trade pursuant to UTP.[387]

             Moreover, to trade Nasdaq NM securities, such a system would

             have to become a signatory to an existing plan governing

             such trading.[388]

                  With regard to these securities registration

             requirements, OptiMark commented that they would preclude,

             as a practical matter, those alternative trading systems

             that trade privately placed securities or unregistered

             foreign securities from choosing to register as exchanges.

             In addition, the various conditions and limited scope of the

             Nasdaq/National Market System/Unlisted Trading Privileges

             ("OTC-UTP") plan[389] would impair the ability of

             alternative trading systems that offer competing facilities

             for securities listed on existing exchanges to register as

             exchanges.  For example, UTP may be extended for Nasdaq NM

             securities, but this does not include Nasdaq SmallCap

             securities or other over-the-counter securities.  Moreover,

             formally amending the OTC-UTP plan to admit any new member

             and to allocate expenses and revenues among competing market

             centers is a time-consuming process.

                  Consequently, OptiMark recommended that the Commission

             exercise its exemptive authority to reduce the differences

             in regulatory treatment between alternative trading systems

             registered as exchanges and those registered as broker-

             dealers.  In particular, OptiMark suggested that, regardless

             of whether they are registered exchanges or broker-dealers,

             alternative trading systems that limit their screen

             availability to certain qualified persons be permitted to

             trade unregistered securities, including private placements

             and foreign securities.  Similarly, OptiMark believed that

             alternative trading systems that seek to compete for order

             flow with existing exchanges should be able to do so in all

             securities listed on those exchanges, regardless of the

             alternative trading systems registration status.[390]

                  The issue of trading unregistered securities, and in

             particular unregistered foreign securities, on exchanges

             raises many difficult issues.  Registration of securities

             provides public information for investors that is prepared

             in accordance with U.S. accounting and auditing standards.

             This assures that the issuers disclosures are consistently

             presented and can be easily compared to the information

             provided by other issuers.  For this reason, the Exchange

             Act requires securities to be registered if they trade on

             national securities exchanges.

                  The Commission has maintained the current structure in

             the final rules: continuing to require registered exchanges

             to trade only registered securities, but not extending this

             requirement to alternative trading systems not registered as

             exchanges.  The Commission is continuing to review on a

             broader basis the issuing and trading of unregistered

             foreign securities in the U.S. and, as part of that review,

             will specifically consider whether unregistered foreign

             securities should continue to be freely traded on

             alternative trading systems that are not registered as

             exchanges.

                       7.   National Market System Participation

                  As discussed in the Proposing Release, any alternative

             trading system that elects to register as a national

             securities exchange would also be expected to become a

             participant in the market-wide transaction and quotation

             reporting plans currently operated by registered exchanges

             and the NASD.  These plans -- the CQS,[391] the CTA,[392]

             the ITS,[393] the Options Price Reporting Authority

             ("OPRA"),[394] and OTC-UTP[395] -- link trading, quotation,

             and reporting for all registered exchanges and the NASD and

             are responsible for the transparent, efficient, and fair

             operation of the securities markets.  These plans form the

             backbone of the national market system and participation in

             these plans by all registered exchanges is vital to the

             success of the national market system.

                  Participation in effective quote and transaction

             reporting plans and procedures would, therefore, be

             mandatory for any newly registered exchange, as it is now

             for currently registered exchanges.[396]  The CTA and the

             CQS, which make quote and transaction information in

             exchange-listed securities available to the public,[397]

             both have provisions governing the entry of participants to

             the plans,[398] and allow any national securities exchange

             or registered national securities association to become a

             participant.[399]  New participants are required to pay

             certain entry fees to the existing participants.[400]

             Participants in these plans share in the income and expenses

             associated with the plans operations.[401]  Because

             national securities exchanges are required to participate in

             an effective quote and transaction reporting plan, the

             Commission expects the participants of existing plans to

             include them in the plans under reasonable conditions

             adapted to the situations of the new exchanges.

                  In addition to requiring participation by newly

             registered exchanges in quote and transaction reporting

             plans, the Commission would expect newly registered

             exchanges to participate in ITS,[402] or an equivalent

             system if one were developed.  ITS provides trading links

             between market centers and 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,

             through the system.[403]  The ITS plan requires 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").[404]  Participation

             in ITS would give users of these new exchanges access to

             other ITS participant markets.  Moreover, participation in

             ITS would require new exchanges to adopt rules to comply

             with other applicable ITS plan provisions and policies on

             matters such as, for example, trade-throughs, locked

             markets,[405] and block trades.[406]  As with the quote and

             transaction reporting plans, alternative trading systems

             that register as exchanges would have to be integrated into

             ITS, or another system that links markets for trading

             purposes would have to be created to accomplish full

             integration of the newly registered exchanges into the

             national market system.

                  The Commission solicited comment on what issues were

             raised by the possible integration of new exchanges into

             ITS.  One commenter strongly believed that the current

             voting structure of ITS establishes barriers to entry, which

             leads to barriers to innovation.  This commenter was

             concerned that the network supporting ITS may not be strong

             enough to handle sharply higher volumes of securities

             transactions and that, in an environment with multiple

             exchanges, the failure of these linkages would impede market

             participants quest for best prices.[407]  Another

             commenter, similarly, expressed concern that the means of

             access to, and participation in, the national market system

             plans more generally was not clearly defined and, therefore,

             provided the current participants in these plans an

             opportunity to delay and to set unreasonable terms and

             conditions for entry of new participants.[408]  The

             Commission realizes that integrating new exchanges into the

             national market system plans may require amendments to these

             plans and notes that national market system plans may be

             amended either by vote of the participants, or by Commission

             action.[409]

                  The Commission also requested comment on whether any

             changes were necessary to incorporate alternative trading

             systems registered as exchanges into the national market

             system plans.  In this regard, the Chicago Board Options

             Exchange ("CBOE") and the NYSE stated that they did not

             believe that there would need to be significant changes to

             these plans, and that any changes that would be necessary to

             accommodate alternative trading systems registered as

             exchanges into ITS would be relatively easy to resolve.[410]

             The CBOE, however, did state that alternative trading

             systems registered as exchanges should be subject to the

             same requirements regarding access to the national market

             system plans as are applicable to traditional exchanges,

             including payment of participation entry fees.[411]

                  The NASD suggested that, before the Commission approves

             an alternative trading systems application for registration

             as an exchange, the Commission address more completely the

             manner in which such an alternative trading system

             registered as an exchange may participate in national market

             system plans.  The NASD noted three areas in which the

             Proposing Release was silent.  First, the Commission did not

             address what mechanism would be used for access among any

             new exchange and other exchanges or markets.  For example,

             in the context of Nasdaq securities, the NASD thought it was

             unclear whether the existing approach to linkage and

             execution should continue to occur through Nasdaqs

             SelectNet system or its successor, or whether there should

             be a new ITS-like entity formed with a completely new

             approach to access.  The NASD expressed a preference for

             using the current approach to linkages.  Second, the NASD

             noted that the Commission did not address whether

             alternative trading systems registered as exchanges could

             continue to charge an access fee, and believed strongly that

             such alternative trading systems should not be allowed to

             charge for another market accessing displayed interest.

             Third, the Commission did not address the intermarket

             linkage issues raised by access to traditional exchanges by

             non-broker-dealers that have indirect access to alternative

             trading systems registered as exchanges.[412]

                  OptiMark asked the Commission to consider the effect of

             an alternative trading systems ability to charge an

             execution fee on its choice to register as an exchange or as

             a broker-dealer.  OptiMark noted that the Proposing Release

             only contemplated that alternative trading systems operating

             as broker-dealers would be able to charge a fee to non-

             subscribers; alternative trading systems registered as

             exchanges and participating in ITS would not.[413]

                  Susquehanna Investment Group ("Susquehanna") expressed

             concern about potentially integrating many alternative

             trading systems registered as exchanges into the national

             market system mechanisms.  Susquehanna commented that

             integrating new exchanges quotations into the national

             market system should be done only with careful consideration

             for the preservation of the ITS trade-through rule.[414]

             Instinet also stated that in order for an alternative

             trading system to make a determination about the feasibility

             of registering as an exchange, the Commission needs to

             address those unresolved issues relating to ITS, including

             the rules governing time/price priority within a multiple

             exchange structure.  In addition, Instinet stated that

             inter-exchange rules need to be set forth for both the

             listed and over-the-counter securities markets.[415]

                  The Commission agrees that access to national market

             system systems is of key importance.  It currently has

             outstanding proposals for incorporation of one linkage into

             ITS of an alternative trading system -- OptiMark -- and a

             traditional exchange -- PCX -- and has sought comment on

             organizational and other changes to ITS to make it more

             responsive to changing conditions.[416]  The precise

             arrangements for inclusion of new exchanges into these plans

             depends on the structure of these exchanges, and will be

             addressed when an applicant seeks registration as an

             exchange.

                       8.   Uniform Trading Standards

                  In addition to participation in national market system

             mechanisms, an alternative trading system that registers as

             an exchange would be required to comply with any Commission-

             instituted trading halt relating to securities traded on or

             through its facilities.[417]  Newly registered exchanges

             would be required in some instances to adopt trading halt

             rules to comply with certain Commission rules.[418]  A newly

             registered exchange would also have the authority and be

             expected to impose trading halts for individual securities,

             for classes of securities, and for its system as a whole

             under the appropriate circumstances.[419]  The Commission

             does not believe that this requirement would present any

             undue burden for alternative trading systems that elect to

             register as national securities exchanges because most

             alternative trading systems are already subject to the

             imposition of trading halts as members of the NASD.

                  In addition, to promote the orderly operation of the

             securities markets in accordance with Section 6 of the

             Exchange Act,[420] the Commission would expect all newly

             registered national securities exchanges to implement

             circuit breaker rules to temporarily halt trading during

             periods of extraordinary market volatility or unusual market

             declines.  The Commission believes that for circuit breakers

             to be effective, all markets must impose corresponding

             circuit breakers.[421]

                       9.   Proposed Rule Changes

                  Under Section 19(b)(1) of the Exchange Act, SROs are

             required to file all proposed rule changes with the

             Commission.[422]  Thus, once registered as an exchange, an

             alternative trading system would have to submit copies of

             any proposed rule changes to the Commission for approval.

                  C.   Application for Registration as an Exchange

                  The Commission proposed to revise Rules 6a-1, 6a-2 and

             6a-3 under the Exchange Act[423] to clarify the requirements

             for registration as an exchange and to accommodate the

             registration as exchanges of automated and proprietary

             trading systems.  Additionally, the Commission proposed to

             revise Form 1, the application used by exchanges to register

             or to apply for an exemption based on limited volume, and to

             repeal Form 1-A.  After considering the comments, the

             Commission is adopting the amendments to Rule 6a-1, Rule 6a-

             2, Rule 6a-3 and Form 1 as proposed.

                       1.   Revisions to and Repeal of Form 1-A

                  The Commission is adopting the revisions to Form 1 and

             repealing Form 1-A as proposed.  Form 1 is revised by

             reorganizing and redesignating the Statements and the

             exhibits.  Because the Commission expects most future

             applicants for registration as an exchange to be fully or

             partially automated, the Commission revised some of the

             information requested in Form 1 to be more applicable to

             automated exchanges.  Specifically, the Commission is adding

             two new exhibits requiring an applicant for registration as

             an exchange to describe the way any of its electronic

             trading systems operate, and the criteria used by the

             exchange in admitting members.[424]  In addition, the

             Commission is adding a new exhibit to Form 1 to reflect the

             possibility that an exchange is owned by shareholders,

             rather than members.[425]  The Commission is also adopting

             other changes to the information requested on Form 1 to

             reflect the fact that a for-profit exchange would have

             participants or subscribers trading, rather than members.

                  Both the NYSE and the Amex expressed concern that these

             new Exhibits would require new and additional

             information.[426]  Exhibits E and L, however, need only

             accompany the application for registration as an exchange

             and, therefore, are inapplicable to currently registered

             exchanges.  In addition, Exhibit K applies only to non-

             member owned exchanges.  Therefore, because all currently

             registered exchanges are member-owned, new Exhibit K does

             not apply to them.  The Commission has clarified that

             Exhibit K exclusively applies to non-member owned exchanges.

             If, however, a currently registered, member-owned exchange

             were to convert to a for-profit structure, it would have to

             comply with the requirement to update Exhibit K.

                  Exchanges currently registered with the Commission are

             required to use amended Form 1 in complying with Rules 6a-2

             and 6a-3.  The information registered exchanges are required

             to update under Rules 6a-2 and 6a-3 is not substantially

             different from what registered exchanges are required to

             update today.  The  Commission has provided the chart below

             to assist currently registered exchanges in complying with

             the filing obligations under amended Rules 6a-2 and 6a-3.

              ---------------------------------------------------------------
              |Amended Form |Filing Requirements Under Amended  |
              Corresponding                                                 |
              |             |                                   |           |
              |1            |       Rules 6a-2 and 6a-3         | part of   |
              |             |                                   |           |
              |             |                                   |former Form|
              |             |                                   |           |
              |             |                                   |1 on which |
              |             |                                   |           |
              |             |                                   |information|
              |             |                                   |           |
              |             |                                   |   was     |
              |             |                                   |           |
              |             |                                   |requested  |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Questions 1- |File an amendment within 10 days   |Questions 1-
              |
              |             |                                   |           |
              |7 of the     |after any action is taken that     |6 of the   |
              |             |                                   |           |
              |Execution    |renders the information previously |Statement  |
              |             |                                   |           |
              |Page         |filed inaccurate (Rule 6a-         |           |
              |             |                                   |           |
              |             |2(a)(1)).                          |           |
              |             |                                   |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit A    |File an amendment every three      |Exhibit A(1)
              |
              |             |                                   |           |
              |             |years (Rule 6a-2(c)) or make       |           |
              |             |                                   |           |
              |             |information available by           |           |
              |             |                                   |           |
              |             |publication, upon request, or via  |           |
              |             |                                   |           |
              |             |an Internet Web site (Rule 6a-     |           |
              |             |                                   |           |
              |             |2(d)).                             |           |
              |             |                                   |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit B    |File an amendment every three      |Exhibit A(2)
              |
              |             |                                   |           |
              |             |years (Rule 6a-2(c)) or make       |           |
              |             |                                   |           |
              |             |information available by           |           |
              |             |                                   |           |
              |             |publication, upon request, or via  |           |
              |             |                                   |           |
              |             |an Internet Web site (Rule 6a-     |           |
              |             |                                   |           |
              |             |2(d)).                             |           |
              |             |                                   |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit C    |File an amendment every three      |Question 7 |
              |             |                                   |           |
              |             |years (Rule 6a-2(c)) or make       |of the     |
              |             |                                   |           |
              |             |information available by           |Statement  |
              |             |                                   |           |
              |             |publication, upon request, or via  |           |
              |             |                                   |           |
              |             |an Internet Web site (Rule 6a-     |Exhibit    |
              |             |                                   |           |
              |             |2(d)).                             |A(3)Exhibit|
              |             |                                   |           |
              |             |File an amendment within 10 days   |H          |
              |             |                                   |           |
              |             |after any action is taken that     |           |
              |             |                                   |           |
              |             |renders the information previously |           |
              |             |                                   |           |
              |             |filed inaccurate (Rule 6a-2(a)(2)).|           |
              |             |                                   |           |
              ---------------------------------------------------------------
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit D    |File an annual amendment (Rule 6a- |Exhibit F  |
              |             |                                   |           |
              |             |2(b)(1)).                          |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit E    |No requirement to update; only     |           |
              |             |                                   |           |
              |             |required on application for        |           |
              |             |                                   |           |
              |             |registration.                      |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit F    |File an amendment within 10 days   |Exhibit B  |
              |             |                                   |           |
              |             |after any action is taken that     |           |
              |             |                                   |           |
              |             |renders the information previously |           |
              |             |                                   |           |
              |             |filed inaccurate (Rule 6a-2(a)(2)).|           |
              |             |                                   |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit G    |File an amendment within 10 days   |Exhibit C  |
              |             |                                   |           |
              |             |after any action is taken that     |           |
              |             |                                   |           |
              |             |renders the information previously |           |
              |             |                                   |           |
              |             |filed inaccurate (Rule 6a-2(a)(2)).|           |
              |             |                                   |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit H    |File an amendment within 10 days   |Exhibit D  |
              |             |                                   |           |
              |             |after any action is taken that     |           |
              |             |                                   |           |
              |             |renders the information previously |           |
              |             |                                   |           |
              |             |filed inaccurate (Rule 6a-         |           |
              |             |                                   |           |
              |             |2(a)(2)).                          |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit I    |File an annual amendment (Rule 6a- |Exhibit E  |
              |             |                                   |           |
              |             |2(b)(1)).                          |           |
              |             |                                   |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit J    |File an amendment every three      |Exhibit G  |
              |             |                                   |           |
              |             |years (Rule 6a-2(c)) or make       |           |
              |             |                                   |           |
              |             |information available by           |           |
              |             |                                   |           |
              |             |publication, upon request, or via  |           |
              |             |                                   |           |
              |             |an Internet Web site (Rule 6a-     |           |
              |             |                                   |           |
              |             |2(d)).                             |           |
              |             |                                   |           |
              |             |File an amendment within 10 days   |           |
              |             |                                   |           |
              |             |after any action is taken that     |           |
              |             |                                   |           |
              |             |renders the information previously |           |
              |             |                                   |           |
              |             |filed inaccurate (Rule 6a-         |           |
              |             |                                   |           |
              |             |2(a)(2)).                          |           |
              ---------------------------------------------------------------

              ---------------------------------------------------------------
              |Exhibit K    |                                   |           |
              |             |                                   |           |
              |             |Only for-profit exchanges are      |           |
              |             |                                   |           |
              |             |required to file an annual         |           |
              |             |                                   |           |
              |             |amendment (Rule 6a-2(b)(2)) or     |           |
              |             |                                   |           |
              |             |make information available by      |           |
              |             |                                   |           |
              |             |publication, upon request, or via  |           |
              |             |                                   |           |
              |             |an Internet Web site (Rule 6a-     |           |
              |             |                                   |           |
              |             |2(d)), and to file an amendment    |           |
              |             |                                   |           |
              |             |within 10 days after any action is |           |
              |             |                                   |           |
              |             |taken that renders the information |           |
              |             |                                   |           |
              |             |previously filed inaccurate (Rule  |           |
              |             |                                   |           |
              |             |6a-2(a)(2)).                       |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit L    |No requirement to update; only     |           |
              |             |                                   |           |
              |             |required on application for        |           |
              |             |                                   |           |
              |             |registration as an exchange.       |           |
              |             |                                   |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit M    |File an annual amendment (Rule 6a- |Question 8 |
              |             |                                   |           |
              |             |2(b)(2)) or make information       |of the     |
              |             |                                   |           |
              |             |available by publication, upon     |Statement  |
              |             |                                   |           |
              |             |request, or via an Internet Web    |           |
              |             |                                   |           |
              |             |site (Rule 6a-2(d)).               |Question   |
              |             |                                   |           |
              |             |File an amendment within 10 days   |9(a) of the|
              |             |                                   |           |
              |             |after any action is taken that     |Statement  |
              |             |                                   |           |
              |             |renders the information previously |           |
              |             |                                   |           |
              |             |filed inaccurate (Rule 6a-         |Exhibit I  |
              |             |                                   |           |
              |             |2(a)(2)).                          |Exhibit J  |
              |             |                                   |           |
              ---------------------------------------------------------------
              |             |                                   |           |
              |             |                                   |           |
              |Exhibit N    |File an annual amendment (Rule 6a- |Exhibit K  |
              |             |                                   |           |
              |             |2(b)(2)) or make information       |Exhibit L  |
              |             |                                   |           |
              |             |available by publication, upon     |Exhibit M  |
              |             |                                   |           |
              |             |request, or via an Internet Web    |           |
              |             |                                   |           |
              |             |site (Rule 6a-2(d)).               |           |
              |             |                                   |           |
              ---------------------------------------------------------------
              |deleted      |                                   |Question   |
              |             |                                   |           |
              |             |                                   |9(b) of the|
              |             |                                   |           |
              |             |                                   |Statement  |
              ---------------------------------------------------------------

                       2.   Amendments to Rules 6a-1, 6a-2, and 6a-3

                            under the Exchange Act

                               In order to reduce some of the filing burdens for

             exchanges and to allow exchanges to comply with the filing

             requirements by posting information on an Internet web page,

             the Commission is amending Rules 6a-1, 6a-2, and 6a-3 under

             the Exchange Act.

                            a.   Rule 6a-1 Application for Registration

                                 as an Exchange or Exemption Based on

                                 Limited Volume of Transactions

                  The Commission proposed to amend Rule 6a-1 to clarify

             that Form 1 should only be used by an exchange to apply for

             registration as a national securities exchange or for an

             exemption from registration under Section 5 of the Exchange

             Act based on such exchanges limited volume of transactions.

             The Commission received no comments on these proposed

             changes and is adopting them as proposed.

                            b.   Rule 6a-2 Periodic Amendments

                  Paragraph (a) of amended Rule 6a-2 requires an exchange

             to file an amendment to Form 1 within 10 days of changes to:

             (1) information filed on the Execution Page of Form 1, or

             amendment thereto; (2) information regarding all affiliates

             and subsidiaries (Exhibit C); (3) application for

             membership, participation or subscription to the exchange or

             for a person associated with a member, participant, or

             subscriber of the exchange (Exhibit F); (4) financial

             statements, reports or questionnaires required of members,

             participants or subscribers (Exhibit G); (5) listing

             applications, any agreements required to be executed in

             connection with listing and a schedule of listing fees

             (Exhibit H);[427] (6) officers, governors, members of all

             standing committees, or persons performing similar

             functions, who presently hold or have held their offices or

             positions during the previous year (Exhibit J);  (7) persons

             with direct ownership and control for non-member owned

             exchanges (Exhibit K);  and (8) any members, participants,

             subscribers or other users and the information pertaining

             thereto (Exhibit M).[428]  Additionally, rather than

             exchanges filing these changes in the form of a notice, as

             is currently required under paragraph (a) of Rule 6a-3, the

             changes will be filed in the form of an amendment on Form 1.

                  These amendments to Rule 6a-2 relieve exchanges from

             some of the filing requirements to which exchanges are

             currently subject.  Specifically, a registered exchange  no

             longer has to file notice within 10 days of changes to: (1)

             its constitution, articles of incorporation or association,

             or by-laws (Exhibit A); (2) written rulings or settled

             practices of any governing board or committee of the

             exchange that have the effect of rules or interpretations

             (Exhibit B); and (3) the schedule of securities listed on

             the exchange (Exhibit N).

                  Paragraph (b) of amended Rule 6a-2 requires an exchange

             to file annually an amendment to Form 1 with the following

             information: (1) unconsolidated financial statements for

             each subsidiary or affiliate or the exchange for latest

             fiscal year (Exhibit D);  (2) audited consolidated financial

             statements for last fiscal year of the exchange prepared in

             accordance with, or reconciled to, United States generally

             accepted accounting principals (Exhibit I);[429]  (3) a list

             of persons with direct ownership and control for non-member

             exchanges (Exhibit K); (4)  a list of all members,

             participants, subscribers or other users and the information

             pertaining thereto (Exhibit M);  and (5)  a schedule of

             securities listed on the exchange, securities admitted to

             unlisted trading privileges and securities admitted to

             trading on the exchange which are exempt from registration

             under Section 12(a) of the Act (Exhibit N).[430]  These

             amendments  remove exchanges obligations to include the

             following as part of the annual amendment: (1) the

             exchanges affiliates and subsidiaries (Exhibit C) and (2) a

             list of officers, governors, and members of standing

             committees be included as part of an annual amendment

             (Exhibit J).

                  Paragraph (c) of amended Rule 6a-2 requires an exchange

             to file an amendment to Form 1 every three years with the

             following information: (1) a copy of the constitution,

             articles or incorporation or association and by-laws

             (Exhibit A); (2) a copy all written rulings, settled

             practices having effect of rules and interpretations of any

             governing board or committee of the exchange (Exhibit B);

             (3) information regarding all affiliates and subsidiaries

             (Exhibit C); and (4) a list of officers, governors, members

             of all standing committees, or persons performing similar

             functions, who presently hold or have held their offices or

             positions during the previous year (Exhibit J).[431]

                  Paragraph (d) of amended Rule 6a-2 provides exchanges

             with alternatives to the annual filing requirement for

             Exhibits K, M, and N, and to the three year filing

             requirement for Exhibits A, B, C, and J.  Pursuant to Rule

             6a-2(d) exchanges have the following options, in lieu of

             paper filing: (1) to publish or cooperate in the publication

             of this information on an annual or more frequent basis, and

             to certify to the accuracy of the information; (2) to keep

             the information up to date, and certify that the information

             is up to date and available to the Commission and the public

             upon request; or (3) to make the information available

             continuously on an Internet web site controlled by an

             exchange, indicate the location of the Internet Web site

             where such information may be found, and to certify that the

             information available at such location is accurate as of its

             date.[432]

                  Comments from the NYSE and the Amex suggested that the

             amendments to Rule 6a-2 and Form 1, as adopted, reimpose

             some of the annual filing requirements previously

             eliminated.[433]  As discussed above, Rule 6a-2 and Form 1,

             as adopted, relax the current filing burdens without

             reimposing any filing requirements.  The technical

             modifications to the amendments to Rule 6a-2 clarify the

             operation of the rule, as adopted.

                            c.   Rule 6a-3 Supplemental Material

                  Paragraph (b) of Rule 6a-3 currently requires

             registered exchanges, or exchanges exempt from registration

             based on their limited volume of transactions, to furnish to

             the Commission copies of all materials issued or made

             available to members.  The Commission proposed to continue

             to require exchanges to provide the Commission with the

             information currently required under the rule.  However, as

             an alternative to filing such information on paper, the

             Commission proposed to permit exchanges to make the

             information available on an Internet web site and provide

             the Commission with the location of the web site.  The

             Commission did not receive comments addressing these

             proposed changes, and is adopting the amendments to Rules

             6a-3(b) as proposed.[434]

                  D.   National Securities Exchanges Operating

                       Alternative Trading Systems

                  National securities exchanges could, under the rules

             the Commission is adopting today, form subsidiaries or

             affiliates that operate alternative trading systems

             registered as broker-dealers.[435]  If a national securities

             exchange chose to form such a subsidiary or affiliate, the

             exchange itself could remain registered as a national

             securities exchange, while the subsidiary or affiliate

             operated as a broker-dealer.  Such subsidiaries or

             affiliates would of course be required to become members of

             a national securities association or another national

             securities exchange.[436]  In addition, any subsidiary or

             affiliate of a registered exchange could not integrate, or

             otherwise link the alternative trading system with the

             exchange, including using the premises or property of such

             exchange for effecting or reporting a transaction, without

             being considered a "facility of the exchange."[437]

             V.   Broker-Dealer Recordkeeping and Reporting Obligations

                  A.   Elimination of  Rule 17a-23

                  Under the regulatory framework adopted in this release,

             alternative trading systems are required to register as

             exchanges or broker-dealers, and comply with the

             requirements under Regulation ATS.  These systems are

             currently subject to recordkeeping and reporting

             requirements under Rule 17a-23 of the Exchange Act.[438]

             Because these alternative trading systems are now subject to

             recordkeeping and reporting requirements relating to their

             operations, either as registered exchanges or as broker-

             dealers under proposed Regulation ATS, the Commission is

             eliminating duplicative recordkeeping and reporting

             obligations for these systems by repealing Rule 17a-23.

             Only the recordkeeping requirements in Rule 17a-23 as they

             apply to broker-dealers that are not also alternative

             trading systems, are being moved to the broker-dealer

             recordkeeping rules, Rules 17a-3 and 17a-4 under the

             Exchange Act.

                  B.   Amendments to Rules 17a-3 and 17a-4

                  Certain trading systems operated by broker-dealers are

             not alternative trading systems, and therefore are not

             required to register as exchanges or comply with Regulation

             ATS under the framework the Commission is adopting today.

             This group of internal broker-dealer systems[439] will

             continue to be regulated under the traditional broker-dealer

             regulatory scheme.  The Commission is amending Rules 17a-3

             and 17a-4 under the Exchange Act[440] to require broker-

             dealers to continually make and keep records regarding the

             activities of internal broker-dealer systems for non-

             alternative trading systems.  These recordkeeping

             requirements are similar to the recordkeeping requirements

             under Rule 17a-23, which the Commission today is

             repealing.[441]  The Commission believes that these

             recordkeeping requirements continue to be valuable to the

             oversight and inspections of internal broker-dealer systems

             by the Commission and the SROs.

                  These amendments ensure that broker-dealers continue to

             keep records of any of their customers that have access to

             their internal broker-dealer system, as well as any

             affiliations between those customers and the broker-dealer.

             Broker-dealers are also required to keep daily trading

             summaries, including information on the types of securities

             for which transactions have been executed through the

             internal broker-dealer system, and transaction volume

             information.[442]  In addition, to clarify the application

             of Rule 17a-3, the Commission is defining, for the purposes

             of the rule, the terms "internal broker-dealer system,"[443]

             "sponsor,"[444] and "system order."[445]

                  The Commission is also amending Rule 17a-4 under the

             Exchange Act to require that the records required under the

             amendments to Rule 17a-3 be preserved for three years, the

             first two years in an accessible place.[446]  This amendment

             also requires the preservation of all notices regarding an

             internal broker-dealer system provided to its participants,

             whether communicated in writing, through the internal

             broker-dealer system, or by other automated means.  Such

             notices include notices concerning the internal broker-

             dealer systems hours of operations, malfunctions,

             procedural changes, maintenance of hardware and software,

             and instructions for accessing the system.

             VI.  Temporary Exemption of Pilot Trading System Rule

             Filings

                  A.   Introduction

                  The Commission recognizes that registered exchanges,

             unlike alternative trading systems registered as broker-

             dealers, must submit rule filings for Commission approval.

             In the Concept Release, the Commission generally sought

             comment on ways to expedite the rule filing process and

             specifically sought comment on whether the Commission should

             exempt new SRO trading systems or mechanisms from rule

             filing requirements.[447]  Commenters pointed out that,

             under the current regulatory structure, registered exchanges

             and alternative trading systems compete on a "playing field

             that is far from level,"[448] and attributed this, in part,

             to exchanges inability to implement new trading systems

             before submitting a rule filing and receiving Commission

             approval.[449]  In response to commenters concerns and to

             make existing markets more competitive, the Commission

             proposed Rule 19b-5, a temporary exemption for SROs that

             would defer the rule filing requirements of Section 19(b)

             under the Exchange Act[450] for pilot trading systems

             ("pilot trading system rule").[451]

                  In formulating the pilot trading system rule, the

             Commission drew on its prior experience with SROs attempts

             to operate new pilot trading systems for their members.[452]

             In the Proposing Release, the Commission sought comment on

             whether the proposed pilot trading system rule would provide

             appropriate regulation and would level the competitive

             playing field between SROs and alternative trading systems.

             As an alternative, the Commission sought comment on the

             benefits and disadvantages of allowing SROs to file proposed

             rule changes relating to pilot trading systems under an

             expedited approval process pursuant to Section 19(b)(3)(A)

             of the Exchange Act.  Overall, comments on the proposed

             pilot trading system rule were supportive of it as a way to

             ease the regulatory disparity between registered exchanges

             and alternative trading systems.

                  The Commission received no comments opposing proposed

             Rule 19b-5.  In general, commenters supported the proposal,

             stating that it would encourage further innovation and

             reduce some of the regulatory burdens that make it difficult

             for SROs to compete with broker-dealer operated trading

             systems.  Some commenters, while generally supporting the

             temporary exemption, suggested modifying proposed Rule 19b-

             5.  These comments focused on the proposed definition of a

             pilot trading system, the types of securities the Commission

             proposed to allow SROs to trade on pilot trading systems,

             and the confidential treatment of information filed by SROs

             regarding their pilot trading systems.[453]  After

             considering the comments, the Commission is adopting Rule

             19b-5 substantially as proposed.

                  Currently, SROs are required to submit a rule filing to

             the Commission and undergo a public notice, comment, and

             approval process before they operate any new trading

             system.[454]  As adopted, the pilot trading system rule

             permits SROs that develop separate, new systems that qualify

             as "pilot trading systems,"[455] to begin their operation

             shortly after submitting new Form PILOT to the Commission.

             Form PILOT is merely an informational filing and an SRO does

             not need to await Commission approval to begin operating its

             pilot trading system.[456]  During the operation of the

             pilot trading system, the sponsoring SRO must submit to the

             Commission quarterly reports, as well as amendments to Form

             PILOT concerning any material changes to the pilot trading

             system.  Rule 19b-5 exempts an SRO from the requirement to

             file rule changes for the pilot trading system with the

             Commission for two years.  Before two years expire, the SRO

             must submit a rule filing to obtain from the Commission

             permanent approval of the pilot trading system or must cease

             operation of the trading system.[457]  In addition, the

             temporary exemption under Rule 19b-5 expires sixty days

             after a pilot trading system exceeds certain volume levels.

             A pilot trading system that exceeds these volume levels must

             file for permanent approval before the two-year period

             expires.[458]

                  The Commission believes the pilot trading system rule

             addresses many of the concerns raised by commenters.[459]

             Inherent in the rule filing process is public disclosure of

             SROs business plans for trading systems prior to their

             operation.  Consequently, SROs competitors are informed

             about the proposed pilot trading system and have an avenue

             to copy, delay, or obstruct implementation of the trading

             system before it can be tested in the marketplace.[460]  The

             rule filing process also hinders innovation because

             registered exchanges do not realize the full competitive

             benefits of their efforts.[461]  In contrast, alternative

             trading systems that offer similarly innovative, start-up

             services do not have the same rule filing obligations and,

             thus, have a significant advantage in their flexibility to

             devise, implement, and modify new pilot trading systems.

             Comments to the Proposing Release echo these concerns.[462]

             By deferring the rule filing process, the pilot trading

             system rule allows SROs to better compete with alternative

             trading systems, while continuing to ensure that investors

             are protected and the pilot trading system is operated in a

             manner consistent with the Exchange Act.

                  Finally, the Commission recognizes that domestic

             markets must compete with less regulated foreign markets and

             broker-dealers.  The Commission agrees with commenters that

             excessive regulation of traditional exchanges, alternative

             trading systems, or other markets hinders these exchanges

             ability to compete and survive in the global arena.  The

             pilot trading system rule responds to SROs need for a more

             balanced competitive playing field.

                  B.   Rule 19b-5

                  The Commission is adopting Rule 19b-5 to provide a

             temporary exemption from Section 19(b) of the Exchange Act

             for SRO proposed rule changes concerning the operation of

             pilot trading systems.

                       1.   Types of Systems Eligible for Exemption Under

                            Rule 19b-5

                            a.   Definition of Pilot Trading System

                  The Commission is adopting the definition of pilot

             trading system substantially as proposed.  Under paragraph

             (c) of Rule 19b-5, a trading system operated by an SRO would

             be a "pilot trading system" if it met one of two

             definitions.  First, a trading system would be a "pilot

             trading system," even if it traded the same securities or

             operated during the same hours as an SROs existing trading

             system, if the SRO operated it for less than two years, and

             during at least two of the last four consecutive calendar

             months, it traded no more than one percent of the U.S.

             average daily trading volume of each security traded on the

             trading system.  In addition, the trading system could not

             have an aggregate share trading volume of more than twenty

             percent of the average daily trading volume of all trading

             systems operated by the SRO.[463]  Second, a trading system

             would also be considered a "pilot trading system" if it were

             independent[464] of any other trading system operated by the

             SRO, the SRO operated it for less than two years, and,

             during at least two of the last four consecutive calendar

             months, it traded no more than five percent of the U.S.

             average daily trading volume of each security traded on the

             trading system.  In addition, under this second definition,

             the trading system would have to have aggregate share

             trading no more than twenty percent of the average daily

             trading volume of all trading systems operated by the

             SRO.[465]

                  If at any time within the two-year period a pilot

             trading system exceeds the volume thresholds, it would be

             allowed to continue to operate for 60 more days under this

             exemption.[466]  During this 60 day period, if the SRO

             intended to continue operating the trading system, it would

             have to file for permanent approval under Section 19(b) of

             the Exchange Act of the rules related to the trading system.

                  The Commission received several comments asking the

             Commission to relax or eliminate the proposed requirement

             that, to be a pilot trading system with five percent of the

             trading volume in a security, the pilot trading system would

             have to be "independent."  As proposed, a pilot trading

             system would be independent if it trades securities

             different from the issues of securities traded on any other

             trading system that is operated by the same SRO and that has

             been approved by the Commission.  A pilot trading system

             would also be deemed independent if it does not operate

             during the same trading hours as any other trading system

             that is operated by the same SRO and that has been approved

             by the Commission.  Finally, a pilot trading system would be

             deemed independent if no market maker or specialist on any

             other trading system operated by the SRO trades on the pilot

             trading system the same securities in which they act as a

             market maker or specialist.[467]  The Commission emphasized

             that a pilot trading system need only satisfy one of the

             three criteria to qualify the pilot trading system as

             independent.  After considering the comments, the Commission

             continues to believe such criteria are not unduly

             restrictive and are necessary for the protection of

             investors, and is adopting it as proposed.

                            b.   Response to Comments on the Proposed

                                 Definition of Pilot Trading System

                  In its proposed definition of a pilot trading system,

             the Commission sought to impose limits that were in the

             public interest and for the protection of investors, while

             still providing SROs with the flexibility to innovate.  The

             Commission requested comment on this proposed definition,

             and specifically asked whether the proposed two-year time

             period, trading volume limits, and independence criteria

             were appropriate.  Commenters were asked to provide specific

             reasons for any concerns about the proposed definition and

             to suggest alternatives.  Several commenters focused on

             particular aspects of the proposed pilot trading system

             definition.

                  The NYSE commented that the specific provisions of

             proposed Rule 19b-5 were carefully crafted.  In addition,

             the NYSE agreed with the Commissions proposal to

             distinguish between systems that are "independent" of other

             SRO trading systems and systems that work together with

             existing SRO trading systems.[468]  The ICI supported the

             proposed limited exemption for pilot trading systems.  The

             ICI, however, discouraged any further expansion of the

             criteria that would constitute a pilot trading system and

             encouraged the Commission to carefully monitor pilot trading

             systems as they operate under the exemption.[469]

                  On the other hand, several commenters stated that Rule

             19b-5 should be liberalized to provide SROs with a

             meaningful opportunity to develop pilot trading systems on a

             comparable basis to alternative trading systems.[470]  For

             example, the CME generally asserted that the numerous

             proposed restrictions on what would qualify as a pilot

             trading system would render the proposal of little practical

             value to exchanges.[471]  With regard to the volume

             thresholds proposed by the Commission, the NASD and the PCX

             stated that the volume thresholds were too low. [472]  The

             PCX stated that the volume restrictions did not make sense

             because they limited the ability of registered exchanges to

             introduce new trading systems -- particularly when neither

             alternative trading systems nor third market makers are

             subject to similar volume limitations.  Instead, the PCX

             stated that Rule 19b-5 should treat exchange pilot trading

             systems as though they were alternative trading systems for

             two years, provided the trading systems did not exceed a

             fairly high percentage (perhaps ten percent) of total

             trading volume in any security.[473]  Moreover, the Amex

             said the volume thresholds for individual securities would

             limit the utility of the exemption for primary markets.  In

             particular, the Amex suggested that the Commission apply

             only an aggregate volume threshold whereby volume in an SRO

             pilot trading system could not exceed a specified percentage

             of total volume in all such SROs trading systems.  This

             approach, the Amex believed, would eliminate the

             administrative burden on SROs monitoring the one percent or

             five percent thresholds and would avoid the potentially

             adverse impact on the operation and success of a pilot

             trading system that could occur by removing securities from

             the system that exceeded a specified threshold.[474]

                  Other commenters thought the criteria establishing the

             independence of a pilot trading system from other trading

             systems operated by the same SRO were too restrictive.[475]

             In particular, the CBOE and NASD asserted that the

             independence criteria unnecessarily precluded exchange

             specialists and market makers from participating in pilot

             trading systems.[476]  Similarly, the CHX stated that it was

             too limiting to require a pilot trading system to trade

             different securities or operate during different hours than

             the sponsoring SROs other trading systems in order to be

             "independent."[477]

                            c.   Adopted Definition of Pilot Trading

                                 System

                  The Commission has considered these comments.  As

             discussed above, it believes that, because the proposed

             definition of a pilot trading system, including the proposed

             volume thresholds and independence criteria is novel and

             untried, the criteria are appropriate.  The Commission notes

             that, pursuant to paragraph (b)(5) under Section 6 of the

             Exchange Act, rules of a registered exchange should be

             designed, among other things, to prevent fraudulent and

             manipulative acts and practices, to promote just and

             equitable principles of trade and, in general, to protect

             investors and the public interest.[478]  The Commission

             believes that the desire of the registered exchanges to

             innovate and compete with alternative trading systems must

             be balanced with their statutory obligations under Section 6

             of the Exchange Act.  Therefore, the volume thresholds and

             other standards are designed to ensure that once a pilot

             trading systems activities reach a significant level, the

             pilot trading system will be subject to the public notice

             and comment process under Section 19(b) of the Exchange Act.

             The Commission recognizes that the definition of  "pilot

             trading system" is more narrow than some SROs would prefer,

             but notes that this does not prevent registered exchanges

             from developing trading systems that do not meet the

             definition of "pilot trading system" and filing proposed

             rule changes relating to those systems under Section 19(b)

             of the Exchange Act.

                  Similarly, through the independence criteria, the

             Commission identified characteristics that render pilot

             trading systems sufficiently distinct from the sponsoring

             SROs other trading systems so that a five percent, rather

             than one percent volume level, is acceptable.  "Independent"

             pilot trading systems pose less risk of substantially

             changing the existing markets in a manner detrimental to

             investors and, therefore, the Commission believes should be

             able to operate under the exemption at higher volume

             thresholds than their "non-independent" counterparts before

             having to submit proposed rule filings under Section 19(b)

             of the Exchange Act.[479]  The Commission will monitor use

             of the pilot trading system exemption, and will consider

             modifying these criteria in the future based on its

             experience with SROs use of the exemption.

                       2.   Scope of Pilot Trading Rule Exemption

                  The Commission is adopting Rule 19b-5 to provide a

             temporary exemption from Section 19(b) of the Exchange Act

             for SRO proposed rule changes concerning the operation of

             pilot trading systems.  This temporary exemption includes

             all rules related to the operation of pilot trading systems.

             The Commission defines trading system in paragraph (b) of

             Rule 19b-5 to include the rules of a self-regulatory

             organization that: (i) determine how the orders of multiple

             buyers and sellers are brought together; and (ii) establish

             non-discretionary methods under which such orders interact

             with each other and under which the buyers and sellers

             entering such orders agree to the terms of trade.[480]  The

             Commission intends this exemption to provide SROs with

             flexibility to establish and modify the pilot trading system

             without obtaining prior approval from the Commission.

             However, this exemption does not include any SRO rules that

             would fundamentally affect the relationship between an SROs

             members and those members customers, or an SROs oversight

             of its members.

                  The Commission notes that Rule 19b-5 does not relieve

             SROs from any obligation under the federal securities laws,

             other than the requirement to file proposed rule changes

             relating to the operation of a pilot trading system.  Rule

             19b-5, therefore, does not provide an exemption for SRO

             rules relating to other requirements imposed under other

             provisions of the Exchange Act, such as Sections 11(a) and

             10(a), and Rule 10a-1 thereunder.  In addition, an SRO must

             ensure that securities listed and traded on any pilot

             trading system comply with, among other things, the

             registration requirements of the Exchange Act.[481]  An SRO

             also continues to be required to enforce compliance with its

             own rules and the federal securities laws, including

             members compliance with the Order Handling Rules.[482]

             SROs, similarly, are expected to operate the pilot trading

             systems in compliance with rules governing market-wide

             trading halts.

                       3.   SROs Continuing Obligations Regarding Pilot

                            Trading Systems

                  In order to ensure that pilot trading systems are

             operated in a manner consistent with the Exchange Act, the

             Commission proposed requiring SROs to comply with certain

             conditions before a pilot trading system would be eligible

             for the temporary exemption.  In particular, the Commission

             proposed that SROs comply with the following with regard to

             pilot trading systems:  (1) notify and periodically file

             information about the pilot trading system with the

             Commission, (2) implement trading rules and procedures, (3)

             establish effective surveillance, (4) establish reasonable

             clearance and settlement procedures, (5) limit the types of

             securities traded, (6) cooperate with inspections and

             examinations by the Commission, and (7) have procedures to

             ensure the confidential treatment of trading

             information.[483]

                  The Commission sought comment on whether there were any

             additional conditions with which SROs should be required to

             comply in order to be temporarily exempt from the rule

             filing requirements under Rule 19b-5.  Commenters did not

             recommend any additional conditions.  The Commission notes,

             however, that, as discussed below, it is adding a

             requirement that SROs make publicly available the rules

             relating to the operation of the pilot trading system.[484]

                  In the Proposing Release, the Commission stated that

             SROs would have to "ensure" that these conditions were

             satisfied in order to rely on the temporary exemption under

             proposed Rule 19b-5.  One commenter raised concerns

             regarding the requirement that SROs "ensure" that the

             conditions were met in order to rely on the proposed pilot

             trading system rule.  Specifically the CBOE requested that

             an SRO be allowed to rely on proposed Rule 19b-5 if the SRO

             acts in good faith in determining that the requirements of

             the pilot trading system rule have been met.[485]  Based

             upon the Commissions experience with reviewing new pilot

             trading system proposals submitted by SROs, the Commission

             continues to believe that SROs operating pilot trading

             systems should satisfy the proposed requirements in order to

             operate such systems in a manner consistent with the

             Exchange Act.  Nonetheless, the Commission recognizes that

             full compliance with some of the conditions may be beyond

             the SROs control.  The Commission agrees it is not

             practical to hold SROs strictly liable for the failure of

             unaffiliated entities to satisfy certain requirements of the

             proposed pilot trading system rule.  Therefore, the

             Commission will consider an SRO exempt from rule filing

             requirements under Rule 19b-5 if the SRO acts in good faith

             in determining that the operation of the pilot trading

             system meets the conditions set out in paragraph (e) of that

             rule, and in operating the pilot trading system.

                            a.   Notice and Filings to the Commission

                  The Commission proposed that SROs be required to

             provide written notice of, and information about, the

             operation of a pilot trading system to the Commission on new

             Form PILOT.  On Form PILOT, an SRO would have to provide

             general information about the pilot trading system,

             including:  (1) the date the SRO expects to commence

             operation of the pilot trading system; (2) a list of

             securities to be traded; (3) a list of anticipated members

             to the pilot trading system; and (4) the names of entities

             assisting in the operation of the pilot trading system.[486]

             The SRO could start operation of the pilot trading system

             twenty days after this filing is complete.  If the SRO

             materially changes its proposed pilot trading system prior

             to commencing operation, the SRO would be required to file

             an amendment to Form PILOT and wait twenty days before

             commencing operation.  The Commission is adopting the notice

             requirement and Form PILOT as proposed.[487]

                  The twenty day period following an SROs filing of Form

             PILOT is intended to provide the Commission with time to

             review the form for compliance by the SRO with the pilot

             trading system rule.  In addition, after reviewing Form

             PILOT the Commission may determine, after notice to the SRO

             and an opportunity for the SRO to respond, that the

             operation of a particular pilot trading system would not be

             necessary or appropriate in the public interest or

             consistent with the protection of investors without the SRO

             filing proposed rule changes under Section 19(b) of the

             Exchange Act.[488]

                  The Commission also proposed to require an SRO to file

             an amendment to Form PILOT at least twenty days before it

             implements any material change to the operation of the pilot

             trading system.  The Commission would consider a material

             change to the pilot trading system to include the addition

             of new types of securities, or a new date for commencing

             operation of the pilot trading system.  The Commission

             proposed that an SRO also submit quarterly reports on Form

             PILOT that would include information about the trading

             volume effected on the pilot trading system during the most

             recent calendar quarter.  The Commission received no

             comments on these requirements and is adopting them as

             proposed.[489]

                  The Commission proposed that all notices and reports

             filed on Form PILOT be kept confidential. The Commission,

             however, requested comment on whether all information on

             Form PILOT should be publicly available or whether, as an

             alternative, information on Form PILOT should be publicly

             available, unless an SRO specifically requests confidential

             treatment.  The Commission received several comments on the

             confidential treatment of information on Form PILOT.  The

             CBOE recommended that all information about a pilot trading

             system filed quarterly on Form PILOT be deemed

             confidential.[490]  The NYSE suggested only limited

             confidentiality for filings on Form PILOT, that is, pilot

             trading system information should be publicly available

             shortly prior to, or on the date of, launch of a new

             system.[491]  Another commenter offered that the Commission

             make public only certain information on Form PILOT.[492]

             One commenter suggested that the confidential treatment of

             Form PILOT information be at the filers discretion.[493]

                  After considering commenters suggestions, the

             Commission has determined that the confidential treatment of

             Form PILOT information is an important element in reducing

             the disparate regulatory treatment of SROs and alternative

             trading systems and that such confidentiality is critical in

             the period prior to a pilot trading system commencing

             operations.  However, the Commission also considers

             important the publics interest in having access to accurate

             information about the pilot trading system.  Accordingly,

             the Commission is modifying proposed Rule 19b-5, so that

             information reported by an SRO on Form PILOT is confidential

             until the pilot trading system commences operation.[494]

             Thereafter, Form PILOT information will be made available to

             the public.

                            b.   Fair Access

                  Because information and access advantages of certain

             SRO members could subvert the fair and orderly trading of

             securities on a pilot trading system or the primary market,

             the Commission is adding a specific condition to the pilot

             trading system rule requiring that the SRO provide fair

             access to the pilot trading system to all members of the

             SRO.  The Commission is adding this fair access requirement

             in order to ensure that markets treat their members

             fairly.[495]  In particular, the SRO shall establish written

             standards for granting access to the pilot trading system

             and apply those standards fairly to all members.  Fair

             access does not require an SRO to allow every member to

             trade on a pilot trading system or to give each member

             trading on the pilot trading system the same privileges.

             However, this requirement does prohibit an SRO from unfairly

             discriminating in the access it does give its members to the

             pilot trading system.  In addition, the SRO must ensure that

             information regarding orders on the pilot trading system is

             equally available to all members of the SRO with access to

             the pilot trading system.[496]  However, a specialist may

             have preferred access to information regarding orders it

             represents in its capacity as specialist on the pilot

             trading system.[497]  This means that such SRO rules need

             not require a member acting as a specialist on the pilot

             trading system to expose its orders to all members, that is

             maintain an "open book."  Such rules established by the SRO

             will be considered part of the pilot trading system for

             purposes of the temporary exemption.[498]

                            c.   Trading Rules and Procedures

                  The Commission proposed to require SROs operating pilot

             trading systems under Rule 19b-5 to adopt and implement

             trading rules and procedures necessary to operate the pilot

             trading system in a manner consistent with the Exchange Act.

             The Commission received no comments specifically addressing

             this condition and is adopting it substantially as proposed.

             As adopted, an SRO must have appropriate trading rules and

             procedures to promote the fair and orderly trading of

             securities on the pilot trading system, including:  (1)

             margin requirements; (2) listing standards; (3) sales

             practice guidelines, such as rules regarding communications

             with the public; and (4) disclosure requirements.  The

             trading rules and procedures should be appropriate for, and

             ensure the fair and orderly trading of, each type of

             security to be traded on the pilot trading system.[499]

                            d.   Surveillance

                  Under the proposal, an SRO would have to establish

             procedures for the effective surveillance of trading

             activity on a pilot trading system.   In the Proposing

             Release, the Commission noted the importance of an SRO being

             able to obtain information necessary to detect and deter

             market manipulation, illegal trading, and other trading

             abuses.  To satisfy this requirement, the Commission

             proposed that an SRO have to develop and implement internal

             surveillance procedures to monitor transactions effected on

             the pilot trading system, and obtain surveillance

             information from other markets, both domestic and foreign.

                  Specifically, in the Proposing Release, the Commission

             discussed its expectation that there be a comprehensive

             information sharing agreement ("ISA") in place between the

             SRO operating a pilot trading system and any other market

             trading the securities, or trading the underlying securities

             of derivative securities products, traded on such pilot

             trading system.[500]   Such agreements provide a necessary

             deterrent to manipulation because they facilitate the

             availability of information needed to fully investigate a

             potential manipulation.  An SRO operating a pilot trading

             system trading U.S. securities, or new derivative securities

             products overlying U.S. securities, would have to continue

             to ensure that all exchanges on which the U.S. securities

             trade are members of the Intermarket Surveillance Group

             ("ISG").[501]   The ISG was formed to coordinate, among

             other things, effective surveillance and investigative

             information sharing arrangements in the stock and options

             markets.

                  The Commission received no comments specifically

             addressing the surveillance requirement under the proposed

             pilot trading system rule.  The Commission continues to

             believe that in order for an SRO to operate a pilot trading

             system in a manner consistent with the Exchange Act, the SRO

             must be able to obtain information necessary to detect and

             deter market manipulation, illegal trading, and other

             trading abuses.  Therefore, the Commission is adopting, as

             proposed, the requirement that an SRO develop and implement

             internal surveillance procedures to monitor transactions

             effected on the pilot trading system, and obtain

             surveillance information from other markets, both domestic

             and foreign by means of an ISA.[502]

                            e.   Clearance and Settlement

                  In the Proposing Release, the Commission observed that

             the integrity of the trading markets depends on the prompt

             and accurate clearance and settlement of securities

             transactions.  For this reason, the Commission proposed

             that, as a condition of the exemption under Rule 19b-5, an

             SRO establish reasonable clearance and settlement procedures

             for transactions effected on the pilot trading system.  For

             example, to ensure that adequate linkages have been formed,

             part of the user agreement should, at a minimum, request

             information about the name of the clearing agency member

             through which the user will clear its trades.  The

             Commission received no comments specifically addressing the

             clearance and settlement requirement under the proposed

             pilot trading system rule.  Therefore, the Commission is

             adopting as proposed, the requirement that an SRO operating

             a pilot trading system ensure that the necessary linkages to

             clearing agencies exist for all pilot trading system

             users.[503]

                            f.   Types of Securities

                  The Commission proposed to limit the types of

             securities an SRO could trade on a pilot trading system.

             Two separate limitations were proposed.  First, under the

             proposal  a pilot trading system would only be permitted to

             trade securities listed on a national securities exchange or

             to which unlisted trading privileges was extended pursuant

             to a rule, regulation, or order of the Commission under

             Section 12(f) of the Exchange Act.  In general, Section 12

             of the Exchange Act requires an exchange to trade only those

             securities that the exchange lists, except that Section

             12(f) of the Exchange Act provides UTP under certain

             circumstances.[504]  For example, under the OTC-UTP plan,

             exchanges are permitted to trade certain over-the-counter

             securities pursuant to a Commission order.[505]  As

             proposed, a pilot trading system operated by a registered

             exchange or a national securities association would be

             limited to trading listed securities or securities to which

             UTP has been extended under Section 12(f) of the Exchange

             Act.  Because national securities associations currently

             trade securities that are neither exchange listed or subject

             to UTP, this provision was unnecessarily restrictive.

             Consequently, the Commission is modifying the limitation on

             the types of securities a pilot trading system may trade

             from that proposed.  In particular, Rule 19b-5(e)(6), as

             adopted, only restricts pilot trading systems by requiring

             that securities traded be registered under Section 12 of the

             Exchange Act.[506]  Registered exchanges will still be

             required to comply with Sections 12(a) and 12(f) of the

             Exchange Act, and therefore, can only trade securities

             listed on that exchange, or securities it is permitted to

             trade under the OTC-UTP Plan.

                            g.   Activities of Specialists

                  As proposed, an SROs pilot trading system  would not

             be eligible for the exemption in Rule 19b-5 if  it traded

             derivative securities, such as options, warrants, or hybrid

             products, the value of which were based, in whole or in

             part, upon the performance of any security traded on another

             trading system operated by that SRO.  Similarly, the

             proposed exemption excluded SRO pilot trading systems that

             traded any security or instrument, such as an equity

             security, the derivative of which traded on another trading

             system operated by that SRO.  The Commission, in proposing

             these limitations, intended to preclude an SRO from relying

             on the temporary exemption if a pilot trading system

             simultaneously traded a security overlying or underlying a

             security traded on that SROs primary market.  The

             Commission has always considered this type of trading to

             raise special concerns that should be resolved through the

             normal rule filing process.[507]

                  In commenting on proposed Rule 19b-5, the CBOE and the

             Amex considered these limitations overly restrictive.  The

             Amex suggested removing this limitation and instead

             requiring SROs to specify on Form PILOT their rules and

             procedures for trading such securities on the pilot trading

             system.[508]  The CBOE suggested an alternative to the

             limitation that pilot trading systems may not trade

             securities that overlie or underlie securities traded on

             another trading system operated by the same SRO.  In

             particular, the CBOE suggested requiring the SRO to create

             firewalls or other safeguards between persons trading the

             derivative and the underlying or overlying securities,

             rather than flatly prohibiting it.[509]

                  After considering the commenters recommendations, the

             Commission has determined that SROs may operate pilot

             trading systems under Rule 19b-5 that simultaneously trade a

             security that is overlying or underlying a security traded

             on another trading system operated by that market, provided

             that such trading remains separate.  This means that, as

             part of the SROs general requirement to have written

             trading rules and procedures to operate the pilot trading

             system,[510] an SRO must have adequate rules and procedures

             to trade related securities simultaneously.  In addition,

             the Commission is adopting a more narrow prohibition than it

             proposed, which prohibits a member firm that is a specialist

             in a security from acting as a specialist on a pilot trading

             system operating during the same hours in a related

             security.[511]  For example, a member firm may not be a

             specialist in a security, such as an equity security, on the

             pilot trading system when it is also a specialist in a

             derivative of that security, such as an option or equity-

             linked note, whose value, in whole or significant part, is

             based on the performance of that security.[512]  The

             Commission would not consider listed options in a single

             underlying instrument to be related securities, for purposes

             of the pilot trading system exemption..  The limitation

             under Rule 19b-5(e)(7)(ii) does not preclude any member firm

             from being a specialist on a pilot trading system in a

             security related to a security in which the member firm is a

             specialist on the SROs other trading systems, when such

             related securities trade at different times.[513]  Also, a

             member may be a specialist in related securities that, the

             Commission, upon application by the SRO, later determines is

             necessary or appropriate in the public interest and

             consistent with the protection of investors.[514]

                  The Commission notes that Rule 19b-5 does not prohibit

             an SRO from developing a trading system that permits a

             member firm to be a specialist in related securities that

             trade simultaneously on trading systems operated by the same

             SRO.  However, the SRO could not avail itself of the Rule

             19b-5 temporary exemption, and instead would have to file

             proposed rule changes with the Commission under Section

             19(b) of the Exchange Act for  public notice and comment and

             obtain Commission approval prior to operating such trading

             system.

                            h.   Inspections and Examinations

                  As a condition to the exemption, the Commission

             proposed that an SRO cooperate with any examination or

             inspection by the Commission of persons effecting

             transactions on the pilot trading system.  The Commission

             received no comments on this requirement and is adopting it

             as proposed.[515]  As adopted, the SRO shall cooperate with

             the examination, inspection, or investigation by the

             Commission of transactions effected on the pilot trading

             system.  The Commission staff will review SRO compliance

             with the conditions in Rule 19b-5 through its routine

             inspections.  In order for the Commission staff to determine

             whether an SRO has properly relied on the exemption under

             Rule 19b-5, the SRO must maintain at its principal place of

             business all relevant records and information pertaining to

             the pilot trading system and the basis for which the SRO

             relied on the exemption from the rule filing

             requirement.[516]  The Commission notes that if an SRO

             outsources the operation or maintenance of any aspect of a

             pilot trading system, such vendor would be considered to be

             operating a facility of an SRO and therefore would also be

             subject to Commission examination or inspection.

                            i.   Public Availability of Pilot Trading

                                 System Rules

                  Although pilot trading system rules do not need to be

             approved by the Commission, the Commission believes the

             current trading rules and procedures of the pilot trading

             system should be publicly available.  Accordingly, the

             Commission is adopting a requirement that the SRO make its

             trading rules and procedures of the pilot trading system

             publicly available.[517]

                  C.   Rule Filing Under Section 19(b)(2) of the Exchange

                       Act Required Within Two Years

                  Within two years of a pilot trading system commencing

             operation, an SRO must submit a rule filing under Section

             19(b)(2) of the Exchange Act to obtain approval for the

             pilot trading system to operate on a permanent basis.[518]

             In accordance with Section 19(b) of the Exchange Act, after

             a formal notice and comment period, the Commission will

             decide whether to approve the proposed rule changes relating

             to a pilot trading system on a permanent basis or whether to

             institute proceedings to disapprove the proposed rule

             changes.  Simultaneous with its request for Commission

             approval under to Section 19(b)(2) of the Exchange Act, an

             SRO may request Commission approval pursuant to Section

             19(b)(3)(A) of the Exchange Act, effective immediate upon

             filing, to continue to operate the trading system for a

             period not to exceed six months. [519]

             VII. The Commissions Interpretation of the "Exchange"

             Definition

                  A.   The Commissions Interpretation in Delta

                  In the Exchange Act, Congress provided a broad

             definition of the term "exchange," permitting the Commission

             to apply the definition flexibly as the securities markets

             evolve over time.[520]  Section 3(a)(1) of the Exchange Act

             provides that:

                  The term exchange means 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 or

                  market facilities maintained by such

                  exchange.[521]

                  Although the statutory definition of "exchange" is

             quite broad, in the 1990 Delta Release,[522] the Commission

             interpreted the definition narrowly 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."[523]  Based

             on this interpretation, which was upheld by the Seventh

             Circuit on review,[524] the Commission staff has given

             operators of  trading systems that do not enhance liquidity

             in traditional ways through market makers, specialists, or a

             single price auction structure, assurances that it would not

             recommend enforcement action if those systems operated

             without registering as exchanges.[525]

                  Several concerns compelled the Commission in 1990 to

             narrowly interpret the definition of the term exchange.

             First, the Commission was concerned that a broad

             interpretation would place "evolving [alternative] trading

             systems within the strait jacket of exchange regulation,"

             thus stifling innovation.[526]  Second, the Commission was

             concerned that a broad definition would subject brokers,

             dealers, and other statutorily defined entities to the

             regulatory scheme prescribed for exchanges.[527]  Third, the

             Commission was concerned that "an expansive definition of

             the term exchange would force a non-member, for-profit,

             proprietary trading system into a regulatory scheme for

             which it is ill-suited, thus ignoring the Congressional and

             judicial mandate to apply flexibly the definition of the

             term exchange to the economic realm."[528]  These

             concerns, however, are largely eliminated by Congress broad

             grant of exemptive authority in 1996,[529] which has

             permitted the Commission to craft a regulatory framework for

             markets which excludes other statutorily defined entities

             (e.g., broker-dealers operating internal matching systems)

             and flexibly regulate markets to accommodate their diverse

             business structures.  In addition, while the Delta

             interpretation was appropriate at the time, its emphasis on

             the "expectation" of regular execution of orders at quoted

             prices no longer reflects todays markets where alternative

             trading systems compete directly with registered exchanges

             and Nasdaq.  The Delta approach has resulted in the anomaly

             of regulating as exchanges small volume entities that raise

             an expectation of liquidity within their system (such as

             AZX), while regulating as broker-dealers higher volume

             entities (such as Instinet).

                  More fundamentally, although traditional exchanges

             still provide liquidity through two-sided quotations and,

             hence, raise an expectation of execution at the quoted

             price, this is no longer the essential characteristic of a

             securities market where stock and other securities exchange

             hands.  Today's technology enables market participants and

             investors to tap simultaneous and multiple sources of

             liquidity from remote locations.  Market makers and

             specialists may be important liquidity providers on a

             particular exchange, but liquidity now comes from many

             sources across multiple markets.[530]  For example, the

             public exposure of investor limit orders means that it is

             now easier to access liquidity in trading venues that do not

             have market makers or specialists.[531]  Today, through

             their computer terminals and other communication links,

             brokers acting on behalf of their customers or institutions

             trading for themselves can see what the quoted price is on

             an exchange or Nasdaq and check it against the price

             available for the same security on one or more alternative

             trading systems.[532]

                  Notably, in Delta, the Commission indicated that the

             Exchange Act does not preclude an alternative trading system

             from coming within the "exchange definition."[533]  The

             Commission recognized that its interpretation of the term

             "exchange" could be subject to change as the securities

             markets continued to change:

                  In order to permit the Commission to apply

                  flexibly the [Exchange] Acts definition of

                  the term exchange to innovative trading

                  systems in securities, Congress imbued the

                  [Exchange] Acts definition of the term

                  exchange with a certain plasticity. . . .

                  ; "it invites reinterpretation as the way the

                  term . . . generally understood

                  evolves."[534]

                  Moreover, on review, although the United States Court

             of Appeals for the Seventh Circuit Court accepted the

             Commissions interpretation of the term "exchange" and

             affirmed the Commissions determination that Delta was not

             an "exchange," the court nevertheless stated that the

             "Commission could have interpreted the section to embrace

             the Delta System" but that it was not compelled to do

             so.[535]

                  B.   The Growing Significance of Alternative Trading

                       Systems in the National Market System

                  Within the past six years, the significance of

             alternative trading systems in the securities markets has

             increased dramatically.  In 1994, the Commissions Division

             of Market Regulation reported that alternative trading

             systems accounted for thirteen percent of the volume in

             Nasdaq securities and 1.4 percent of the trading volume in

             NYSE-listed securities.[536]  In the Proposing Release, the

             Commission estimated that, as of the end of 1996, the

             trading volume on alternative trading systems amounted to

             almost twenty percent of the trades in Nasdaq stocks, and

             almost four percent of orders in securities listed on the

             NYSE.

                  In addition to the general increase in the volume of

             trading occurring on alternative trading systems, the actual

             number of alternative trading systems has skyrocketed.  In

             1991, the Commission was aware of only a few such systems.

             Today, over forty such systems are currently operating.  The

             viability of this number of alternative trading systems

             indicates that these systems account for an increasing

             proportion of trading and that a growing number of investors

             use these systems.  Moreover, the arrival of trading

             services on the Internet portends an increasing level of

             retail interest in alternative means for trading.

                  As more alternative trading systems have developed to

             offer varying services to diverse customer bases, the

             availability of trading information and the accessibility of

             trading opportunities have become increasingly fragmented.

             The national market system relies on centralized sources of

             trading opportunities and trading information.  Exchange

             regulation is designed to facilitate centralization and

             enhance the general publics opportunities to obtain trading

             information and to access trading interest.

                  The narrow interpretation of the term "exchange" in

             Delta has eroded the effectiveness of the Commissions

             oversight of markets.  For example, as discussed in the

             Concept Release, it is clear that regulatory concerns may be

             raised by entities that constitute a market where buyers and

             sellers interact, but do not necessarily ensure a two-sided

             market by design.[537]  Moreover, the Commissions

             traditional approach to broker-dealer regulation is not

             designed to substitute for market regulation.  Consequently,

             these alternative trading systems are not fully integrated

             into the mechanisms that promote market fairness,

             efficiency, and transparency.  In addition to raising

             regulatory fairness concerns, this lack of integration into

             the national market system has had a negative impact on the

             quality and pricing efficiency of secondary markets.[538]

                  C.   The Revised Interpretation of "Exchange"

                  For purposes of effectively regulating the securities

             markets, including alternative trading systems, the

             Commission believes a revised interpretation of what

             constitutes an exchange is in order.[539] Although the

             Commission has considered many characteristics of the modern

             exchange in revising its interpretation,[540] it believes

             two elements most accurately reflect the functions and uses

             of todays exchange markets.  Under the interpretation in

             Rule 3b-16, the first essential element of an exchange is

             the bringing together of orders of multiple buyers and

             sellers.  This reflects the statutory concept of bringing

             together purchasers and sellers and also reflects the

             reality of todays marketplace -- where supply and demand

             originate from a variety of sources, not simply from

             individual brokers and dealers.[541]  The second essential

             element is that trading on an exchange takes place according

             to established, non-discretionary rules or procedures.  As

             discussed above, an essential indication of the non-

             discretionary status of rules and procedures is that those

             rules and procedures are communicated to the systems users.

             Thus, participants have an expectation regarding the manner

             of execution -- that is, if an order is entered, it will be

             executed in accordance with those procedures and not at the

             discretion of a counterparty or intermediary.[542]

                  Some commenters thought the Commission should retain

             its current interpretation of an exchange.  For example,

             TBMA advocated a less expansive definition of exchange, and

             recommended that the Commission continue to regulate

             alternative trading systems within the broker-dealer

             framework, crafting appropriate regulations to address

             particular issues presented by unique operations as they

             develop.[543]  TBMA also raised a question about whether, by

             eliminating the requirement that a system provide a

             reasonable expectation of liquidity to be considered an

             exchange, the Commissions proposal conflicted with the

             statutory definition of "exchange" because liquidity is

             "generally understood" to be a fundamental characteristic of

             an exchange. As noted above, however, today's technology

             gives market participants the ability to access multiple

             markets for liquidity at any given time.  As a result,

             assuring liquidity within a single market by posting

             continuous two-sided quotations is no longer the essential

             characteristic of a market where securities exchange

             hands.[544]

                  Accordingly, the Commission believes that new Rule 3b-

             16 more accurately describes the range of markets that

             perform exchange functions as understood today.  At the same

             time, the Commission's exemption from the exchange

             definition for many alternative trading systems provides a

             flexible framework, permitting each participant to choose

             the regulatory approach that best serves its own business

             needs.

                  D.   Other Practical Reasons for Revising the Current

                       Interpretation

                       1.   Additional Flexibility Provided by the

                            National Securities Markets Improvement Act

                            of 1996

                  As stated above, one principal reason the Commission,

             to date, has interpreted the term "exchange" narrowly has

             been to avoid the imposition of unnecessary and burdensome

             regulatory obligations on small and emerging trading

             systems, which could stifle innovation.[545]  The enactment

             of  NSMIA,[546] however, alleviates the concern that an

             expanded interpretation of the term exchange will inhibit

             innovation.[547]  Specifically, NSMIA added Section 36(a)(1)

             to the Exchange Act, which provides that:

                  the Commission, by rule, regulation, or

                  order, may conditionally or unconditionally

                  exempt any person, security, or transaction,

                  or any class or classes of persons,

                  securities, or transactions, from any

                  provision or provisions of [the Exchange Act]

                  or of any rule or regulation thereunder, to

                  the extent that such exemption is necessary

                  or appropriate in the public interest, and is

                  consistent with the protection of

                  investors.[548]

                  Prior to adoption of NSMIA, the Commissions authority

             under the Exchange Act to reduce or eliminate certain

             consequences of exchange registration was limited.[549]

             Section 36, however, allows the Commission greater

             flexibility in regulating new trading systems by giving the

             Commission broad authority to exempt any person from any

             provision of the Exchange Act.  As a result, the Commission

             now has greater authority to adopt a more consistent

             regulatory approach to securities markets in general, and

             particularly for alternative trading systems that do not

             neatly fit into the existing regulatory framework.[550]

                       2.   No-action Approach to Alternative Trading

                            Systems is No Longer Workable

                  The Commission also believes that the proliferation of

             new trading systems necessitates the revision of the

             interpretation of the term "exchange."  The no-action review

             process that the Commission has used to date to address

             hybrid systems that incorporate features of both exchanges

             and broker-dealers worked well and was consistent with the

             protection of investors when relatively few systems applied

             for no-action treatment.  The no-action process allowed the

             Division to review the systems services and mechanisms and

             to monitor the impact of such systems on a case-by-case

             basis.  This is no longer practicable.  Absent a revised

             interpretation of "exchange," the Commission would have to

             continue to respond to an increasing volume of no-action

             requests from developing alternative trading systems that

             seek to avoid the burdens associated with registration as a

             national securities exchange.  The Commissions revised

             interpretation eliminates the need for this no-action

             approach.  By codifying a regulatory framework that does not

             rely on Commission staff review of each novel system

             development, the Commission believes that technological

             improvements and enhanced services will become available

             more rapidly.

                       3.   More Rational Treatment of Regulated Entities

                  The Commission believes that the revised interpretation

             of the term exchange, in combination with the adoption of

             Regulation ATS, which allows alternative trading systems to

             register as broker-dealers,[551] is consistent with other

             goals and provisions of the Exchange Act.  The new

             regulatory framework, including the revised interpretation

             of "exchange" avoids the need for the Commission to draw

             what are now arbitrary distinctions between organizations

             that perform similar functions, avoids classifying

             alternative trading systems in a manner that does not fit

             the structure of these systems, and squarely addresses the

             regulatory concerns raised by these systems

                  Moreover, the Commissions new framework helps assure

             consistency with existing broker-dealer regulations.  For

             those alternative trading systems that wish to participate

             in the markets as exchanges, regulation as a national

             securities exchange is available.  However, the Commission

             expects that many alternative trading systems will not elect

             to register as national securities exchanges.  Under the

             Commissions proposal, these systems would have to maintain

             a structure more akin to that of traditional broker-dealers

             and comply with regulatory obligations more appropriately

             tailored to their chosen business structure.  These

             obligations include the new requirements for more

             significant alternative trading systems to address the

             transparency, fair access, and systems capacity, integrity,

             and security concerns raised by these particular

             systems.[552]

             VIII.Effective Dates and Compliance Dates

                  The rules and rule amendments adopted in this release

             are effective on [insert date 120 days after publication in

             the Federal Register], except for Exchange Act Rules

             301(b)(5)(D) and (E) and Rules 301(b)(6)(D) and (E), which

             shall become effective on April 1, 2000.  Alternative

             trading systems, however, will only have to comply with the

             public display requirement in Rule 301(b)(3) for fifty

             percent of the securities subject to this requirements on

             [insert date 120 days after publication in the Federal

             Register].  Alternative trading systems will have to comply

             with Rule 301(b)(3) for all such securities by [insert date

             240 days after publication in the Federal Register].[553]

             Prior to [insert date 120 days after publication in the

             Federal Register], the Commission will publish a schedule of

             those securities for which alternative trading systems must

             comply with Rule 301(b)(3) on [insert date 120 days after

             publication in the Federal Register.]

             IX.  Costs and Benefits of the Rules and Amendments

                  To assist the Commission in its evaluation of the costs

             and benefits that may result from the rules and amendments,

             commenters were requested to provide analysis and data, if

             possible, relating to the costs and benefits associated with

             the proposals.  The Commission initially identified certain

             costs and benefits associated with its changes in the

             Proposing Release.  Although the Commission received seventy

             comment letters, as of December 1, 1998 concerning the

             proposed rules, none of the commenters responded

             specifically to the request for comment on the cost/benefit

             analysis.  Some commenters did raise related issues and the

             Commission will address those comments in this analysis.

             After considering the comments, the Commission continues to

             believe that the benefits of the rules and amendments

             justify the associated costs.

                  A.   Costs and Benefits of the Rules and Amendments

                       Regarding Alternative Trading Systems

                  The Commission identified several benefits and costs to

             investors and market participants in the Proposing Release

             with regard to alternative trading systems.  The Commission

             is not making any changes to the rules or amendments that

             increase the cost estimates for alternative trading system

             notice, reporting and recordkeeping obligations.  The most

             significant change the Commission is making in the rules as

             adopted is to revise the fair access provisions.  The rules

             and amendments in the Proposing Release provided investors

             with a right of appeal to the Commission and required

             alternative trading systems to provide investors denied or

             limited access to the system with notice of that action and

             their right to appeal the decision to the Commission.  The

             Commission has decided not to adopt the right of appeal

             provisions and the requirement of notice to investors denied

             or limited access.  Instead, alternative trading systems

             with significant volume will be required to provide

             quarterly notices to the Commission on Form ATS-R of all

             grants, denials, and limitations of access as well as

             descriptive information regarding those access decisions.

             The net effect of these changes to the fair access

             requirements is a decrease, relative to the original

             proposal, in the burdens on alternative trading systems with

             significant volume.  Several commenters objected to the

             proposed fair access rules on various grounds.[554]

                  Several commenters had general comments with regard to

             the burdens imposed on respondents under Regulation ATS.

             One commenter argued that the Commission should impose only

             minimal requirements on start-up or smaller trading

             systems.[555]  The alternative trading system rules have

             been tailored to minimize their burden on alternative

             trading systems generally and small systems specifically.

             Because many of the provisions in the rules are triggered by

             a volume threshold, the Commission expects that small

             alternative trading systems will not have sufficient volume

             to trigger those thresholds and will, therefore, not have to

             comply with those provisions.  The recordkeeping and

             reporting requirements with which smaller, lower volume

             alternative trading systems will have to comply under

             Regulation ATS are substantially similar to those with which

             alternative trading systems currently comply.  Consequently

             the costs for smaller alternative trading systems should

             remain unchanged.

                  One commenter argued that material changes on Form ATS

             should be reported twenty days after such a change is made

             rather than twenty days before.[556]  The Commission

             believes that is important to have some advance notice of

             significant changes in order to permit it to carry out its

             market oversight and investor protection functions.  By

             requiring notice before such changes are made, the

             Commission has an opportunity to make inquiries to clarify

             any questions that might arise.  Currently, alternative

             trading systems are required to give twenty days prior

             notice of material changes on Part 1-A of Form 17A-23.  This

             burden remains unchanged under the new rules.

                  Several commenters pointed out areas for possible

             reductions of regulatory overlap.  One commenter argued that

             the Commission should eliminate those broker-dealer

             requirements that would be irrelevant for alternative

             trading systems.[557]  The Commission, however, does not

             believe that the broker-dealer requirements as they apply to

             alternative trading systems, are irrelevant or overly

             burdensome.  Another commented that recordkeeping burdens

             should be coordinated with the NASDs OATS program.[558]

             These recordkeeping rules do not specify the manner in which

             such records must be maintained, but only that they must be

             made available upon request.  Such records may be required

             for other purposes, but it is important to assure that all

             alternative trading systems maintain records sufficient to

             construct an audit trail.

                  One commenter argued that the Commissions rules and

             amendments impose costs and burdens on market innovators

             rather than encouraging such systems.[559] As discussed

             above, however, the Commission does not intend its new

             regulatory framework to impose a penalty on systems because

             of their use of technology.  The Commissions new framework

             is based on the functions performed by a trading system, not

             on its use of technology.

                  Finally, a large number of institutional subscribers to

             alternative trading systems submitted comments within the

             last two weeks.  These commenters expressed a number of

             concerns about the public display requirement.  Among the

             concerns voiced by these commenters was a concern about

             decreasing liquidity, limiting a potentially advantageous

             trading strategy, being able to provide best execution for

             their clients, and increasing costs to execute trades.  The

             Commission responds to these concerns below.[560]

                  The Commission solicited comment on the feasibility of

             permitting alternative trading systems to file forms

             electronically.  Three commenters supported electronic

             filing as an option to reduce the burdens on

             respondents.[561]  While not feasible at this time, the

             Commission intends to make electronic filing an option when

             it is possible.

                  Three commenters argued that the Commissions rules

             should not apply to debt securities, in part, due to the

             burdens that such requirements would place on a largely

             decentralized market.[562]  Other commenters supported

             including debt securities within Regulation ATS.[563]  The

             Commission continues to believe that many of the same

             concerns about the trading of equity securities on

             alternative trading systems apply equally to the trading of

             fixed income securities on alternative trading systems.

             Debt securities are increasingly being traded on alternative

             trading systems, similar to the way that equity securities

             are traded.  Accordingly, the Commissions new regulatory

             framework would require alternative trading systems trading

             debt securities, other than alternative trading systems

             trading solely government and related securities, to

             register as an exchange or register as a broker-dealer and

             comply with Regulation ATS.  If an alternative trading

             system chooses to register as a broker-dealer, Regulation

             ATS applies the same notice, recordkeeping, and reporting

             requirements on debt alternative trading systems as apply to

             equity alternative trading systems.  Because of the way the

             debt market currently operates, however, the transparency

             provisions do not apply to alternative trading systems that

             trade debt securities.  Only those alternative trading

             systems that trade at least twenty percent of certain

             categories of debt are be subject to the fair access

             requirements[564] and the provisions governing systems

             capacity, security, and integrity.[565]

                  Under the rules and amendments in this release,

             alternative trading systems have a choice between

             registering as a national securities exchange or registering

             as a broker-dealer and complying with Regulation ATS.  The

             choice between these two options is complex and each

             alternative trading system will make a choice based on its

             business plan and the role it wishes to play in the market.

             There are several factors that will have an impact on each

             alternative trading systems decision.

                  First, the regulatory costs associated with registering

             and operating as a national securities exchange are higher

             than the regulatory costs associated with registering as a

             broker-dealer and complying with Regulation ATS.  Second,

             registered exchanges have national market system obligations

             that require those exchanges to bear the expenses associated

             with joining the CTA, CQS, and ITS plans.  To offset some of

             those costs, however, registered exchanges also participate

             in the revenue generated from the sale of quotation

             information.  Third, registered exchanges are SROs and,

             therefore, have obligations to surveil trading activity and

             member conduct on the exchange.  These obligations can be

             significant in terms of time, personnel, and financial

             resources.  However, a significant advantage to a registered

             exchange of being an SRO is that it is not subject to

             oversight by a competitor.  Fourth, registered exchanges are

             subject to the statutory requirement to provide fair access,

             which requires a commitment of resources to consider

             membership applications and to report denials to the

             Commission and defend any denial decisions before the

             Commission if an appeal is made.

                  Because of the range of obligations of registered

             exchanges, operation as an exchange requires a significant

             investment of financial resources.  A relatively high volume

             of trading may be required to justify this financial

             investment.  While the advent of for-profit and non-member

             owned exchanges may make it easier to raise the financial

             resources necessary to operate as a registered exchange, the

             Commission does not expect that many alternative trading

             systems will choose to register as exchanges.

                  On the other hand, alternative trading systems that

             register as broker-dealers must comply with the filing and

             conduct obligations associated with being a registered

             broker-dealer including membership in an SRO and compliance

             with that SROs rules.  They must also comply with

             Regulation ATS, which includes filing, recordkeeping and

             reporting obligations.  Unlike registered exchanges,

             alternative trading systems are subject to oversight by an

             SRO, which may operate a competing market.  Regulation ATS

             is designed to impose few requirements on lower volume

             alternative trading systems.  Only alternative trading

             systems with significant volume are required to link to an

             SRO and publicly display orders, provide investors with fair

             access, and comply with systems capacity, integrity, and

             security requirements.  These obligations for alternative

             trading systems with significant volume are similar,

             although not identical, to obligations of registered

             exchanges.  Therefore, it is more likely that a high volume

             alternative trading system will consider the costs and

             benefits of registering as an exchange to be more comparable

             to the costs and benefits of regulation as a broker-dealer

             alternative trading system.  The costs associated with

             regulation as a registered exchange, and with operating as a

             broker-dealer and complying with Regulation ATS are

             discussed more fully below.

                       1.   Benefits

                            a.   Improved Market Transparency

                  The Commissions amendments and rules enhance

             transparency of trading on alternative trading systems.

             Transparency of orders helps ensure that publicly available

             prices fully reflect overall supply and demand and helps

             reduce the negative consequences of market fragmentation

             (e.g., the chance that an order for a security in one market

             will be executed at a price inferior to that available at

             the same time in another market).  The Commission has been

             particularly concerned that the development of so-called

             "hidden markets," in which a market participant privately

             publishes quotations at prices superior to the quotation

             information it disseminates publicly, impedes national

             market system objectives.  Some systems that permit this

             activity have become significant markets in their own right,

             but are not currently required to integrate their orders

             into the public quote because they are not registered as

             national securities exchanges or national securities

             associations.

                  For alternative trading systems choosing to register as

             broker-dealers, the Commissions amendments and rules

             improve the transparency of orders in systems that account

             for a significant portion of the trading volume in any

             security.  The amendments and rules help to incorporate

             alternative trading system quotes into the national market

             system, thus reducing fragmentation, improving liquidity,

             facilitating price discovery, and narrowing the quoted

             spread.[566]

                  Because non-market maker broker-dealers and

             institutions at times enter the best priced orders in an

             alternative trading system, the Commission expects that

             display of these orders in the public quote will also

             improve the NBBO.  For example, of all orders on ECNs by

             non-market maker broker-dealers and institutions that could

             improve the NBBO if included in the public quote stream,

             only about six percent of those orders were actually entered

             into the public quote stream.  Consequently, about ninety-

             four percent of those orders that could have improved the

             NBBO were not included in the public quote stream and thus

             did not impact the NBBO.  These orders were therefore

             unavailable to some investors, in particular, retail

             investors, who do not have direct access to ECNs.  The

             unavailability of these quotes continues to effectively

             result in a two-tiered market.  While the Commission is

             unable to precisely quantify the market impact of these

             changes, it does believe that the benefit for investors will

             be significant based on preliminary estimates.

                  Based on an analysis of ECN trading activity during a

             four day period in June 1997 (June 23, 1997 to June 27,

             1997), the staff estimates that spreads could decrease by as

             much as four percent for Nasdaq issues when non-market maker

             broker-dealer and institutional orders are displayed in the

             public quote.  In making this estimate, the staff has

             assumed an average spread of 35 cents per share, a maximum

             increase of eleven percent for the times that ECNs could

             narrow the inside, and a maximum of 12.5 cents per share

             improvement.  In addition to the effects on the bid-ask

             spread, retail investors and other non-subscribers will gain

             access to the liquidity and better prices now available only

             to alternative trading system subscribers.  Moreover,

             because many broker-dealers offer retail customers automatic

             execution of their small orders at the publicly quoted

             price, a better price in the public quote potentially

             improves the price received by thousands of broker-dealer

             customers.  Larger orders negotiated between institutions

             and broker-dealers also potentially benefit because the

             price negotiated will reflect a smaller spread.  For these

             reasons, the Commission believes that new display and access

             requirements will result in significant benefits to

             investors.

                  The above data is consistent with the results of the

             transparency improvements achieved through the

             implementation of the Order Handling Rules.[567]  The NASD

             studied the effect of the Order Handling Rules on the Nasdaq

             market by comparing various measures between a pre-period of

             twenty days in the beginning of 1997 (December 18, 1997 to

             January 17, 1998) and a post-period of twenty days in the

             beginning of 1998 (January 5, 1998 to February 2, 1998).

             The success of the Order Handling Rules further supports the

             view that the amendments and rules the Commission is

             adopting today will further investors opportunities to

             trade at the best prices.

                  In its study, the NASD also found that quoted spreads

             in the Nasdaq market decreased by an average of forty-one

             percent.  The NASD estimates that this reduction in spreads

             resulted in annual savings to investors of between $284

             million and $673 million.  Because of the increased market

             transparency provided by the display of institutional and

             non-market maker broker-dealer orders, the Commission

             believes that the rules and amendments in this release will

             also further shrink spreads.

                  Finally, the Commission believes that improved

             transparency of orders in alternative trading systems will

             reduce the potential for alternative trading system

             subscribers to manipulate the public market.  It has been

             alleged that institutions and non-market makers

             intentionally influence the market by displaying an order in

             an alternative trading system that locks the price displayed

             in the public market.  For example, if the public market is

             displaying a bid of 20 and an offer of 21, an institution or

             non-market maker might display an offer of 20 in an

             alternative trading system.  Market participants often then

             assume that the order in the alternative trading system

             indicates the direction in which the market is moving and

             begin selling to market makers bidding 20, pushing the

             public market lower.  The price in the alternative trading

             system is then canceled and the institution or non-market

             maker buys securities at a lower price.  This type of

             activity is possible only because institution and non-market

             maker orders in alternative trading systems are not

             displayed to the public market.  The Commission believes

             that the integrity of the public markets is threatened when

             institutions and non-market makers can affect the public

             markets without participating in them.

                  The transparency of trading on alternative trading

             systems that choose to register as exchanges will also

             improve.  All registered exchanges are expected to

             participate in the national market system plans, such as the

             CTA, CQS, and ITS.  These plans form an integral part of the

             national market system, and contribute greatly to the

             operation of linked, transparent, efficient, and fair

             markets.  In addition to improving transparency, alternative

             trading system participation in these market-wide mechanisms

             will benefit investors by reducing trading fragmentation.

                            b.   Improved Investor Protections

                  The Commissions amendments and rules provide benefits

             to investors by improving the surveillance of trading on

             alternative trading systems.  Adequate surveillance of the

             trading on alternative trading systems is critical to the

             continued integrity of our markets.  This is particularly

             the case with regard to alternative trading systems that

             have a significant percentage of the trading volume in one

             or many issues of securities.  The oversight of trading

             activities on alternative trading systems that choose to

             register as broker-dealers will improve because the

             proposals clarify the relationship between SROs and

             alternative trading systems.

                  The notice, reporting, and recordkeeping requirements

             under Regulation ATS also contribute to the Commissions and

             the SROs ability to effectively oversee alternative trading

             systems regulated as broker-dealers.  The Commission

             believes that these enhancements to the surveillance and

             oversight of alternative trading systems regulated as

             broker-dealers benefit the public by helping to prevent

             fraud and manipulation.

                  The surveillance of trading on alternative trading

             systems that choose to register as exchanges under the

             Commissions proposal will also be improved.  All registered

             exchanges are SROs, which have direct obligations to surveil

             the trading on their own markets.  The Commission believes

             that, through improved surveillance mechanisms, it will be

             better able to detect fraud and manipulation that could

             occur on alternative trading systems.  For example,

             alternative trading systems can be used to artificially

             narrow the NBBO spreads for the sole purpose of trading

             through a broker-dealers automatic execution system at the

             artificial prices.[568]  The Commission and the SROs will be

             able to more readily detect such activity through enhanced

             surveillance.  The Commission believes that this more direct

             oversight of trading activities will therefore benefit

             investors and the market generally by helping to prevent

             fraud and manipulation.

                            c.   Fair Access

                  The Commissions rules require alternative trading

             systems with significant volume to provide a fair

             opportunity to participate in alternative trading systems.

             Fair and non-discriminatory treatment of potential and

             current subscribers by alternative trading systems is

             important, especially when an alternative trading system

             captures a large percentage of trading volume in a security.

             Although an alternative trading system with significant

             volume is required to provide access to orders that it is

             required to display in the public quote stream, there are

             other benefits to direct participation on an alternative

             trading system.  In particular, participation on an

             alternative trading system allows an investor to enter its

             own orders, view contingent orders not publicly displayed

             (such as all or none orders) and use special features of an

             alternative trading system, such as a negotiation feature or

             reserve size feature.  Accordingly, the rules prevent

             discriminatory denials of access and ensure that market

             participants are not prevented from gaining access to

             significant sources of liquidity.

                            d.   Systems Capacity, Integrity, and

                                 Security

                  The Commission believes that its rules regarding

             systems capacity, integrity, and security of alternative

             trading systems provide several benefits to the marketplace

             and to investors.  Marketplaces are increasingly reliant on

             technology and most of their functions are becoming highly

             automated.  Alternative trading systems are subject only to

             business incentives to avoid system breakdowns that may

             disrupt the market.  In the past, alternative trading system

             failures have affected the public market, particularly

             during periods of high trading volume.  Some alternative

             trading systems have had prolonged shut-downs during the

             busiest trading sessions due to systems problems.  For

             example, during the past year, Instinet, Island, Bloomberg,

             and Archipelago (operated by Terra Nova) have all

             experienced systems outages due to problems with their

             automated systems.  On a number of occasions, ECNs have had

             to stop disseminating market maker quotations in order to

             keep from closing altogether, including during the market

             decline of October 1997 when one significant ECN withdrew

             its quotes from Nasdaq because of lack of capacity.

             Similarly, a major IDB in non-exempt securities experienced

             serious capacity problems in processing the large number of

             transactions in October 1997 and had to close down

             temporarily.

                  The Commissions rules require alternative trading

             systems that handle a significant volume of trades to

             establish reasonable capacity estimates, conduct stress

             tests, implement procedures to monitor system development,

             review systems vulnerability, and establish adequate

             contingency plans.  Investors will benefit from the rules

             because significant systems will be less likely to shut down

             as a result of systems failures and will be better equipped

             to handle market demand and provide liquidity during periods

             of market stress.  The ability of alternative trading

             systems to provide more reliable and consistent service in

             the market benefits investors and the public markets

             generally.  The Commission also believes that investors will

             benefit from robust system security provided by ensuring

             that significant alternative trading systems maintain

             sufficient security measures to prevent unauthorized access.

                  All currently registered exchanges participate in the

             Commissions automation review program.  Alternative trading

             systems that choose to register as exchanges will similarly

             be expected to participate in this program.  Under the

             automation review program, exchanges are expected to

             maintain sufficient systems capacity to meet current and

             anticipated volume levels.  The benefits to investors and

             the public generally, as with significant alternative

             trading systems, will be the assurance that systems are

             reasonably equipped to handle market demand and provide

             liquidity during periods of market stress.

                       2.   Costs

                  The alternative trading system rules and amendments

             have been tailored to minimize their burden on alternative

             trading systems and especially small systems.  Many of the

             provisions in the rules and amendments are triggered by a

             volume threshold. The Commission expects that small

             alternative trading systems will not have sufficient volume

             to trigger those thresholds and will therefore not have to

             comply with those provisions.  The recordkeeping and

             reporting requirements with which smaller, lower volume

             alternative trading systems have to comply under Regulation

             ATS are substantially similar to those with which

             alternative trading systems currently comply.  Consequently

             the costs for smaller alternative trading systems should

             remain materially unchanged.  The paperwork, filing, and

             recordkeeping costs are discussed in the Paperwork Reduction

             Act section below.

                            a.   Notice, Reporting, and Recordkeeping

                  All alternative trading systems that will be subject to

             notice, reporting, and recordkeeping requirements under the

             Commissions new rules are currently subject to similar

             requirements under Rule 17a-23.  The requirements under

             Regulation ATS, however, require some additional information

             that is not currently required under Rule 17a-23.

                  Under Regulation ATS, alternative trading systems file

             an initial operation report, notices of material systems

             changes, and quarterly reports.  The rules also include new

             Forms ATS and ATS-R to standardize reporting of such

             information and make it more useful for the Commission.  The

             rules require information that is not currently required

             under Rule 17a-23, such as greater detail about the system

             operations, the volume and types of securities traded,

             criteria for granting access to subscribers, procedures

             governing order execution, reporting, clearance and

             settlement, procedures for reviewing systems capacity and

             contingency procedures, and the identity of any other

             entities involved in operating the system.

                  Regulation ATS requires staff time to comply with the

             initial notice and amendment requirements.  While the

             Commission has designed the requirements in an effort to

             balance the costs of filing with the benefits to be gained

             from the information, some effort will be necessary to

             gather and file this information.  Most of the information,

             however, already exists.  Alternative trading systems will

             only be required to gather this information and supply it in

             the required format to the Commission.  The periodic

             updating requirements will also require staff time over the

             life of the alternative trading system to comply with the

             rules.

                  The Commission estimates that there are currently about

             forty-five alternative trading systems that will be required

             to register as exchanges or register as broker-dealers and

             comply with Regulation ATS.[569]  The Commission also

             estimates that, over time, there will be approximately three

             new alternative trading systems each year that choose to

             register as broker-dealers and comply with Regulation

             ATS.[570]  The Commission also estimates that, over time,

             there will be approximately three alternative trading

             systems that file cessation of operations reports each year.

             Thus, the Commission anticipates that, over time, if all

             forty-five current alternative trading systems choose to

             register as broker-dealers and comply with Regulation ATS,

             there will be approximately forty-five alternative trading

             systems operating each year.

                            b.   Public Display of Orders and Equal

                                 Execution Access

                  Regulation ATS requires that alternative trading

             systems with significant volume display their best-priced

             orders for securities in which they have 5 percent or more

             of total trading volume in the public quote.  The Commission

             identified the anticipated benefits of this requirement

             above.  Below is a discussion of possible costs associated

             with this requirement.

                  One possible cost is the impact on institutional order

             flow to alternative trading systems generally.  Institutions

             have several options available to them to execute trades.

             They can send orders to block trading desks, a number of

             different types of alternative trading systems, or directly

             to registered exchanges through broker-dealer give-ups.

             Although not currently displayed to the public, orders sent

             to an alternative trading system by institutions are

             displayed to other alternative trading system

             subscribers.[571]  Thus, placing large orders, or a series

             of successive small orders, in an alternative trading system

             signals to a large number of sophisticated market

             participants the interest in a particular security.

                  The Commission is not persuaded by commenters that

             suggest that institutions currently willing to use

             alternative trading systems to display their orders to other

             alternative trading system subscribers, including other

             institutions, market-markers, and broker-dealers, will be

             less willing to use alternative trading systems that must

             display those orders to the public market.  Our reasons are

             as follows.  The primary group of market participants that

             will benefit from the public display of institutional orders

             is retail investors.  Retail investors are not currently

             alternative trading system subscribers.  To avoid market

             impact, institutions try to avoid signaling other

             institutions and market professionals, not retail investors.

             Almost all market professionals and a significant number of

             institutions already subscribe to alternative trading

             systems.  Thus, the Commission believes that the additional

             exposure to the market should not affect institutions use

             of alternative trading systems.  Moreover, to the extent

             that institutions want to display small sized orders in the

             public market, rather than their entire order, they will

             still be able to make use of an alternative trading systems

             "reserve size" feature.  This will enable institutions to

             avoid exposing the total size of their order to the public

             market.

                  Nonetheless, assuming institutions do have a preference

             for showing their sized orders to other alternative trading

             system subscribers but not the public market, there may be

             two reactions by institutions.  First, institutions could

             choose to move their orders to more opaque venues, such as

             block trading desks.  The cost of this movement of orders

             would be a loss of transparency to the limited group of

             alternative trading system subscribers who now benefit from

             the display of institutional orders on alternative trading

             systems, and the loss of business to alternative trading

             systems.  While block trading desks would benefit from the

             increased business, it likely would increase institutions

             transaction costs.  For this reason, as well as those

             discussed above, the Commission believes it unlikely for

             institutions to react this way.  Second, because the public

             display requirement only applies to alternative trading

             systems with five percent or more of the volume in a

             particular security, there is a possibility that

             institutions may move their order flow to smaller

             alternative trading systems in order to avoid the public

             display requirement.  Such movements of order flow could

             benefit some alternative trading systems in the form of

             increased revenue and be a cost to other alternative trading

             systems who lose revenue.

                  Currently, alternative trading systems are able to

             attract subscribers because prices in their systems are

             often better than the prices available in the public

             markets.  Because alternative trading systems are now

             required to publicly display their best priced orders for

             securities in which they represent five percent or more of

             the trading volume, the best priced orders for certain

             securities will also be available through the public

             markets.   Alternative trading systems will no longer be

             able to provide subscribers with the unlimited ability to

             avoid public display in the NBBO and possible interaction

             with non-subscribers.  Consequently, some subscribers could

             leave an alternative trading system if they think there are

             fewer advantages than before in having direct access to the

             alternative trading system.

                  However, the growth of ECNs since the Order Handling

             Rules were implemented indicates that alternative trading

             systems can, and are, attracting subscribers.[572]  As

             mentioned above, there are still significant benefits to

             being a subscriber to an alternative trading system,

             including, but not limited to:  the ability to enter orders

             and the use of such features as a negotiation feature or a

             "reserve size" feature; the ability to access the best

             priced orders for securities in which an alternative trading

             system represents less than 5 percent of the trading volume

             and therefore is not subject to the transparency

             requirements; and access to the entire "book," not merely

             the "top of the book," that contains important real-time

             market information regarding depth of trading interest.  All

             of these benefits will be retained under the new display

             requirement.

                  Despite the impact on high volume alternative trading

             systems, integrating their best-priced orders into the

             public market is critical to the national market system.

             Section 11A of the Exchange Act directs the Commission to

             facilitate a national market system and to carry out

             Congress objectives of, among other things, assuring "the

             practicability of brokers executing investors orders in the

             best market."[573]  The public display requirement adopted

             today furthers the objectives in Section 11A of the Exchange

             Act by ensuring that the public markets reflect the best

             priced orders displayed in alternative trading systems that

             have a significant trading market in particular securities.

                  Several commenters also expressed concern about whether

             or not alternative trading systems will be permitted to

             continue charging fees to non-subscribers that access

             alternative trading systems publicly displayed orders.

             Currently, alternative trading systems charge a range of

             fees to subscribers.  In particular, alternative trading

             systems may allow institutional subscribers to select higher

             fees and then have soft-dollars rebated in an amount equal

             to the excess above the actual cost for execution of a

             trade.  Because of the presence of soft dollars, it is

             difficult to estimate the amount of revenue that alternative

             trading systems receive from institutional subscribers.  The

             Commission notes, however, that it is not requiring

             alternative trading systems to change their fee structures.

             The Commission is merely limiting alternative trading

             systems to charging non-subscribers fees that are consistent

             with equivalent access.[574]  The Commission does not

             believe that such limitations will substantially affect an

             alternative trading systems revenues.  In fact, some

             alternative trading systems may have increased revenues from

             the fees charged to non-subscribers.

                  The rules the Commission is adopting today prohibit an

             alternative trading system from charging fees that would

             effectively deny non-subscribers equivalent access to an

             alternative trading systems publicly displayed orders.  As

             long as a fee does not deny equivalent access, it would be

             permissible under these rules.  The SROs will be able to

             establish rules to ensure that alternative trading system

             fees are not inconsistent with the standard of equivalent

             access.  Any SRO rule impacting an alternative trading

             systems access fees would have to be filed with the

             Commission for public comment, review, and approval.  The

             Commission cannot approve any SRO rule unless it finds that

             such rule is consistent with the Exchange Act, including

             whether the rule will promote "efficiency, competition, and

             capital formation."[575]

                  As discussed above, one of the expected benefits of

             displaying the best-priced orders in alternative trading

             systems to all investors is that spreads will shrink.  The

             success of the Order Handling Rules indicates that the

             Commissions current proposal should further enhance

             liquidity and price improvement opportunities in the public

             markets.  Because non-market maker broker-dealers and

             institutions at times enter the best priced orders in an

             alternative trading system, the Commission expects that

             display of these orders in the public quote will improve the

             NBBO.  As a result, some market markers may experience a

             loss of revenue.  For example, a market maker may currently

             be at the NBBO even when an alternative trading system is

             better than that market makers bid or offer.  Accordingly,

             if the better priced institutional or non-market maker

             broker-dealer order were displayed in the public quote, that

             market maker would not execute an order unless it improved

             its quote.  While reduced spreads may represent a cost to

             market makers, as discussed above, it represents a

             corresponding benefit to investors.  Moreover, reduced

             spreads make the overall market more efficient by reducing

             transaction costs.  If trading is less expensive, all other

             things being equal, investors can be expected to trade more.

                  The staff also notes that a market maker is not

             required to execute a customer order at the NBBO if the best

             available price is represented by an alternative trading

             system quote.  Instead, a market maker may attempt to

             execute that customer order against the alternative trading

             system quote.  If the market maker acts as agent in

             effecting the customers trade, it may be entitled to a

             brokerage fee.  Therefore, market makers may be able to

             offset, at least partially, the loss of trading profits with

             additional brokerage revenues.

                            c.   Fair Access

                  Under Regulation ATS, alternative trading systems with

             significant volume are required to establish and maintain

             standards for granting access to their system and keep

             records of such standards.  In addition, such alternative

             trading systems must apply those standards in a fair and

             non-discriminatory manner and submit certain information

             regarding grants, denials, and limitations of access with

             their quarterly reports on Form ATS-R. Based on current

             volume estimates, at most two alternative trading systems

             will be initially subject to this requirement.  The

             Paperwork Reduction Act section of this release summarizes

             the filing and recordkeeping costs associated with the fair

             access requirement.

                  The fair access requirement, as adopted, differs from

             that proposed.  The proposal would have provided market

             participants who believe they had been unfairly denied or

             limited access to an alternative trading system subject to

             the fair access requirement with a right to appeal that

             alternative trading systems action to the Commission.

             Alternative trading systems subject to the fair access

             requirement would also have been required to provide

             investors with notice of a denial or limitation of access

             and their right to appeal that action to the Commission.

             The fair access requirement being adopted today does not

             include any right to appeal an alternative trading systems

             access decisions to the Commission.  Instead, the Commission

             intends to enforce the prohibition on alternative trading

             systems with significant volume unfairly denying access

             through its inspection and enforcement authority.  The

             Commission believes the fair access requirement it is

             adopting will be less costly to alternative trading systems

             than the one proposed because alternative trading systems

             will not be required to defend their access decisions in

             appeals before the Commission.  Moreover, the requirement

             adopted does not require alternative trading systems to send

             notice of their decisions to market participants.

                            d.   Systems Capacity, Integrity, and

                                 Security

                  The Commission does not believe that its amendments and

             rules requiring alternative trading systems to meet certain

             systems related standards imposes significant costs.  The

             standards the Commission is adopting are general standards

             that are consistent with good business practices.  In

             addition, smaller alternative trading systems will not be

             subject to the proposed requirements.  For those alternative

             trading systems that do not, for business reasons alone,

             ensure adequate capacity, integrity, and security of their

             systems, there will be costs associated with complying with

             the requirements.  The costs associated with upgrading

             systems to an adequate level may include, for example,

             investing in computer hardware and software.  In addition,

             alternative trading systems will incur costs associated with

             the independent review of their systems on an annual basis.

             An independent review should be performed by competent,

             independent audit personnel following established audit

             procedures and standards.  If internal auditors are used by

             an alternative trading system to complete the review, these

             auditors should comply with the standards of the EDPAA.  If

             external auditors are used, they should comply with the

             standards of the AICPA and the EDPAA.  The review must be

             conducted according to established procedures and standards.

             The costs involved may vary widely depending on the business

             of the alternative trading system.  Alternative trading

             systems will also be subject to paperwork burdens and

             recordkeeping and reporting requirements.  These

             requirements are necessary for the Commission and the

             appropriate SROs to ensure compliance with systems related

             requirements.  In addition, keeping such records permits

             alternative trading systems to effectively analyze systems

             problems that occur.  While alternative trading systems are

             not required to file such documentation with the Commission

             on a regular basis, the Commission recognizes that

             generating and maintaining such documentation will impose

             some additional costs.

                  The notification requirement for material systems

             outages should impose relatively little additional costs on

             alternative trading systems.  Moreover, the Commission

             believes that this small burden is justified by the need to

             keep Commission staff abreast of systems developments and

             problems.  The Paperwork Reduction Act section of this

             release summarizes the costs associated with the

             recordkeeping and reporting burdens of compliance with the

             systems capacity, integrity, and security requirements.

                            e.   Costs of Exchange Registration

                  The framework the Commission is adopting today for

             alternative trading systems is designed to allow such

             systems the option of registering as national securities

             exchanges.  If an alternative trading system chooses to

             register as an exchange, corresponding regulatory

             obligations could impose costs on such systems, however, the

             elective nature of exchange regulation under the framework

             the Commission is adopting today ensures that only those

             entities for whom it is cost-effective will choose exchange

             registration and therefore bear the costs.

                  For example, exchange-registered alternative trading

             systems will have to be organized to, and have the capacity

             to, carry out the purposes of the Exchange Act, including

             their own compliance and the ability to enforce member

             compliance with the securities laws.  Consequently, any

             newly registered exchange will have to establish appropriate

             surveillance and disciplinary mechanisms.  In addition,

             newly registered exchanges will incur certain start-up costs

             associated with this obligation, such as writing rule

             manuals.

                  National securities exchanges currently operating have

             significant assets and expenses in order to carry out their

             functions.  The cost of acquiring the necessary assets and

             the operating funds required to carry out the day-to-day

             functions of a national securities exchange are significant.

             For example, for the fiscal year 1997, the NYSE had total

             assets of $1,174,887,000 and total expenses of $488,811,000.

             The Cincinnati Stock Exchange ("CSE"), currently the only

             completely automated national securities exchange, had total

             assets of $13,124,585 and total expenses of $5,343,403.  Due

             to these costs, it appears that an alternative trading

             system will need to have significant volume in order to make

             the benefits of exchange registration outweigh the costs.

                  As registered exchanges, alternative trading systems

             will also be subject to more frequent inspection by the

             Commission.  As broker-dealers, alternative trading systems

             will be inspected on a regular basis by any SRO of which

             they are a member, and by the Commission only on an

             intermittent basis.  As registered exchanges, these systems

             will be inspected more regularly by Commission staff, but

             will, of course, no longer be subject to examinations by

             SROs.

                  The Commission inspects different SRO programs on

             independent review cycles.  For example, separate

             inspections are conducted for an SROs surveillance,

             arbitration, listings, and financial soundness programs.

             Where appropriate, SROs will be examined for other programs

             they may operate, such as index programs.  Each type of

             examination will be performed at regular intervals, which

             are typically two to three years.  An SRO, however, may

             expect several examinations throughout a particular year,

             each in a different program.  Each examination typically

             involves three to four attorneys and/or accountants from the

             Commission, who spend one week at the SRO, or up to two

             weeks for particularly large programs, to examine records

             and interview SRO personnel.  In order to comply with

             Section 17(b) under the Exchange Act, an SRO must expend

             resources to provide copies of relevant documents to, and

             answer questions from, the Commission staff.  The cost to an

             SRO of each examination varies greatly depending on the

             scope of the examination and the size or complexity of the

             SROs particular program.

                  In addition, there will also be costs associated with

             meeting the obligations set forth in Section 11A of the

             Exchange Act and the rules thereunder.  These costs include

             the costs of joining, or creating new, market-wide plans,

             such as the CQS, CTA, ITS, and OTC-UTP, although some of

             these costs will be offset by the right to share in the

             revenues generated by these plans.  For example, to join the

             CTA plan, applicants will be asked to pay, as a condition to

             entry into the plan, an amount that reflects the value of

             the tangible and intangible assets created by the CTA plan

             that will be available to the applicant.[576]  Similarly,

             new participants in ITS will have to pay a share of the

             development costs, which will reflect a share of the initial

             development costs, which were $721,631, and a share of costs

             incurred after June 30, 1978.[577]  These costs will also

             include the costs of complying with Rule 11Ac1-1(b) under

             the Exchange Act,[578] which requires national securities

             exchanges and national securities associations to make the

             best bid, best offer, and aggregate quotation size for each

             security traded on its facilities available to quotation

             vendors for public dissemination.[579]  These costs will

             vary depending on the nature and size of the systems

             involved.

                  The Commission notes that the remaining costs will be

             partially offset because the alternative trading systems

             assuming the costs of exchange registration will no longer

             be regulated as broker-dealers.  Consequently, they will no

             longer be obligated to comply with the broker-dealer

             requirements, such as filing and updating Form BD,

             maintaining books and records in accordance with Rules 17a-3

             and 17a-4 under the Exchange Act, and paying fees for

             membership in an SRO.  In addition, because exchange-

             registered alternative trading systems share the

             responsibilities of self-regulation, the regulatory burden

             carried by currently registered exchanges should be reduced.

             Other benefits include the freedom from oversight by a

             competing SRO, no obligation to comply with net capital

             requirements, the right to establish trading and conduct

             rules, the right to establish fee schedules, the ability to

             directly participate in the national market system

             mechanisms, and the right to share in the profits and

             benefits produced by the national market system mechanisms

             such as the CQS, CTA, ITS and OTC-UTP plans.[580]

                  The costs of exchange registration also include certain

             paperwork, filing, and recordkeeping requirements.  These

             costs are discussed in the Paperwork Reduction Act section

             below.

                  The Commission anticipates that only a few of the

             existing alternative trading systems would consider

             registering as a national securities exchange.  For most of

             the alternative trading systems currently in existence, the

             Commission believes that the costs and obligations discussed

             above potentially make registering as a national securities

             exchange less commercially viable than registering as a

             broker-dealer and complying with Regulation ATS.

                  B.   Amendments to Application and Related Rules for

                       Registration as an Exchange

                  The Commission identified several costs and benefits to

             investors and market participants in the Proposing Release

             with respect to amendments to the application and rules for

             exchange registration.  Only two commenters identified areas

             of concern regarding exchange registration.  These

             commenters suggested that the Commission was seeking to

             reimpose annual filing requirements previously eliminated in

             1994.[581]  In response, the Commission has made technical

             modifications to Rule 6a-2 to clarify the operation of the

             rule.  The Commission does not believe that these filing

             burdens are reimposed under the rules as adopted.  These

             commenters also questioned the value of requiring exchanges

             to compile and submit amendments to Form 1 that contain

             information that has been provided to the Commission

             throughout the year in other contexts.  The Commission

             continues to believe that it is important to have all the

             required information gathered in one place in order to make

             it useful for Commission staff.  In addition, the additional

             costs should be minimal because the respondents are required

             only to compile existing documents rather than generate new

             material.

                       1.   Benefits

                  The Commission believes that the amendments provide

             benefits to organizations that are currently registered, or

             in the future will apply for registration, as national

             securities exchanges. Generally, the Commission expects that

             the regulatory framework discussed in this release

             accommodates automated and for-profit exchanges and makes

             registering as a national securities exchange more

             commercially viable for possible future exchanges.[582]

             First, the amendments to Rules 6a-1, 6a-2, and 6a-3 ease

             compliance burdens by simplifying the rule.  By simplifying

             the rule language itself, the Commission anticipates that

             parties attempting to comply with Rules 6a-1, 6a-2, and 6a-3

             will be better able to understand the rules requirements

             and comply with them.  Much of the information required on

             Form 1 will not change, but the revised form recasts the

             questions and exhibits in a different format that will ease

             compliance and make the responses more relevant to investors

             and the Commission.  While national securities exchanges

             have traditionally been membership-owned, Form 1 also is

             revised to accommodate proprietary national securities

             exchanges.

                  Second, the amendments give national securities

             exchanges the option of complying with certain ongoing

             filing requirements by posting information on an Internet

             web site and supplying the location to the Commission,

             instead of filing a complete paper copy with the Commission.

             The Commission anticipates that exchanges will choose to use

             the Internet to comply with Rules 6a-2 and 6a-3 rather than

             filing many exhibits on paper.  The availability of such

             information on the Internet will also provide the public

             with easier and less expensive access to the information

             than requesting paper copies from the Commission or the

             national securities exchanges as currently required.  In

             addition, permitting exchanges to use the Internet as a

             means of compliance will reduce expenses associated with

             clerical time, postage, and copying.

                  The amended rules also reduce the frequency of certain

             ongoing filings to update the information in Form 1,

             directly reducing the compliance burden on national

             securities exchanges while still meeting investors and the

             Commissions need for reasonably current information.

             Specifically, the amendments eliminate exchanges

             requirement to submit changes to their constitution, their

             rules, or the securities listed on the exchange within ten

             days.  The amendments also permit exchanges to file certain

             information regarding subsidiaries and affiliates every

             three years rather than annually.  These amendments will

             conserve registered exchanges staff time to comply with the

             rules.

                       2.   Costs

                  The amendments are intended to simplify the filing

             requirements and reduce the compliance burdens for national

             securities exchanges and will likely impose few additional

             costs on national securities exchanges.  Initially, there

             may be some additional personnel costs required to review

             the proposed rules and revised Form 1, but the Commission

             believes that the simplified requirements will reduce

             overall compliance burdens and costs over time.  Reducing

             the frequency of filings for some requirements may result in

             some information being less current.  The Commission,

             however, believes that much of this type of information does

             not change frequently.  Moreover, the option of posting such

             information on an Internet web site should encourage more

             frequent updating of current information.  Compliance with

             Rules 6a-1, 6a-2, and 6a-3 also include certain paperwork

             costs, which are discussed as "burdens" in the Paperwork

             Reduction Act section below.

                  C.   Costs and Benefits of the Repeal of Rule 17a-23

                       and the Amendments to Rules 17a-3 and 17a-4

                  The Commission identified several costs and benefits to

             investors and market participants in the Proposing Release

             with respect to Rules 17a-23, 17a-3, and 17a-4.  One

             commenter stated that the transfer of recordkeeping burdens

             would impose no additional burdens.[583]

                  Approximately forty-five of the broker-dealer trading

             systems currently filing reports under Rule 17a-23 will be

             alternative trading systems under the amendments and rules

             in this release.  These trading systems will not fall within

             the definition of "internal broker-dealer system," and will,

             therefore, not be required to maintain records under the new

             provisions of Rules 17a-3(a)(16) and 17a-4(b)(10).  In its

             Paperwork Reduction Act analysis, the Commission notes that

             annual aggregate burdens for the recordkeeping obligations

             under Rule 17a-23 will be eliminated.  Although the

             reporting requirements under Rule 17a-23 will be eliminated,

             alternative trading systems will be subject to similar

             recordkeeping requirements under Regulation ATS.[584]  These

             paperwork "burdens" are discussed below in the Paperwork

             Reduction Act section.

                  D.   SRO Pilot Trading System

                  The Commission identified several costs and benefits to

             investors and market participants in the Proposing Release

             with respect to Rule 19b-5.  While the Commission solicited

             comment on the costs and benefits of Rule 19b-5, no comments

             were received specifically on that point.  Several

             commenters did, however, address the Commissions proposal.

             One commenter agreed that Rule 19b-5 would reduce regulatory

             costs and encourage innovation, but believed that the rules

             limitations should be reduced.[585]  Two other commenters

             expressed support for the goals of Rule 19b-5, but argued

             that burdens wouldnt be reduced as a practical matter due

             to the limitations of the rule.[586]  In response, the

             Commission notes that it has adopted the rule with some

             changes that should permit SROs more flexibility in taking

             advantage of the temporary exemption from rule filing

             requirements.

                  By permitting SROs to begin operating eligible pilot

             trading systems immediately and to continue operating for

             two years under a flexible regulatory scheme, the Commission

             believes that Rule 19b-5 will benefit SROs and investors.

             Rule 19b-5 will enhance competition in the trading markets

             without imposing significant SRO compliance burdens.[587]

             Rule 19b-5 will permit the timely implementation of pilot

             trading systems without the widespread dissemination of

             critical business information.  Therefore, Rule 19b-5 will

             reduce SRO costs associated with the Commission approval

             process and improve the competitive balance between SROs and

             alternative trading systems that are regulated as broker-

             dealers.[588]  Moreover, the Commission believes that Rule

             19b-5 will foster innovation and create a streamlined

             procedure for SROs to operate pilot trading systems and will

             reduce filing costs for SROs pilot trading systems.

                  The costs of complying with Rule 19b-5 includes certain

             paperwork, filing, and recordkeeping requirements that are

             discussed below in the Paperwork Reduction Act section.

             X.   Effects on Competition, Efficiency and Capital

             Formation

                  Section 23(a)(2)[589] of the Act requires that the

             Commission, when promulgating rules under the Exchange Act,

             to consider the impact any rule would have on competition

             and to not adopt any rule that would impose a burden on

             competition that is not necessary or appropriate in the

             public interest.  In the Proposing Release, the Commission

             solicited comment on the effects on competition, efficiency

             and capital formation of the rules and amendments.

             Specifically, the Commission requested commenters to address

             how the proposed rules and amendments would affect

             competition between and among alternative trading systems,

             broker-dealers, exchanges, investors, and other market

             participants.  The Commission received no comments

             specifically regarding these issues.

                  The Commission has considered the rules and rule

             amendment in light of the standards cited in Section

             23(a)(2) of the Act and believes they would not likely

             impose any significant burden on competition not necessary

             or appropriate in furtherance of the Exchange Act.  As

             discussed above in the Cost - Benefit Section, the

             Commission recognizes that some alternative trading systems

             and their institutional users will be affected competitively

             by the rules adopted today.  Nonetheless, the Commission

             believes that the rules and amendments will encourage

             innovation, accommodate the growing role of technology in

             the securities markets, improve transparency for market

             participants and ensure the stability of trading systems

             with a significant role in the markets, thereby furthering

             the development of a national market system in accordance

             with the goals under Section 11A of the Exchange Act.  In

             particular, as discussed above in the Cost - Benefit

             Section, the Commission believes that the rules and

             amendments will significantly reduce spreads, thereby

             benefiting all investors.

                  In adopting these rules and amendments, the Commission

             has considered whether the action will protect investors,

             and promote efficiency, competition, and capital

             formation.[590]  The Commission believes that the rules and

             amendments will allow the Commission to better oversee the

             activities of alternative trading systems and integrate

             alternative trading systems into the national market system.

             The rules and amendments will also better accommodate

             automated and for-profit exchanges and permit SROs to

             operate pilot trading systems temporarily without Commission

             approval.  These steps will help to protect investors by

             preventing discriminatory denials or limitations of access,

             preventing systems related failures, and permitting access

             to best-priced orders.  In addition, alternative trading

             systems should continue to compete based on innovation,

             price, and service rather than access to "hidden markets."

                  Rules 3a1-1, 3b-16, and Regulation ATS adopted today

             are intended to provide a choice between registering as a

             broker-dealer and registering as an exchange for markets

             operated as alternative trading systems.[591]  In addition,

             the amendments to Rules 6a-1, 6a-2, and 6a-3 adopted today

             are intended to update the requirements for registered or

             exempt exchanges in order to accommodate different forms of

             organization and methods of operation.  The Commission

             believes that these changes will create a more efficient

             market, encourage competition among alternative trading

             systems, and stimulate capital formation by making the

             regulatory framework sufficiently flexible to accommodate

             new or different approaches to exchange formation and

             operation, including automated and for-profit exchanges.

             The Commission further believes that the costs identified in

             the above analysis are not substantial enough to deter any

             market participants from attempting to become an alternative

             trading system.[592]

                  In addition, Rule 19b-5 and Form Pilot are intended to

             provide SROs the opportunity to develop and operate pilot

             trading systems with less cost and time delay.  As

             previously stated, currently, SROs are required to submit a

             rule filing to the Commission and undergo a public notice,

             comment, and approval process, before they operate a new

             pilot trading system.  Rule 19b-5 would permit SROs that

             develop pilot trading systems to begin operation shortly

             after submitting Form PILOT to the Commission.  One of the

             consequences of SROs filing rule changes before

             implementation is that the rule filing process informs SROs

             competitors about the proposed pilot trading system and

             provides an avenue for those competitors to copy, delay, or

             obstruct implementation of a pilot trading system before it

             can be tested in the marketplace.  As a result, the

             Commission believes that proposed Rule 19b-5 and Form Pilot

             should help create a more efficient market, encourage

             competition between SROs and alternative trading systems,

             and stimulate capital formation by creating a streamlined

             procedure for SROs to operate pilot trading systems and

             reducing filing costs for SROs generally.

             XI.  Summary of Final Regulatory Flexibility Analysis

                  A Final Regulatory Flexibility Analysis ("FRFA") has

             been prepared in accordance with Section 4 of the Regulatory

             Flexibility Act ("RFA").[593]  The FRFA relates to the

             adoption of new rules 3a1-1,[594] 3b-16,[595] 19b-5,[596]

             Regulation ATS,[597] new Forms ATS,[598] ATS-R,[599]

             PILOT,[600] amendments to rules 6a-1,[601] 6a-2,[602] 6a-

             3,[603] 11Ac1-1,[604] 17a-3,[605] 17a-4,[606] the

             Commissions Rules of Practice,[607] to Form 1, and the

             repeal of Rule 17a-23[608] under the Exchange Act.[609]  The

             FRFA notes the potential costs of operation and procedural

             changes that may be necessary to comply with the new rules

             and rule amendments ("new regulatory framework"). A summary

             of the Initial Regulatory Flexibility Analysis ("IRFA")

             appeared in the Proposing Release.[610]

                  As more fully discussed in the FRFA, market

             participants have developed a variety of alternative trading

             systems that furnish services traditionally provided solely

             by registered exchanges.  Our current regulatory framework,

             designed more than six decades ago, however, did not foresee

             many of these trading and business functions.  Alternative

             trading systems now handle twenty percent or more of the

             orders in securities listed on Nasdaq, and almost four

             percent of orders in listed securities.  Even though these

             systems provide services that are similar to those provided

             by the registered exchanges and Nasdaq, the current

             regulatory framework largely ignores the market functions of

             alternative trading systems.  This creates disparities that

             affect investor protection, market intermediaries, and other

             markets.  For example, activity on alternative trading

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

             investors and 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.  In addition, they do not have an

             obligation to ensure that their capacity is sufficient to

             handle trading demand.  Because of the increasingly

             important role of alternative trading systems, these

             differences call into question not only the fairness of

             current regulatory requirements, but also the efficacy of

             the existing national market system structure.

                  As described in the FRFA, under the new regulatory

             framework, the Commission will offer trading systems a

             choice between broker-dealer regulation and exchange

             regulation.  Specifically, the Commission proposed to allow

             alternative trading systems to choose whether to register as

             national securities exchanges, or to register as broker-

             dealers and comply with additional requirements under

             proposed Regulation ATS depending on their activities and

             trading volume.  In conjunction with this proposal, the

             Commission proposed to repeal Rule 17a-23, which currently

             requires alternative trading systems -- as well as broker-

             dealer trading systems that are not alternative trading

             systems -- to maintain certain records and file reports with

             the Commission.  The Commission also proposed amendments to

             Form 1, which securities markets file to register as

             national securities exchanges, and related rules.  Finally,

             to enable registered exchanges and national securities

             associations to better compete in the fast changing

             marketplace, the Commission proposed to temporarily exempt

             certain pilot trading systems operated by such exchanges and

             associations from the rule filing requirements of the

             Exchange Act.

                  In the Proposing Release, the Commission solicited

             public comment on the proposed new rules and rule amendments

             which were designed to resolve many of the concerns raised

             by alternative trading systems.   As discussed in the FRFA,

             commenters generally supported the Commissions proposals

             and welcomed the regulatory flexibility these proposals

             offered.  While no public comments were received in response

             to the IRFA, several of the comments were related to the

             IRFA.  Several commenters encouraged the Commission to

             accept electronic filings as a means of reducing the burden

             on market participants.  The Commission is, in fact, working

             toward the goal of accepting filings in electronic form.

             One commenter suggested that the Commission impose only

             minimal regulatory requirements, if any, on alternative

             trading systems that trade only minimal volume in order to

             avoid erecting significant barriers to entry and innovation.

             The Commission believes that the requirements of Regulation

             ATS are minimal for new alternative trading systems,

             especially as compared to the current no-action letter

             process.  Regulation ATS sets forth concrete requirements

             for a system to operate, imposes only notice filings, and

             reserves more burdensome requirements for high volume

             systems.  Another commenter stated that the reporting

             requirements under proposed Regulation ATS are similar to

             current Rule 17a-23 and, thus, are not inappropriately

             burdensome.  The Commission agrees and notes that most

             current potential respondents under Regulation ATS already

             have experience with the requirements and burdens associated

             with Rule 17a-23, so Regulation ATS will not impose

             significant new burdens on currently operating alternative

             trading systems.

                  The Commission is adopting new Regulation ATS

             substantially in the form it was proposed.

                  The FRFA addresses how the proposal would affect

             broker-dealers that operate alternative trading systems and

             internal broker-dealer trading systems that are small

             entities.  As more fully explained in the FRFA, the

             Commission believes that the improved regulatory framework

             provided by Regulation ATS justifies the costs incurred by

             industry participants to comply with Regulation ATS.  The

             FRFA also describes the Commissions consideration of

             significant alternatives to Regulation ATS.  The FRFA

             concludes that the alternatives, in the context of the a new

             regulatory framework, would not accomplish the stated

             objectives of  Regulation ATS.  A copy of the FRFA may be

             obtained by contacting Denise Landers, Attorney, Division of

             Market Regulation, Securities and Exchange Commission, 450

             Fifth Street, N.W., Mail Stop 10-1, Washington D.C. 20549.

             XII. Paperwork Reduction Act

                  As explained in the Proposing Release, certain

             provisions of the rules and rule amendments contain

             "collection of information" requirements within the meaning

             of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et

             seq.) ("PRA").  Accordingly, the Commission submitted the

             collection of information requirements contained in the

             rules and rule amendments to the Office of Management and

             Budget ("OMB") for review and were approved by OMB which

             assigned the following control numbers:  Form 1, Rules 6a-1

             and 6a-2, control number 3235-0017; Rule 6a-3, control

             number 3235-0021; Rule 17a-3(a)(16), control number 3235-

             0508; Rule 17a-4(b)(10), control number 3235-0506; Rule 19b-

             5 and Form PILOT, control number 3235-0507; Rule 301, Form

             ATS and Form ATS-R, control number 3235-0509; Rule 302,

             control number 3235-0510; and Rule 303, control number 3235-

             0505.  The collections of information are in accordance with

             Section 3507 of the PRA.[611]  With regard to Rule 301, Form

             ATS, and Form ATS-R, Rule 302, and Rule 303, the Commission

             staff has changed its estimate of the paperwork burdens

             slightly due to an increase in the estimated number of

             respondents that will be affected and a change to the fair

             access rules.  Accordingly, the Commission has submitted a

             PRA change worksheet to OMB.[612]

                  The collection of information obligations imposed by

             the rules and rule amendments are mandatory.  However, it is

             important to note that an alternative trading system

             operating as a broker-dealer is optional, operation of a

             national securities exchange is optional, and operating a

             pilot trading system is optional.  The information

             collected, retained, and/or filed pursuant to the rules and

             rule amendments under Regulation ATS will be kept

             confidential to the extent permitted by the Freedom of

             Information Act [5 U.S.C.  552 et seq.].  The information

             collected, retained, and/or filed pursuant to the rules for

             registration as a national securities exchange will not be

             confidential and will be available to the public.  The

             information collected, retained, and/or filed pursuant to

             the rules for operation of pilot trading systems will not be

             confidential and will be made available to the public when

             the pilot trading system starts to operate.  An agency may

             not conduct or sponsor, and a person is not required to

             comply with, a collection of information unless it displays

             a currently valid OMB control number.

                  The collections of information are necessary for

             persons to obtain certain benefits or to comply with certain

             requirements.  As described in the Proposing Release, the

             rules and rule amendments to which the collections of

             information are related allow the Commission to respond to

             the impact of technological developments in the securities

             markets and permit the Commission to more effectively

             oversee the growing number of alternative trading systems.

             The collections of information are also necessary to permit

             the Commission to effectively oversee SRO pilot trading

             systems.  With the exception of two changes to the final

             rules, there are no material changes to the rules and

             amendments as adopted that affect the burden estimates in

             the Proposing Release.  The Commission is adopting different

             fair access requirements from those it published in the

             Proposing Release.  The Commission has determined to not

             adopt the fair access requirements that would have required

             investors denied or limited access to have a right to appeal

             to the Commission and alternative trading systems making

             access denial or limitation decisions to notify such

             investors of the decision and their right of appeal to the

             Commission.  Instead, the Commission has decided to adopt

             rules that require alternative trading systems to report

             quarterly to the Commission a record of all grants, denials,

             and limitations of access as well as other descriptive

             information surrounding the decision.  These changes

             eliminate the proposed paperwork burden of providing notice

             to investors and adds a compliance burden on Form ATS-R to

             report such information to the Commission.  Aggregate

             paperwork burdens have also been revised to reflect updated

             information regarding the estimated number of alternative

             trading systems that will be subject to the rules.  In the

             Proposing Release, the Commission staff estimated that there

             were approximately forty-three alternative trading systems

             operating.  The Commission staff now estimates that there

             are forty-five alternative trading systems operating, so the

             aggregate paperwork burdens have been revised to reflect

             this change.

                  The Commission solicited public comment on the

             collection of information requirements contained in the

             Proposing Release.  While the Commission received no

             comments that specifically addressed the PRA portion of the

             release, it did receive several comments that touched on PRA

             related issues.

                  Several commenters encouraged the Commission to accept

             electronic filings as a means of reducing the burden on

             market participants.  The Commission is, in fact, working

             toward the goal of accepting filings in electronic form.

             The Commission anticipates that the option of electronic

             filing will be made available to respondents at some point

             in the relatively near future.  Several commenters also

             suggested that the Commission reduce the burden on national

             securities exchanges by relieving them of the obligation to

             file annual amendments to Form 1 due to the same information

             being submitted to the Commission in other forms

             periodically throughout the year.  The Commission believes

             that it is important to have one complete annual filing that

             compiles all the changes to the information contained on

             Form 1 throughout the year and all other required SRO

             information.  Additionally, the Commission believes that

             such a filing represents only a compilation of existing

             information, so the additional burden of requiring an annual

             filing is largely clerical and generally minimal.

                  One commenter suggested that the Commission impose only

             minimal regulatory requirements, if any, on alternative

             trading systems that trade only minimal volume in order to

             avoid erecting significant barriers to entry and innovation.

             The Commission believes that the requirements of Regulation

             ATS are minimal for new alternative trading systems,

             especially as compared to the current no-action letter

             process.  Regulation ATS sets forth concrete requirements

             for a system to operate, imposes only notice filings, and

             reserves more burdensome requirements for high volume

             systems.  Another commenter stated that the reporting

             requirements under proposed Regulation ATS are similar to

             current Rule 17a-23 and, thus, are not inappropriately

             burdensome.  The Commission agrees and notes that most

             current potential respondents under Regulation ATS already

             have experience with the requirements and burdens associated

             with Rule 17a-23, so Regulation ATS will not impose

             significant new burdens on currently operating alternative

             trading systems.

                  As noted above in the Cost-Benefit section, below is a

             summary of the paperwork burdens that were identified in the

             Proposing Release.  Although not mandated by the PRA, to

             give regulated entities and others an understanding of the

             paperwork costs, the discussion below provides dollar

             estimates assuming certain labor costs.

                  A.   Form 1, Rules 6a-1 and 6a-2

                  These amendments are intended to simplify the filing

             requirements and reduce the compliance burdens for national

             securities exchanges and will likely impose few additional

             costs on national securities exchanges.  Initially, there

             may be some additional personnel costs required to review

             the proposed rules and revised Form 1, but the Commission

             believes that the simplified requirements will reduce

             overall compliance burdens and costs over time.  Reducing

             the frequency of filings for some requirements may result in

             some information being less current.  The Commission,

             however, believes that much of this type of information does

             not change frequently.  Moreover, the option of posting such

             information on an Internet web site should encourage more

             frequent updating of current information.

                  The Commission staff has estimated that each respondent

             will incur an average burden of forty-seven hours to comply

             with Rule 6a-1 and file an initial application for

             registration on Form 1.  This represents a two hour increase

             from the current average burden due to the estimated

             additional burden of the added exhibits.  The Commission

             staff has estimated that the average additional cost per

             response will be approximately $30.[613]  Because the

             Commission receives applications for registration as an

             exchange on Form 1 from time to time, and not on a

             predictable basis, it cannot estimate the annual aggregate

             costs and burden hours associated with such filings.[614]

                  The Commission notes that it is making no material

             changes to Rule 6a-1, Rule 6a-2, or Form 1 from the

             Proposing Release.  Thus, the collection of information

             burdens are not changing from those proposed.

                  B.   Rule 6a-3

                  The Commission anticipates that the amendments will not

             change the paperwork burden associated with complying with

             Rule 6a-3.  The Commission staff has estimated that the

             average burden for each respondent to comply with Rule 6a-3

             is one-half hour per response because compliance only

             requires photocopying existing documents.  The Commission

             also estimates that each respondent will file supplemental

             information under Rule 6a-3 approximately twenty-five times

             per year.  The estimated average cost per response for each

             individual respondent is $9.50, resulting in an estimated

             annual average cost burden for each respondent of

             $237.50.[615]

                  C.   Rule 17a-3(a)(16)

                  No additional recordkeeping burdens will be imposed on

             internal broker-dealer systems under the amendments to Rule

             17a-3.  The amendments apply only to systems that are

             presently subject to the recordkeeping requirements of Rule

             17a-23.  Because the Commission is repealing Rule 17a-23 and

             amending Rules 17a-3 and 17a-4 by transferring the

             recordkeeping requirements from Rule 17a-23, the Commission

             does not anticipate any new recordkeeping costs or burdens

             for respondents.

                  Based on Commission experience with the burdens

             associated with Rule 17a-23, the Commission has estimated

             the burdens that will be associated with Rule 17a-3(a)(16).

             The Commission staff has estimated that there will be

             approximately ninety-four broker-dealers operating one

             hundred twenty-three internal broker-dealer systems that

             will have to make the records described in Rule 17a-

             3(a)(16).  The Commission staff has estimated that each

             respondent will spend approximately twenty-seven hours per

             year keeping the required records under Rule 17a-3(a)(16) at

             an annual cost of $1,298.16.[616]  The aggregate burden for

             approximately ninety-four broker-dealers operating internal

             broker-dealer trading systems is estimated to be 2,619 hours

             for a total average cost of $122,027.04.[617]

                  D.   Rule 17a-4(b)(10)

                  No additional recordkeeping burdens will be imposed on

             internal broker-dealer systems under the amendments to Rule

             17a-4.  The amendments apply only to systems that are

             presently subject to the recordkeeping requirements of Rule

             17a-23.  Because the Commission is repealing Rule 17a-23 and

             amending Rules 17a-3 and 17a-4 by transferring the

             recordkeeping requirements from Rule 17a-23, the Commission

             does not anticipate any new recordkeeping costs or burdens

             for respondents.

                  Based on Commission experience with the burdens

             associated with Rule 17a-23, the Commission has estimated

             the burdens that will be associated with Rule 17a-4(b)(10).

             The Commission staff has estimated that there will be

             approximately ninety-four broker-dealers operating one

             hundred twenty-three internal broker-dealer systems that

             will have to keep the records described in Rule 17a-

             4(b)(10).  The Commission staff has estimated that each

             respondent will spend approximately three hours to preserve

             the required records under Rule 17a-4(b)(10) at an annual

             cost of $144.24.[618]  The aggregate burden for

             approximately ninety-four broker-dealers operating internal

             broker-dealer trading systems is estimated to be two hundred

             eighty two hours for a total average cost of

             $13,558.56.[619]

                  E.   Rule 19b-5 and Form PILOT

                  For SROs that choose to operate pilot trading systems

             and avail themselves of the provisions of Rule 19b-5,

             compliance with Rule 19b-5 and the filings required on Form

             PILOT are mandatory.  Initial filings on Form PILOT are

             confidential until the pilot system is operational and

             subsequent filings are not confidential.  Thus, after a

             pilot trading system starts to operate, all filings on Form

             PILOT are available to the public.  Rule 19b-5 reiterates

             SROs existing recordkeeping obligations under Rule 17a-1,

             which requires that such records be kept for not less than

             five years, the first two years in an easily accessible

             place.

                  The Commission anticipates receiving approximately 6

             notices per year regarding pilot trading systems on Form

             PILOT.[620]  An SRO will be required to submit a Form PILOT

             providing detailed operational data and update this

             information quarterly.  The Commission staff has estimated

             that an SRO will expend twenty-four hours to file an initial

             operation report and three hours to file a quarterly report

             and a systems change notice.[621]  The Commission also

             estimates that an SRO will file two amendments per year to

             report changes to the system.[622]  The Commission staff has

             estimated that an SRO will expend $1,242 per initial Form

             PILOT filing and $155 for each quarterly Form PILOT and

             system change notice filed.[623]  Thus, the total estimated

             annual burden for SROs to comply with Rule 19b-5 by filing

             an initial notice on Form PILOT is estimated to be one

             hundred forty-four hours for a total average cost of

             $7,452.[624]  The total estimated annual burden for SROs to

             file systems change notices and quarterly reports on Form

             PILOT is estimated to be one hundred eight hours for a total

             average cost of $5,580.[625]

                  F.   Rule 301, Form ATS and Form ATS-R

                  For alternative trading systems that choose to register

             as a broker-dealer, the requirements of Rule 301, Form ATS

             and Form ATS-R are mandatory.  All filings required under

             Rule 301, Form ATS and Form ATS-R are considered

             confidential and are not available to the public.  All

             records required to be made under the Rule are required to

             be  preserved for three years, the first two years in an

             easily accessible place.

                  The alternative trading system amendments and rules

             have been tailored to minimize their burden on alternative

             trading systems and especially small systems.  Many of the

             provisions in the proposed rules are triggered by a volume

             threshold.  The Commission expects that small alternative

             trading systems will not have sufficient volume to trigger

             those thresholds and will therefore not have to comply with

             those provisions.  The recordkeeping and reporting

             requirements with which smaller, lower volume alternative

             trading systems have to comply under proposed Regulation ATS

             are substantially similar to those with which alternative

             trading systems currently comply.  Consequently the costs

             for smaller alternative trading systems should remain

             unchanged.

                       1.   Notice, Reporting, and Recordkeeping

                  All alternative trading systems that will be subject to

             notice, reporting, and recordkeeping requirements under the

             Commissions rules as adopted today are currently subject to

             similar requirements under Rule 17a-23.  The requirements

             under Regulation ATS, however, require some additional

             information that is not currently required under Rule 17a-

             23.

                  Under Regulation ATS, alternative trading systems file

             an initial operation report, notices of material systems

             changes, and quarterly reports.  The rules also include new

             Forms ATS and ATS-R to standardize reporting of such

             information and make it more useful for the Commission.  The

             rules require information that is not currently required

             under Rule 17a-23, such as greater detail about the system

             operations, the volume and types of securities traded,

             criteria for granting access to subscribers, procedures

             governing order execution, reporting, clearance and

             settlement, procedures for reviewing systems capacity and

             contingency procedures, and the identity of any other

             entities involved in operating the system.

                  Regulation ATS requires staff time to comply with the

             initial notice and amendment requirements.  While the

             Commission has designed the requirements in an effort to

             balance the costs of filing with the benefits to be gained

             from the information, some effort will be necessary to

             gather and file this information.  Most of the information,

             however, already exists.  Alternative trading systems will

             only be required to gather this information and supply it in

             the required format to the Commission.  The periodic

             updating requirements will also require staff time over the

             life of the alternative trading system to comply with the

             rules.

                  The Commission staff has estimated that there are

             currently about forty-five alternative trading systems that

             will be required to register as exchanges or register as

             broker-dealers and comply with Regulation ATS.[626]  The

             Commission also estimates that, over time, there will be

             approximately three new alternative trading systems each

             year that choose to register as broker-dealers and comply

             with Regulation ATS.[627]  The Commission also estimates

             that, over time, there will be approximately three

             alternative trading systems that file cessation of

             operations reports each year.  Thus, the Commission

             anticipates that, over time, if all forty-five current

             alternative trading systems choose to register as broker-

             dealers and comply with Regulation ATS, there will be

             approximately forty-five alternative trading systems

             operating each year.

                  The Commission staff has estimated that the average

             burden per respondent to file the initial operations report

             on Form ATS will be twenty hours.  This burden is computed

             by estimating that completing the report will require an

             average of thirteen hours of professional work and seven

             hours of clerical work.[628]  The Commission staff has

             estimated that the average cost per response will be $1,019

             representing the twenty hours and cost of supplies.[629]  If

             all forty-five alternative trading systems opt to register

             as broker-dealers and comply with Regulation ATS, the total,

             one time cost to comply with the proposed requirements to

             file initial operation reports is estimated to be

             $45,855.[630]  The Commission also estimates that, over

             time, approximately three new alternative trading systems

             will register as broker-dealers per year, incurring an

             annual aggregate burden of sixty hours for an average total

             cost of $3,057 after the first year following adoption of

             Regulation ATS.[631]

                  In addition, the rules require alternative trading

             systems to amend their initial operations report to notify

             the Commission of material systems changes and other changes

             to the information contained in the initial operations

             report.  The Commission staff has estimated that each

             respondent will file six such amendments per year.[632]  The

             Commission staff has estimated that each respondent will

             incur an average burden of two hours per response and incur

             an average cost of $111.50 for each amendment to the initial

             operation report that it submits.[633]  If all forty-five

             alternative trading systems opt to comply with Regulation

             ATS rather than to register as exchanges, the total

             aggregate cost per year to comply with the proposed

             requirement to file amendments to the initial operation

             reports is estimated to be $30,105.[634]

                  Alternative trading systems registering as broker-

             dealers will also be required to file quarterly reports on

             Form ATS-R, reporting participating system subscribers, the

             securities traded on the system, and aggregate volume

             information.  The Commission staff has estimated that the

             quarterly reports will cause each respondent to incur an

             average burden of 4 hours per response and incur an average

             cost of $223 for each Form ATS-R that it submits.[635]  The

             annual burden per respondent is estimated to be $892.[636]

             If all forty-five alternative trading systems opt to

             register as broker-dealers and comply with Regulation ATS,

             the total cost per year to comply with the requirement to

             file quarterly reports is estimated to be $40,140.[637]

                  Finally, alternative trading systems registered as

             broker-dealers will be required to submit a notice and a

             report on Form ATS when they cease operations.  The

             Commission anticipates a total of three such filings per

             year.  The Commission staff has estimated that individual

             respondents will incur a burden of two hours to file the

             cessation notice.  The Commission staff has estimated that

             individual respondents will incur a cost of $111.50 to file

             the cessation of operations report on Form ATS.[638]  The

             annual aggregate burden for three alternative trading

             systems to file cessation of operations reports is estimated

             to be $334.50.[639]

                       2.   Fair Access

                  Under Regulation ATS, alternative trading systems with

             significant volume are required to establish and maintain

             standards for granting access to their system and keep

             records of such standards.  In addition, alternative trading

             systems with significant volume are required to submit

             certain information regarding grants, denials, and

             limitations of access with their quarterly reports on Form

             ATS-R.  The Commission staff has estimated that each

             respondent obligated to establish and maintain such records

             will incur a burden of seventeen hours per year to make and

             keep standards for granting access for a total estimated

             cost of $958.50.[640]

                  Although these estimates reflect a program change from

             the Proposing Release, the total burdens on respondents are

             decreasing slightly as a result of the program changes.  The

             Commission is eliminating the proposal to require

             alternative trading systems that deny investors access to

             the system to provide them with notice of the denial and

             their right of appeal to the Commission.  Under the rules as

             adopted, there is no right of appeal to the Commission.  In

             the Proposing Release, the Commission estimated that the

             burden to comply with the notice requirement would be

             approximately twenty-seven hours per year for each

             respondent.  Under the rules as adopted, such alternative

             trading systems are required to submit fair access

             information on Form ATS-R on a quarterly basis.  The burden

             for this requirement is only twelve hours per year for each

             respondent.  Thus, the changes from the Proposing Release

             are anticipated to reduce the burden on each respondent by

             approximately fifteen hours per year.  The Commission staff

             has estimated that only two respondents will be affected by

             this program change, resulting in an aggregate reduction of

             thirty burden hours for all respondents.  This reduction,

             however, is offset by an increase in the estimated number of

             respondents.  Specifically, the aggregate paperwork burden

             for Rule 301, Form ATS, and Form ATS-R is increasing by one

             hundred sixty hours due to updating the estimate of the

             number of potential respondents from forty-three in the

             Proposing Release to forty-five currently.

                       3.   Systems Capacity, Integrity, and Security

                  The notification requirement for material systems

             outages should impose relatively little additional costs on

             alternative trading systems.  Moreover, the Commission

             believes that this small burden is justified by the need to

             keep Commission staff abreast of systems developments and

             problems.

                  The Commission staff has estimated that each respondent

             will incur an average annual burden of fifteen hours to

             comply with the recordkeeping requirements associated with

             the systems capacity, integrity, and security provisions of

             Regulation ATS.  The Commission staff has estimated that

             each respondent will make an average of five system outage

             notices per year, for an estimated average burden of 1.25

             hours per year.[641]  The Commission staff has estimated

             that the total estimated average cost of compliance for each

             respondent will be $85 per year.[642]  Such alternative

             trading systems will also be required to keep records

             relating to the steps taken to comply with systems capacity,

             integrity, and security requirements under Regulation ATS.

             The Commission staff has estimated that each respondent will

             incur a burden of ten hours per year to comply with such

             recordkeeping requirements for a total estimated cost of

             $675 per year.[643]  The Commission staff has estimated that

             two alternative trading systems will be required to comply

             with the systems capacity, integrity, and security

             provisions of Regulation ATS due to their significant

             volume.  The estimated aggregate cost for these alternative

             trading systems chose to comply with the systems capacity,

             integrity, and security requirements is $1,520.[644]

                  G.   Rule 302

                  Rule 302 requires alternative trading systems to make

             certain records with respect to trading activity through the

             alternative trading systems.  This collection of information

             will permit the Commission to detect and investigate

             potential market irregularities and to ensure investor

             protection.  Such information is not available in any other

             form from any other sources.

                  For alternative trading systems that choose to register

             as a broker-dealer, the requirements of Rule 302 are

             mandatory.  All records required to be made under Rule 302

             are considered confidential and are not available to the

             public.  All records required to be made under the Rule are

             required to be preserved for three years, the first two

             years in an easily accessible place.

                  The Commission staff has estimated that each

             alternative trading system that chooses to register as a

             broker-dealer will be required to expend an average of

             thirty-six hours to comply with Rule 302 at an average cost

             of $1,730.88.[645]  If all forty-five alternative trading

             systems opt to register as broker-dealers, rather than as

             exchanges, the total cost for recordkeeping under Rule 302

             is estimated to be $77,889.60 per year.[646]

                  The Commission notes that it is making no material

             changes to Rule 302 from the Proposing Release.  The

             collection of information burdens are increasing slightly

             due to an updated estimate of the number of respondents and

             not due to any changes to the rule as proposed.

                  H.   Rule 303

                  Rule 303 requires alternative trading systems

             registered as broker-dealers to preserve certain records

             produced under Rule 302, as well as standards for granting

             access to the system and records generated in complying with

             the systems capacity, integrity and security requirements

             for alternative trading systems with significant trading

             volume.  Alternative trading systems registered as broker-

             dealers are not required to file such information, but

             merely to retain it in an organized manner and make it

             available to the Commission upon request.

                  For alternative trading systems that choose to register

             as a broker-dealer, the requirements of Rule 303 are

             mandatory.  All records required to be made under Rule 303

             are considered confidential and are not available to the

             public.  All records required to be made under the Rule are

             required to be preserved for three years, the first two

             years in an easily accessible place.

                  The Commission staff has estimated that each

             alternative trading system that chooses to register as a

             broker-dealer will be required to expend an average of four

             hours per year to comply with Rule 303 at an average cost of

             $192.32.[647]  If all forty-five alternative trading systems

             opt to register as broker-dealers, rather than as exchanges,

             the total cost for record preservation is estimated to be

             $8,654.40 per year.[648]

                  The Commission notes that it is making no material

             changes to Rule 302 from the Proposing Release.  The

             collection of information burdens are increasing slightly

             due to an updated estimate of the number of respondents and

             not due to any changes to the rule as proposed.

             XIII.Statutory Authority

                  The rules and rule amendments in this release are being

             adopted pursuant to 15 U.S.C. 78 et seq., particularly

             Sections 3(b), 5, 6, 11A, 15, 17(a), 17(b), 19, 23(a), and

             36 of the Exchange Act, 15 U.S.C. 78c, 78e, 78f, 78k-1, 78o,

             78q(a), 78q(b), 78s(b), 78w(a), and 78mm.

             List of Subjects

             17 CFR Part 202

                  Administrative practice and procedure, Securities.

             17 CFR Part 240

                  Brokers-dealers, Fraud, Issuers, Reporting and

             recordkeeping requirements, Securities.

             17 CFR Part 242

                  Securities

             17 CFR Part 249

                  Reporting and recordkeeping requirements, Securities.

                  For the reasons set out in the preamble, Title 17,

             Chapter II of the Code of Federal Regulations is amended as

             follows.

             PART 202 -- INFORMAL AND OTHER PROCEDURES

                  1.   The authority citation for part 202 continues to

             read in part as follows:

                  Authority:  15 U.S.C. 77s, 77t, 78d-1, 78u, 78w,

             7811(d), 79r, 79t, 77sss, 77uuu, 80a-37, 80a-41, 80b-9, and

             80b-11, unless otherwise noted.

                                      * * * * *

                  2.   Paragraph (b) of  202.3 is revised to read as

             follows:

              202.3   Processing of filings.

                  (a)  ***

                  (b)(1)Applications for registration as brokers,

             dealers, investment advisers, municipal securities dealers

             and transfer agents are submitted to the Office of Filings

             and Information Services where they are examined to

             determine whether all necessary information has been

             supplied and whether all required financial statements and

             other documents have been furnished in proper form.

             Defective applications may be returned with a request for

             correction or held until corrected before being accepted as

             a filing.  The files of the Commission and other sources of

             information are considered to determine whether any person

             connected with the applicant appears to have engaged in

             activities which would warrant commencement of proceedings

             on the question of denial of registration.  The staff

             confers with applicants and makes suggestions in appropriate

             cases for amendments and supplemental information.  Where it

             appears appropriate in the public interest and where a basis

             therefore exists, denial proceedings may be instituted.

             Within forty-five days of the date of the filing of a

             brokerdealer, investment adviser or municipal securities

             dealer application (or within such longer period as to which

             the applicant consents), the Commission shall by order grant

             registration or institute proceedings to determine whether

             registration should be denied. An application for

             registration as a transfer agent shall become effective

             within 30 days after receipt of the application (or within

             such shorter period as the Commission may determine).  The

             Office of Filings and Information Services is also

             responsible for the processing and substantive examination

             of statements of beneficial ownership of securities and

             changes in such ownership filed under the Securities

             Exchange Act of 1934, the Public Utility Holding Company Act

             of 1935, and the Investment Company Act of 1940, and for the

             examination of reports filed pursuant to  230.144 of this

             chapter.

                  (2)  Applications for registration as national

             securities exchanges, or exemption from registration as

             exchanges by reason of such exchanges limited volume of

             transactions filed with the Commission are routed to the

             Division of Market Regulation, which examines these

             applications to determine whether all necessary information

             has been supplied and whether all required financial

             statements and other documents have been furnished in proper

             form.  Defective applications may be returned with a request

             for correction or held until corrected before being accepted

             as a filing.  The files of the Commission and other sources

             of information are considered to determine whether any

             person connected with the applicant appears to have engaged

             in activities which would warrant commencement of

             proceedings on the question of denial of registration.  The

             staff confers with applicants and makes suggestions in

             appropriate cases for amendments and supplemental

             information.  Where it appears appropriate in the public

             interest and where a basis therefore exists, denial

             proceedings may be instituted.  Within 90 days of the date

             of the filing of an application for registration as a

             national securities exchange, or exemption from registration

             by reason of such exchanges limited volume of transactions

             (or within such longer period as to which the applicant

             consents), the Commission shall by order grant registration,

             or institute proceedings to determine whether registration

             should be denied as provided in  240.19(a)(1) of this

             chapter.

             PART 240 -- GENERAL RULES AND REGULATIONS, SECURITIES

             EXCHANGE ACT OF 1934

                  3.   The authority citation for Part 240 continues to

             read in part as follows:

                  Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s,  77z-2,

             77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j,

             78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,

             78w, 78x, 78ll(d), 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29,

             80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.

                                      * * * * *

                  4.   Section 240.3a1-1 is added before the undesignated

             center heading "Definition of Equity Security as Used in

             Sections 12(g) and 16" to read as follows:

              240.3a1-1Exemption from the definition of "Exchange" under

             Section 3(a)(1) of the Act.

                  (a)  An organization, association, or group of persons

             shall be exempt from the definition of the term "exchange"

             under Section 3(a)(1) of the Act, (15 U.S.C. 78c(a)(1)), if

             such organization, association, or group of persons:

                  (1)  Is operated by a national securities association;

                  (2)  Is in compliance with Regulation ATS, 17 CFR

             242.300 through 242.303; or

                  (3)  Pursuant to paragraph (a) of  242.301 of

             Regulation ATS, 17 CFR 242.301(a), is not required to comply

             with Regulation ATS, 17 CFR 242.300 through 242.303.

                  (b)  Notwithstanding paragraph (a) of this section, an

             organization, association, or group of persons shall not be

             exempt under this section from the definition of "exchange,"

             if:

                  (1)  During three of the preceding four calendar

             quarters such organization, association, or group of persons

             had:

                  (i)  Fifty percent or more of the average daily dollar

             trading volume in any security and five percent or more of

             the average daily dollar trading volume in any class of

             securities; or

                  (ii) Forty percent or more of the average daily dollar

             trading volume in any class of securities; and

                  (2)  The Commission determines, after notice to the

             organization, association, or group of persons, and an

             opportunity for such organization, association, or group of

             persons to respond, that such an exemption would not be

             necessary or appropriate in the public interest or

             consistent with the protection of investors taking into

             account the requirements for exchange registration under

             Section 6 of the Act, (15 U.S.C. 78f), and the objectives of

             the national market system under Section 11A of the Act, (15

             U.S.C 78k-1).

                  (3)  For purposes of paragraph (b) of this section,

             each of the following shall be considered a "class of

             securities":

                  (i)  Equity securities , which shall have the same

             meaning as in  240.3a11-1;

                  (ii) Listed options, which shall mean any options

             traded on a national securities exchange or automated

             facility of a national securities exchange;

                  (iii)Unlisted options, which shall mean any options

             other than those traded on a national securities exchange or

             automated facility of a national securities association;

                  (iv) Municipal securities, which shall have the same

             meaning as in Section 3(a)(29) of the Act, (15 U.S.C.

             78c(a)(29));

                  (v)  Investment grade corporate debt securities, which

             shall mean any security that:

                  (A)  Evidences a liability of the issuer of such

             security;

                  (B)  Has a fixed maturity date that is at least one

             year following the date of issuance;

                  (C)  Is rated in one of the four highest ratings

             categories by at least one Nationally Recognized Statistical

             Ratings Organization; and

                  (D)  Is not an exempted security, as defined in Section

             3(a)(12) of the Act, (15 U.S.C. 78c(a)(12));

                  (vi) Non-investment grade corporate debt securities,

             which shall mean any security that:

                  (A)  Evidences a liability of the issuer of such

             security;

                  (B)  Has a fixed maturity date that is at least one

             year following the date of issuance;

                  (C)  Is not rated in one of the four highest ratings

             categories by at least one Nationally Recognized Statistical

             Ratings Organization; and

                  (D)  Is not an exempted security, as defined in Section

             3(a)(12) of the Act, (15 U.S.C. 78o);

                  (vii)Foreign corporate debt securities, which shall

             mean any security that:

                  (A)  Evidences a liability of the issuer of such debt

             security;

                  (B)  Is issued by a corporation or other organization

             incorporated or organized under the laws of any foreign

             country; and

                  (C)  Has a fixed maturity date that is at least one

             year following the date of issuance; and

                  (viii)Foreign sovereign debt securities, which shall

             mean any security that:

                  (A)  Evidences a liability of the issuer of such debt

             security;

                  (B)  Is issued or guaranteed by the government of a

             foreign country, any political subdivision of a foreign

             country, or any supranational entity; and

                  (C)  Does not have a maturity date of a year or less

             following the date of issuance.

                  5.   Section 240.3b-16 is added before the undesignated

             center heading "Registration and Exemption of Exchanges" to

             read as follows:

              240.3b-16Definitions of terms used in Section 3(a)(1) of

             the Act.

                  (a)  An organization, association, or group of persons

             shall be considered to constitute, maintain, or provide "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 those terms are used in Section 3(a)(1)

             of the Act, (15 U.S.C. 78c(a)(1)), if such organization,

             association, or group of persons:

                  (1)  Brings together the orders for securities of

             multiple buyers and sellers; and

                  (2)  Uses established, non-discretionary methods

             (whether by providing a trading facility or by setting

             rules) under which such orders interact with each other, and

             the buyers and sellers entering such orders agree to the

             terms of a trade.

                  (b)  An organization, association, or group of persons

             shall not be considered to constitute, maintain, or provide

             "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," solely because such

             organization, association, or group of persons engages in

             one or more of the following activities:

                  (1)  Routes orders to a national securities exchange, a

             market operated by a national securities association, or a

             broker-dealer for execution; or

                  (2)  Allows persons to enter orders for execution

             against the bids and offers of a single dealer; and

                  (i)  As an incidental part of these activities, matches

             orders that are not displayed to any person other than the

             dealer and its employees; or

                  (ii) In the course of acting as a market maker

             registered with a self-regulatory organization, displays the

             limit orders of such market makers, or other broker-

             dealers, customers; and

                  (A)  Matches customer orders with such displayed limit

             orders; and

                  (B)  As an incidental part of its market making

             activities, crosses or matches orders that are not displayed

             to any person other than the market maker and its employees.

                  (c)  For purposes of this section the term order means

             any firm indication of a willingness to buy or sell a

             security, as either principal or agent, including any bid or

             offer quotation, market order, limit order, or other priced

             order.

                  (d)  For the purposes of this section, the terms bid

             and offer shall have the same meaning as under  240.11Ac1-

             1.

                  (e)  The Commission may conditionally or

             unconditionally exempt any organization, association, or

             group of persons from the definition in paragraph (a) of

             this section.

                  6.  Section 240.6a-1 is amended by revising the section

             heading and paragraphs (a) and (b) to read as follows:

              240.6a-1Application for registration as a national

             securities exchange or exemption from registration based on

             limited volume.

                  (a)  An application for registration as a national

             securities exchange, or for exemption from such registration

             based on limited volume, shall be filed on Form 1 ( 249.1

             of this chapter), in accordance with the instructions

             contained therein.

                  (b)  Promptly after the discovery that any information

             filed on Form 1 was inaccurate when filed, the exchange

             shall file with the Commission an amendment correcting such

             inaccuracy.

                                      * * * * *

                  7.  Section 240.6a-2 is revised to read as follows:

             240.6a-2 Amendments to application.

                  (a)  A national securities exchange, or an exchange

             exempted from such registration based on limited volume,

             shall file an amendment to Form 1, ( 249.1 of this

             chapter), which shall set forth the nature and effective

             date of the action taken and shall provide any new

             information and correct any information rendered inaccurate,

             on Form 1, ( 249.1 of this chapter), within 10 days after

             any action is taken that renders inaccurate, or that causes

             to be incomplete, any of the following:

                  (1)  Information filed on the Execution Page of Form 1,

             or amendment thereto; or

                  (2)  Information filed as part of Exhibits C, F, G, H,

             J, K or M, or any amendments thereto.

                  (b)  On or before June 30 of each year, a national

             securities exchange, or an exchange exempted from such

             registration based on limited volume, shall file, as an

             amendment to Form 1, the following:

                  (1)  Exhibits D and I as of the end of the latest

             fiscal year of the exchange; and

                  (2)  Exhibits K, M, and N, which shall be up to date as

             of the latest date practicable within 3 months of the date

             the amendment is filed.

                  (c)  On or before June 30, 2001 and every 3 years

             thereafter, a national securities exchange, or an exchange

             exempted from such registration based on limited volume,

             shall file, as an amendment to Form 1, complete Exhibits A,

             B, C and J.  The information filed under this paragraph (c)

             shall be current as of the latest practicable date, but

             shall, at a minimum, be up to date within 3 months as of the

             date the amendment is filed.

                  (d)(1)  If an exchange, on an annual or more frequent

             basis, publishes, or cooperates in the publication of, any

             of the information required to be filed by paragraphs (b)(2)

             and (c) of this section, in lieu of filing such information,

             an exchange may:

                  (i)  Identify the publication in which such information

             is available, the name, address, and telephone number of the

             person from whom such publication may be obtained, and the

             price of such publication; and

                  (ii) Certify to the accuracy of such information as of

             its publication date.

                  (2)  If an exchange keeps the information required

             under paragraphs (b)(2) and (c) of this section up to date

             and makes it available to the Commission and the public upon

             request, in lieu of filing such information, an exchange may

             certify that the information is kept up to date and is

             available to the Commission and the public upon request.

                  (3)  If the information required to be filed under

             paragraphs (b)(2) and (c) of this section is available

             continuously on an Internet web site controlled by an

             exchange, in lieu of filing such information with the

             Commission, such exchange may:

                  (i)  Indicate the location of the Internet web site

             where such information may be found; and

                  (ii) Certify that the information available at such

             location is accurate as of its date.

                  (e)  The Commission may exempt a national securities

             exchange, or an exchange exempted from such registration

             based on limited volume, from filing the amendment required

             by this section for any affiliate or subsidiary listed in

             Exhibit C of the exchanges application for registration, as

             amended, that either:

                  (1)  Is listed in Exhibit C of the application for

             registration, as amended, of one or more other national

             securities exchanges; or

                  (2)  Was an inactive subsidiary throughout the

             subsidiarys latest fiscal year.

             Any such exemption may be granted upon terms and conditions

             the Commission deems necessary or appropriate in the public

             interest or for the protection of investors, provided

             however, that at least one national securities exchange

             shall be required to file the amendments required by this

             section for an affiliate or subsidiary described in

             paragraph (e)(1) of this section.

                  8.  Section 240.6a-3 is revised to read as follows:

             240.6a-3 Supplemental material to be filed by exchanges.

                  (a)(1)A national securities exchange, or an exchange

             exempted from such registration based on limited volume,

             shall file with the Commission any material (including

             notices, circulars, bulletins, lists, and periodicals)

             issued or made generally available to members of, or

             participants or subscribers to, the exchange.  Such material

             shall be filed with the Commission within 10 days after

             issuing or making such material available to members,

             participants or subscribers.

                  (2)  If the information required to be filed under

             paragraph (a)(1) of this section is available continuously

             on an Internet web site controlled by an exchange, in lieu

             of filing such information with the Commission, such

             exchange may:

                  (i)  Indicate the location of the Internet web site

             where such information may be found; and

                  (ii) Certify that the information available at such

             location is accurate as of its date.

                  (b)  Within 15 days after the end of each calendar

             month, a national securities exchange or an exchange

             exempted from such registration based on limited volume,

             shall file a report concerning the securities sold on such

             exchange during the calendar month.  Such report shall set

             forth:

                  (1)  The number of shares of stock sold and the

             aggregate dollar amount of such stock sold;

                  (2)  The principal amount of bonds sold and the

             aggregate dollar amount of such bonds sold; and

                  (3)  The number of rights and warrants sold and the

             aggregate dollar amount of such rights and warrants sold.

                  9.  Section 240.11Ac1-1 is amended by redesignating

             paragraph (c)(5)(ii)(A) as paragraph (c)(5)(ii)(A)(l),

             paragraph (c)(5)(ii)(B) as paragraph (c)(5)(ii)(A)(2),

             paragraph (c)(5)(ii)(B)(1) as paragraph (c)(5)(ii)(A)(2)(i),

             paragraph (c)(5)(ii)(B)(2) as paragraph

             (c)(5)(ii)(A)(2)(ii), in newly designated paragraph

             (c)(5)(ii)(A)(2)(ii) removing the period and adding in its

             place "; or", and adding new paragraph (c)(5)(ii)(B) to read

             as follows:

              240.11Ac1-1 Dissemination of quotations.

                                      * * * * *

                  (c)  * * *

                  (5)  * * *

                  (ii)  * * *

                  (A)(1) * * *

                  (B)  Is an alternative trading system that:

                  (1)  Displays orders and provides the ability to effect

             transactions with such orders under  242.301(b)(3) of this

             chapter; and

                  (2)  Otherwise is in compliance with Regulation ATS, 

             242.300 through  242.303 of this chapter.

                                      * * * * *

                  10.  Section 240.17a-3 is amended by adding paragraph

             (a)(16) to read as follows:

              240.17a-3  Records to be made by certain exchange members,

             brokers and dealers.

                  (a) * * *

                  (16)(i)The following records regarding any internal

             broker-dealer system of which such a broker or dealer is the

             sponsor:

                  (A)  A record of the brokers or dealers customers

             that have access to an internal broker-dealer system

             sponsored by such broker or dealer (identifying any

             affiliations between such customers and the broker or

             dealer);

                  (B)  Daily summaries of trading in the internal broker-

             dealer system, including:

                  (1)  Securities for which transactions have been

             executed through use of such system; and

                  (2)  Transaction volume (separately stated for trading

             occurring during hours when consolidated trade reporting

             facilities are and are not in operation):

                  (i)  With respect to equity securities, stated in

             number of trades, number of shares, and total U.S. dollar

             value;

                  (ii) With respect to debt securities, stated in total

             settlement value in U.S. dollars; and

                  (iii)With respect to other securities, stated in number

             of trades, number of units of securities, and in dollar

             value, or other appropriate commonly used measure of value

             of such securities; and

                  (C)  Time-sequenced records of each transaction

             effected through the internal broker-dealer system,

             including date and time executed, price, size, security

             traded, counterparty identification information, and method

             of execution (if internal broker-dealer system allows

             alternative means or locations for execution, such as

             routing to another market, matching with limit orders, or

             executing against the quotations of the broker or dealer

             sponsoring the system).

                  (ii) For purposes of paragraph (a) of this section, the

             term:

                  (A)  Internal broker-dealer system shall mean any

             facility, other than a national securities exchange, an

             exchange exempt from registration based on limited volume,

             or an alternative trading system as defined in Regulation

             ATS,  242.300 through 242.303 of this chapter, that

             provides a mechanism, automated in full or in part, for

             collecting, receiving, disseminating, or displaying system

             orders and facilitating agreement to the basic terms of a

             purchase or sale of a security between a customer and the

             sponsor, or between two customers of the sponsor, through

             use of the internal broker-dealer system or through the

             broker or dealer sponsor of such system;

                  (B)  Sponsor shall mean any broker or dealer that

             organizes, operates, administers, or otherwise directly

             controls an internal broker-dealer trading system or, if the

             operator of the internal broker-dealer system is not a

             registered broker or dealer, any broker or dealer that,

             pursuant to contract, affiliation, or other agreement with

             the system operator, is involved on a regular basis with

             executing transactions in connection with use of the

             internal broker-dealer system, other than solely for its own

             account or as a customer with access to the internal broker-

             dealer system; and

                  (C)  System order means any order or other

             communication or indication submitted by any customer with

             access to the internal broker-dealer system for entry into a

             trading system announcing an interest in purchasing or

             selling a security.  The term "system order" does not

             include inquiries or indications of interest that are not

             entered into the internal broker-dealer system.

                                      * * * * *

                  11.  Section 240.17a-4 is amended by revising paragraph

             (b)(1) and adding paragraph (b)(10) to read as follows:

              240.17a-4.Records to be preserved by certain exchange

             members, brokers and dealers.

                                      * * * * *

                  (b) * * *

                  (1)  All records required to be made pursuant to

             paragraphs (a)(4), (a)(6), (a)(7), (a)(8), (a)(9), and

             (a)(10) of  240.17a-3.

                                      * * * * *

                  (10) All notices relating to an internal broker-dealer

             system provided to the customers of the broker or dealer

             that sponsors such internal broker-dealer system, as defined

             in paragraph (a)(16)(ii)(A) of  240.17a-3.  Notices,

             whether written or communicated through the internal broker-

             dealer trading system or other automated means, shall be

             preserved under this paragraph (b)(10) if they are provided

             to all customers with access to an internal broker-dealer

             system, or to one or more classes of customers.  Examples of

             notices to be preserved under this paragraph (b)(10)

             include, but are not limited to, notices addressing hours of

             system operations, system malfunctions, changes to system

             procedures, maintenance of hardware and software, and

             instructions pertaining to access to the internal broker-

             dealer system.

                                      * * * * *

                  12.  Section 240.17a-23 is removed and reserved.

                  13.  Section 240.19b-5 is added to read as follows:

                                     Preliminary Notes

                  1.   The following section provides for a temporary

             exemption from the rule filing requirement for self-

             regulatory organizations that file proposed rule changes

             concerning the operation of a pilot trading system pursuant

             to Section 19(b) of the Act (15 U.S.C. 78s(b), as amended).

             All other requirements under the Act that are applicable to

             self-regulatory organizations continue to apply.

                  2.   The disclosures made pursuant to the provisions of

             this section are in addition to any other applicable

             disclosure requirements under the federal securities laws.

             240.19b-5Temporary exemption from the filing requirements

             of Section 19(b) of the Act.

                  (a)  For purposes of this section, the term specialist

             means any member subject to a requirement of a self-

             regulatory organization that such member regularly maintain

             a market in a particular security.

                  (b)  For purposes of this section, the term trading

             system means the rules of a self-regulatory organization

             that:

                  (i)  Determine how the orders of multiple buyers and

             sellers are brought together; and

                  (ii) Establish non-discretionary methods under which

             such orders interact with each other and under which the

             buyers and sellers entering such orders agree to the terms

             of trade.

                  (c)  For purposes of this section, the term pilot

             trading system shall mean a trading system operated by a

             self-regulatory organization that is not substantially

             similar to any trading system or pilot trading system

             operated by such self-regulatory organization at any time

             during the preceding year, and that:

                  (1)(i)Has been in operation for less than two years;

                  (ii) Is independent of any other trading system

             operated by such self-regulatory organization that has been

             approved by the Commission pursuant to Section 19(b) of the

             Act, (15 U.S.C. 78s(b));

                  (iii)With respect to each security traded on such pilot

             trading system, during at least two of the last four

             consecutive calendar months, has traded no more than 5

             percent of the average daily trading volume of such security

             in the United States; and

                  (iv) With respect to all securities traded on such

             pilot trading system, during at least two of the last four

             consecutive calendar months, has traded no more than 20

             percent of the average daily trading volume of all trading

             systems operated by such self-regulatory organization; or

                  (2)(i)Has been in operation for less than two years;

                  (ii) With respect to each security traded on such pilot

             trading system, during at least two of the last four

             consecutive calendar months, has traded no more than 1

             percent of the average daily trading volume of such security

             in the United States; and

                  (iii)With respect to all securities traded on such

             pilot trading system, during at least two of the last four

             consecutive calendar months, has traded no more than 20

             percent of the average daily trading volume of all trading

             systems operated by such self-regulatory organization; or

                  (3)(i)Has been in operation for less than two years;

             and

                  (ii)(A)Satisfied the definition of pilot trading system

             under paragraph (c)(1) of this section no more than 60 days

             ago, and continues to be independent of any other trading

             system operated by such self-regulatory organization that

             has been approved by the Commission pursuant to Section

             19(b) of the Act, (15 U.S.C. 78s(b)); or

                  (B)  Satisfied the definition of pilot trading system

             under paragraph (c)(2) of this section no more than 60 days

             ago.

                  (d)  A pilot trading system shall be deemed independent

             of any other trading system operated by a self-regulatory

             organization if:

                  (1)  Such pilot trading system trades securities other

             than the issues of securities that trade on any other

             trading system operated by such self-regulatory organization

             that has been approved by the Commission pursuant to Section

             19(b) of the Act, (15 U.S.C. 78s(b));

                  (2)  Such pilot trading system does not operate during

             the same trading hours as any other trading system operated

             by such self-regulatory organization that has been approved

             by the Commission pursuant to Section 19(b) of the Act, (15

             U.S.C. 78s(b)); or

                  (3)  No specialist or market maker on any other trading

             system operated by such self-regulatory organization that

             has been approved by the Commission pursuant to Section

             19(b) of the Act, (15 U.S.C. 78s(b)), is permitted to effect

             transactions on the pilot trading system in securities in

             which they are a specialist or market maker.

                  (e)  A self-regulatory organization shall be exempt

             temporarily from the requirement under Section 19(b) of the

             Act, (15 U.S.C. 78s(b)), to submit on Form 19b-4, 17 CFR

             249.819, proposed rule changes for establishing a pilot

             trading system, if the self-regulatory organization complies

             with the following requirements:

                  (1)  Form PILOT. The self-regulatory organization:

                  (i)  Files Part I of Form PILOT, 17 CFR 249.821, in

             accordance with the instructions therein, at least 20 days

             prior to commencing operation of the pilot trading system;

                  (ii) Files an amendment on Part I of Form PILOT at

             least 20 days prior to implementing a material change to the

             operation of the pilot trading system; and

                  (iii)Files a quarterly report on Part II of Form PILOT

             within 30 calendar days after the end of each calendar

             quarter in which the market has operated after the effective

             date of this section.

                  (2)  Fair access.

                  (i)  The self-regulatory organization has in place

             written rules to ensure that all members of the self-

             regulatory organization have fair access to the pilot

             trading system, and that information regarding orders on the

             pilot trading system is equally available to all members of

             the self-regulatory organization with access to such pilot

             trading system.

                  (ii) Notwithstanding the requirement in paragraph

             (e)(2)(i) of this section, a specialist on the pilot trading

             system may have preferred access to information regarding

             orders that it represents in its capacity as specialist.

                  (iii)The rules established by a self-regulatory

             organization pursuant to paragraph (e)(2)(i) of this section

             will be considered rules governing the pilot trading system

             for purposes of the temporary exemption under this section.

                  (3)  Trading rules and procedures and listing

             standards.

                  (i)  The self-regulatory organization has in place

             written trading rules and procedures and listing standards

             necessary to operate the pilot trading system.

                  (ii) The rules established by a self-regulatory

             organization pursuant to paragraph (e)(3)(i) of this section

             will be considered rules governing the pilot trading system

             for purposes of the temporary exemption under this section.

                  (4)  Surveillance. The self-regulatory organization

             establishes internal procedures for the effective

             surveillance of trading activity on the self-regulatory

             organizations pilot trading system.

                  (5)  Clearance and settlement.  The self-regulatory

             organization establishes reasonable clearance and settlement

             procedures for transactions effected on the self-regulatory

             organizations pilot trading system.

                  (6)  Types of securities.  The self-regulatory

             organization permits to trade on the pilot trading system

             only securities registered under Section 12 of the Act, (15

             U.S.C. 78l).

                  (7)  Activities of specialists.

                  (i)  The self-regulatory organization does not permit

             any member to be a specialist in a security on the pilot

             trading system and a specialist in a security on a trading

             system operated by such self-regulatory organization that

             has been approved by the Commission pursuant to Section

             19(b) of the Act, (15 U.S.C. 78s(b)), or on another pilot

             trading system operated by such self-regulatory

             organization, if such securities are related securities,

             except that a member may be a specialist in related

             securities that the Commission, upon application by the

             self-regulatory organization, later determines is necessary

             or appropriate in the public interest and consistent with

             the protection of investors;

                  (ii) Notwithstanding paragraph (e)(7)(i) of this

             section, a self-regulatory organization may permit a member

             to be a specialist in any security on a pilot trading

             system, if the pilot trading system is operated during

             trading hours different from the trading hours of the

             trading system in which such member is a specialist.

                  (iii)For purposes of paragraph (e)(7) of this section,

             the term related securities means any two securities in

             which:

                  (A)  The value of one security is determined, in whole

             or significant part, by the performance of the other

             security; or

                  (B)  The value of both securities is determined, in

             whole or significant part, by the performance of a third

             security, combination of securities, index, indicator,

             interest rate or other common factor.

                  (8)  Examinations, inspections, and investigations.

             The self-regulatory organization cooperates with the

             examination, inspection, or investigation by the Commission

             of transactions effected on the pilot trading system.

                  (9)  Recordkeeping. The self-regulatory organization

             shall retain at its principal place of business and make

             available to Commission staff for inspection, all the rules

             and procedures relating to each pilot trading system

             operating pursuant to this section for a period of not less

             than five years, the first two years in an easily accessible

             place, as prescribed in  240.17a-1.

                  (10) Public availability of pilot trading system rules.

             The self-regulatory organization makes publicly available

             all trading rules and procedures, including those

             established under paragraphs (e)(2) and (e)(3) of this

             section.

                  (11) Every notice or amendment filed pursuant to this

             paragraph (e) shall constitute a "report" within the meaning

             of Sections 11A, 17(a), 18(a), and 32(a), (15 U.S.C. 78k-1,

             78q(a), 78r(a), and 78ff(a)), and any other applicable

             provisions of the Act.  All notices or reports filed

             pursuant to this paragraph (e) shall be deemed to be

             confidential until the pilot trading system commences

             operation.

                  (f)(1)A self-regulatory organization shall request

             Commission approval, pursuant to Section 19(b)(2) of the

             Act, (15 U.S.C. 78s(b)(2)), for any rule change relating to

             the operation of a pilot trading system by submitting Form

             19b-4, 17 CFR 249.819, no later than two years after the

             commencement of operation of such pilot trading system, or

             shall cease operation of the pilot trading system.

                  (2)  Simultaneous with a request for Commission

             approval pursuant to Section 19(b)(2) of the Act, (15 U.S.C.

             78s(b)(2)), a self-regulatory organization may request

             Commission approval pursuant to Section 19(b)(3)(A) of the

             Act, (15 U.S.C. 78s(b)(3)(A)),  for any rule change relating

             to the operation of a pilot trading system by submitting

             Form 19b-4, 17 CFR 249.819, effective immediate upon filing,

             to continue operations of such trading system for a period

             not to exceed six months.

                  (g)  Notwithstanding paragraph (e) of this section,

             rule changes with respect to pilot trading systems operated

             by a self-regulatory organization shall not be exempt from

             the rule filing requirements of Section 19(b)(2) of the Act,

             (15 U.S.C. 78s(b)(2)), if the Commission determines, after

             notice to the SRO and opportunity for the SRO to respond,

             that exemption of such rule changes is not necessary or

             appropriate in the public interest or consistent with the

             protection of investors.

             PART 242 -- REGULATIONS M and ATS

                  14.  The authority citation for part 242 is revised to

             read as follows:

                  Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c,

             78i(a), 78j, 78k-1(c), 78l, 78m, 78mm, 78n, 78o(b), 78o(c),

             78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 80a-23, 80a-

             29, and 80a-37.

                  15.  The part heading for part 242 is revised as set

             forth above.

                  16.  Part 242 is amended by adding Regulation ATS, 

             242.300 through 242.303 to read as follows:

             Regulation ATS -- Alternative Trading Systems

                   242.300 Definitions.

                   242.301 Requirements for alternative trading systems.

                   242.302 Recordkeeping requirements for alternative

             trading systems.

                   242.303 Record preservation requirements for

             alternative trading systems.

             Regulation ATS - Alternative Trading Systems

                                     Preliminary Notes

                  1.   An alternative trading system is required to

             comply with the requirements in this Regulation ATS, unless

             such alternative trading system:

                  (a)  Is registered as a national securities exchange;

                  (b)  Is exempt from registration as a national

             securities exchange based on the limited volume of

             transactions effected on the alternative trading system; or

                  (c)  Trades only government securities and certain

             other related instruments.

                  All alternative trading systems must comply with the

             antifraud, antimanipulation, and other applicable provisions

             of the federal securities laws.

                  2.   The requirements imposed upon an alternative

             trading system by Regulation ATS are in addition to any

             requirements applicable to broker-dealers registered under

             Section 15 of the Act, (15 U.S.C. 78o).

                  3.   An alternative trading system must comply with any

             applicable state law relating to the offer or sale of

             securities or the registration or regulation of persons or

             entities effecting transactions in securities.

                  4.   The disclosures made pursuant to the provisions of

             this section are in addition to any other disclosure

             requirements under the federal securities laws.

              242.300 Definitions.

                  For purposes of this section, the following definitions

             shall apply:

                  (a)  Alternative trading system means any organization,

             association, person, group of persons, or system:

                  (1)  That 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 within the meaning of  240.3b-16 of this

             chapter; and

                  (2)  That does not:

                  (i)  Set rules governing the conduct of subscribers

             other than the conduct of such subscribers trading on such

             organization, association, person, group of persons, or

             system; or

                  (ii) Discipline subscribers other than by exclusion

             from trading.

                  (b)  Subscriber means any person that has entered into

             a contractual agreement with an alternative trading system

             to access such alternative trading system for the purpose of

             effecting transactions in securities or submitting,

             disseminating, or displaying orders on such alternative

             trading system, including a customer, member, user, or

             participant in an alternative trading system.  A subscriber,

             however, shall not include a national securities exchange or

             national securities association.

                  (c)  Affiliate of a subscriber means any person that,

             directly or indirectly, controls, is under common control

             with, or is controlled by, the subscriber, including any

             employee.

                  (d)  Debt security shall mean any security other than

             an equity security, as defined in  240.3a11-1 of this

             chapter, as well as non-participatory preferred stock.

                  (e)  Order means any firm indication of a willingness

             to buy or sell a security, as either principal or agent,

             including any bid or offer quotation, market order, limit

             order, or other priced order.

                  (f)  Control means the power, directly or indirectly,

             to direct the management or policies of an alternative

             trading system, whether through ownership of securities, by

             contract, or otherwise.  A person is presumed to control an

             alternative trading system, if that person:

                  (1)  Is a director, general partner, or officer

             exercising executive responsibility (or having similar

             status or performing similar functions);

                  (2)  Directly or indirectly has the right to vote 25

             percent or more of a class of voting security or has the

             power to sell or direct the sale of 25 percent or more of a

             class of voting securities of the alternative trading

             system; or

                  (3)  In the case of a partnership, has contributed, or

             has the right to receive upon dissolution, 25 percent or

             more of the capital of the alternative trading system.

                  (g)  Covered security shall have the meaning provided

             in  240.11Ac1-1(a)(6) of this chapter, provided, however,

             that a debt or convertible debt security shall not be deemed

             a covered security for purposes of Regulation ATS.

                  (h)  Effective transaction reporting plan shall have

             the meaning provided in  240.11Aa3-1(a)(3) of this chapter.

                  (i)  Exchange market maker shall have the meaning

             provided in  240.11Ac1-1(a)(9) of this chapter.

                  (j)  OTC market maker shall have the meaning provided

             in  240.11Ac1-1(a)(13) of this chapter.

                  (k)  Investment grade corporate debt security shall

             mean any security that:

                  (1)  Evidences a liability of the issuer of such

                       security;

                  (2)  Has a fixed maturity date that is at least one

                       year following the date of issuance;

                  (3)  Is rated in one of the four highest ratings

             categories by at least one Nationally Recognized Statistical

             Ratings Organization; and

                  (4)  Is not an exempted security, as defined in Section

                       3(a)(12) of the Act (15 U.S.C. 78c(a)(12)).

                  (l)  Non-investment grade corporate debt security shall

             mean any security that:

                  (1)  Evidences a liability of the issuer of such

                       security;

                  (2)  Has a fixed maturity date that is at least one

             year following the date of issuance;

                  (3)  Is not rated in one of the four highest ratings

             categories by at least one Nationally Recognized Statistical

             Ratings Organization; and

                  (4)  Is not an exempted security, as defined in Section

             3(a)(12) of the Act (15 U.S.C. 78c(a)(12)).

                  (m)  Commercial paper shall mean any note, draft, or

             bill of exchange which arises out of a current transaction

             or the proceeds of which have been or are to be used for

             current transactions, and which has a maturity at the time

             of issuance of not exceeding nine months, exclusive of days

             of grace, or any renewal thereof the maturity of which is

             likewise limited.

              242.301 Requirements for alternative trading systems.

                  (a)  Scope of section.  An alternative trading system

             shall comply with the requirements in paragraph (b) of this

             section, unless such alternative trading system:

                  (1)  Is registered as an exchange under Section 6 of

             the Act, (15 U.S.C. 78f);

                  (2)  Is exempted by the Commission from registration as

             an exchange based on the limited volume of transactions

             effected;

                  (3)  Is operated by a national securities association;

                  (4)(i)Is registered as a broker-dealer under Sections

             15(b) or 15C of the Act (15 U.S.C. 78o(b), and 78o-5), or is

             a bank, and

                  (ii) Limits its securities activities to the following

             instruments:

                  (A)  Government securities, as defined in Section

             3(a)(42) of the Act, (15 U.S.C. 78c(a)(42));

                  (B)  Repurchase and reverse repurchase agreements

             solely involving securities included within paragraph

             (a)(4)(ii)(A) of this section;

                  (C)  Any put, call, straddle, option, or privilege on a

             government security, other than a put, call, straddle,

             option, or privilege that:

                  (1)  Is traded on one or more national securities

             exchanges; or

                  (2)  For which quotations are disseminated through an

             automated quotation system operated by a registered

             securities association; and

                  (D)  Commercial paper.

                  (5)  Is exempted, conditionally or unconditionally, by

             Commission order, after application by such alternative

             trading system, from one or more of the requirements of

             paragraph (b) of this section.  The Commission will grant

             such exemption only after determining that such an order is

             consistent with the public interest, the protection of

             investors, and the removal of impediments to, and perfection

             of the mechanisms of, a national market system.

                  (b)  Requirements.  Every alternative trading system

             subject to this Regulation ATS, pursuant to paragraph (a) of

             this section, shall comply with the requirements in this

             paragraph (b).

                  (1)  Broker-dealer registration.  The alternative

             trading system shall register as a broker-dealer under

             Section 15 of the Act, (15 U.S.C. 78o).

                  (2)  Notice.  (i)  The alternative trading system shall

             file an initial operation report on Form ATS,  249.637 of

             this chapter, in accordance with the instructions therein,

             at least 20 days prior to commencing operation as an

             alternative trading system, or if the alternative trading

             system is operating as of [insert date 120 days following

             publication in the Federal Register], no later than [insert

             date 140 days following publication in the Federal

             Register].

                  (ii) The alternative trading system shall file an

             amendment on Form ATS at least 20 calendar days prior to

             implementing a material change to the operation of the

             alternative trading system.

                  (iii)If any information contained in the initial

             operation report filed under paragraph (b)(2)(i) of this

             section becomes inaccurate for any reason and has not been

             previously reported to the Commission as an amendment on

             Form ATS, the alternative trading system shall file an

             amendment on Form ATS correcting such information within 30

             calendar days after the end of each calendar quarter in

             which the alternative trading system has operated.

                  (iv) The alternative trading system shall promptly file

             an amendment on Form ATS correcting information previously

             reported on Form ATS after discovery that any information

             filed under paragraphs (b)(2)(i), (ii) or (iii) of this

             section was inaccurate when filed.

                  (v)  The alternative trading system shall promptly file

             a cessation of operations report on Form ATS in accordance

             with the instructions therein upon ceasing to operate as an

             alternative trading system.

                  (vi) Every notice or amendment filed pursuant to this

             paragraph (b)(2) shall constitute a "report" within the

             meaning of Sections 11A, 17(a), 18(a), and 32(a), (15 U.S.C.

             78k-1, 78q(a), 78r(a), and 78ff(a)), and any other

             applicable provisions of the Act.

                  (vii)The reports provided for in paragraph (b)(2) of

             this section shall be considered filed upon receipt by the

             Division of Market Regulation, Stop 10-2, at the

             Commissions principal office in Washington, D.C.  Duplicate

             originals of the reports provided for in paragraphs

             (b)(2)(i) through (v) of this section must be filed with

             surveillance personnel designated as such by any self-

             regulatory organization that is the designated examining

             authority for the alternative trading system pursuant to 

             240.17d-1 of this chapter simultaneously with filing with

             the Commission.  Duplicates of the reports required by

             paragraph (b)(9) of this section shall be provided to

             surveillance personnel of such self-regulatory authority

             upon request.  All reports filed pursuant to this paragraph

             (b)(2) and paragraph (b)(9) of this section shall be deemed

             confidential when filed.

                  (3)  Order display and execution access.  (i) An

             alternative trading system shall comply with the

             requirements set forth in paragraph (b)(3)(ii) of this

             section , with respect to any covered security in which the

             alternative trading system:

                  (A)  Displays subscriber orders to any person (other

             than alternative trading system employees); and

                  (B)  During at least 4 of the preceding 6 calendar

             months, had an average daily trading volume of 5 percent or

             more of the aggregate average daily share volume for such

             covered security as reported by an effective transaction

             reporting plan or disseminated through an automated

             quotation system as described in Section 3(a)(51)(A)(ii) of

             the Act, (15 U.S.C. 78c(a)(51)(A)(ii)).

                  (ii) Such alternative trading system shall provide to a

             national securities exchange or national securities

             association the prices and sizes of the orders at the

             highest buy price and the lowest sell price for such covered

             security, displayed to more than one person in the

             alternative trading system, for inclusion in the quotation

             data made available by the exchange or association to

             quotation vendors pursuant to  240.11Ac1-1 of this chapter.

                  (iii)With respect to any order displayed pursuant to

             paragraph (b)(3)(ii) of this section, an alternative trading

             system shall provide to any broker-dealer that has access to

             the national securities exchange or national securities

             association to which the alternative trading system provides

             the prices and sizes of displayed orders pursuant to

             paragraph (b)(3)(ii)(A) of this section, the ability to

             effect a transaction with such orders that is:

                  (A)  Equivalent to the ability of such broker-dealer to

             effect a transaction with other orders displayed on the

             exchange or by the association; and

                  (B)  At the price of the highest priced buy order or

             lowest priced sell order displayed for the lesser of the

             cumulative size of such priced orders entered therein at

             such price, or the size of the execution sought by such

             broker-dealer.

                  (4)  Fees.  The alternative trading system shall not

             charge any fee to broker-dealers that access the alternative

             trading system through a national securities exchange or

             national securities association, that is inconsistent with

             equivalent access to the alternative trading system required

             by paragraph (b)(3)(iv) of this section.  In addition, if

             the national securities exchange or national securities

             association to which an alternative trading system provides

             the prices and sizes of orders under paragraphs (b)(3)(ii)

             and (b)(3)(iii) of this section establishes rules designed

             to assure consistency with standards for access to

             quotations displayed on such national securities exchange,

             or the market operated by such national securities

             association, the alternative trading system shall not charge

             any fee to members that is contrary to, that is not

             disclosed in the manner required by, or that is inconsistent

             with any standard of equivalent access established by such

             rules.

                  (5)  Fair access.  (i)  An alternative trading system

             shall comply with the requirements in paragraph (b)(5)(ii)

             of this section, if during at least 4 of the preceding 6

             calendar months, such alternative trading system had:

                  (A)  With respect to any covered security, 20 percent

             or more of the average daily volume in that security

             reported by an effective transaction reporting plan or

             disseminated through an automated quotation system as

             described in Section 3(a)(51)(A)(ii) of the Act (15 U.S.C.

             78c(a)(51)(A)(ii));

                  (B)  With respect to an equity security that is not a

             covered security and for which transactions are reported to

             a self-regulatory organization, 20 percent or more of the

             average daily volume in that security as calculated by the

             self-regulatory organization to which such transactions are

             reported;

                  (C)  With respect to municipal securities, 20 percent

             or more of the average daily volume traded in the United

             States;

                  (D)  With respect to investment grade corporate debt,

             20 percent or more of the average daily volume traded in the

             United States;

                  (E)  With respect to non-investment grade corporate

             debt, 20 percent or more of the average daily volume traded

             in the United States.

                  (ii) An alternative trading system shall:

                  (A)  Establish written standards for granting access to

             trading on its system;

                  (B)  Not unreasonably prohibit or limit any person in

             respect to access to services offered by such alternative

             trading system by applying the standards established under

             paragraph (b)(5)(ii)(A) of this section in an unfair or

             discriminatory manner; and

                  (C)  Make and keep records of:

                  (1)  All grants of access including, for all

             subscribers, the reasons for granting such access;

                  (2)  All denials or limitations of access and reasons,

             for each applicant, for denying or limiting access.

                  (D)  Report the information required on Form ATS-R, 

             249.638 of this chapter, regarding grants, denials, and

             limitations of access.

                  (iii)Notwithstanding paragraph (b)(5)(i) of this

             section, an alternative trading system shall not be required

             to comply with the requirements in paragraph (b)(5)(ii) of

             this section, if such alternative trading system:

                  (A)  Matches customer orders for a security with other

             customer orders;

                  (B)  Such customers orders are not displayed to any

             person, other than employees of the alternative trading

             system; and

                  (C)  Such orders are executed at a price for such

             security disseminated by an effective transaction reporting

             plan or through an automated quotation system as described

             in Section 3(a)(51)(A)(ii) of the Act, (15 U.S.C.

             78c(a)(51)(A)(ii)), or derived from such prices.

                  (6)  Capacity, integrity, and security of automated

             systems.  (i)  The alternative trading system shall comply

             with the requirements in paragraph (b)(6)(ii) of this

             section, if during at least 4 of the preceding 6 calendar

             months, such alternative trading system had:

                  (A)  With respect to any covered security, 20 percent

             or more of the average daily volume reported by the

             effective transaction reporting plan or disseminated through

             an automated quotation system as described in Section

             3(a)(51)(A)(ii) of the Act, (15 U.S.C. 78c(a)(51)(A)(ii));

                  (B)  With respect to equity securities that are not

             covered securities and for which transactions are reported

             to a self-regulatory organization, 20 percent or more of the

             average daily volume as calculated by the self-regulatory

             organization to which such transactions are reported;

                  (C)  With respect to municipal securities, 20 percent

             or more of the average daily volume traded in the United

             States;

                  (D)  With respect to investment grade corporate debt,

             20 percent or more of the average daily volume traded in the

             United States;

                  (E)  With respect to non-investment grade corporate

             debt, 20 percent or more of the average daily volume traded

             in the United States.

                  (ii) With respect to those systems that support order

             entry, order routing, order execution, transaction

             reporting, and trade comparison, the alternative trading

             system shall:

                  (A)  Establish reasonable current and future capacity

             estimates;

                  (B)  Conduct periodic capacity stress tests of critical

             systems to determine such systems ability to process

             transactions in an accurate, timely, and efficient manner;

                  (C)  Develop and implement reasonable procedures to

             review and keep current its system development and testing

             methodology;

                  (D)  Review the vulnerability of its systems and data

             center computer operations to internal and external threats,

             physical hazards, and natural disasters;

                  (E)  Establish adequate contingency and disaster

             recovery plans;

                  (F)  On an annual basis, perform an independent review,

             in accordance with established audit procedures and

             standards, of such alternative trading systems controls for

             ensuring that paragraphs (b)(6)(ii)(A) through (E) of this

             section are met, and conduct a review by senior management

             of a report containing the recommendations and conclusions

             of the independent review; and

                  (G)  Promptly notify the Commission staff of material

             systems outages and significant systems changes.

                  (iii)Notwithstanding paragraph (b)(6)(i) of this

             section, an alternative trading system shall not be required

             to comply with the requirements in paragraph (b)(6)(ii) of

             this section, if such alternative trading system:

                  (A)  Matches customer orders for a security with other

             customer orders;

                  (B)  Such customers orders are not displayed to any

             person, other than employees of the alternative trading

             system; and

                  (C)  Such orders are executed at a price for such

             security disseminated by an effective transaction reporting

             plan or through an automated quotation system as described

             in Section 3(a)(51)(A)(ii) of the Act, (15 U.S.C.

             78c(a)(51)(A)(ii)), or derived from such prices.

                  (7)  Examinations, inspections, and investigations.

             The alternative trading system shall permit the examination

             and inspection of its premises, systems, and records, and

             cooperate with the examination, inspection, or investigation

             of subscribers, whether such examination is being conducted

             by the Commission or by a self-regulatory organization of

             which such subscriber is a member.

                  (8)  Recordkeeping.  The alternative trading system

             shall:

                  (i)  Make and keep current the records specified in

             242.302; and

                  (ii) Preserve the records specified in  242.303.

                  (9)  Reporting.  The alternative trading system shall:

                  (i)  File the information required by Form ATS-R (

             249.638 of this chapter) within 30 calendar days after the

             end of each calendar quarter in which the market has

             operated after the effective date of this section; and

                  (ii) File the information required by Form ATS-R within

             10 calendar days after an alternative trading system ceases

             to operate.

                  (10) Procedures to ensure the confidential treatment of

             trading information.

             (i)

             The alternative trading system shall establish adequate

             safeguards and procedures to protect subscribers

             confidential trading information.  Such safeguards and

             procedures shall include:

                  (A)  Limiting access to the confidential trading

             information of subscribers to those employees of the

             alternative trading system who are operating the system or

             responsible for its compliance with these or any other

             applicable rules;

                  (B)  Implementing standards controlling employees of

             the alternative trading system trading for their own

             accounts; and

                  (ii) The alternative trading system shall adopt and

             implement adequate oversight procedures to ensure that the

             safeguards and procedures established pursuant to paragraph

             (b)(10)(i) of this section are followed.

                  (11) Name.  The alternative trading system shall not

             use in its name the word "exchange," or derivations of the

             word "exchange," such as the term "stock market."

              242.302 Recordkeeping requirements for alternative trading

             systems.

                  To comply with the condition set forth in paragraph

             (b)(8) of  242.301, an alternative trading system shall

             make and keep current the following records:

                  (a)  A record of subscribers to such alternative

             trading system (identifying any affiliations between the

             alternative trading system and subscribers to the

             alternative trading system, including common directors,

             officers, or owners);

                  (b)  Daily summaries of trading in the alternative

             trading system including:

                  (1)  Securities for which transactions have been

             executed;

                  (2)  Transaction volume, expressed with respect to

             equity securities in:

                  (i)  Number of trades;

                  (ii) Number of shares traded; and

                  (iii)Total settlement value in terms of U.S. dollars;

             and

                  (3)  Transaction volume, expressed with respect to debt

             securities in:

                  (i)  Number of trades; and

                  (ii) Total U.S. dollar value; and

                  (c)  Time-sequenced records of order information in the

             alternative trading system, including:

                  (1)  Date and time (expressed in terms of hours,

             minutes, and seconds) that the order was received;

                  (2)  Identity of the security;

                  (3)  The number of shares, or principal amount of

             bonds, to which the order applies;

                  (4)  An identification of the order as related to a

             program trade or an index arbitrage trade as defined in New

             York Stock Exchange Rule 80A;

                  (5)  The designation of the order as a buy or sell

             order;

                  (6)  The designation of the order as a short sale

             order;

                  (7)  The designation of the order as a market order,

             limit order, stop order, stop limit order, or other type or

             order;

                  (8)  Any limit or stop price prescribed by the order;

                  (9)  The date on which the order expires and, if the

             time in force is less than one day, the time when the order

             expires;

                  (10) The time limit during which the order is in force;

                  (11) Any instructions to modify or cancel the order;

                  (12) The type of account, i.e., retail, wholesale,

             employee, proprietary, or any other type of account

             designated by the alternative trading system, for which the

             order is submitted;

                  (13) Date and time (expressed in terms of hours,

             minutes, and seconds) that the order was executed;

                  (14) Price at which the order was executed;

                  (15) Size of the order executed (expressed in number of

             shares or units or principal amount); and

                  (16) Identity of the parties to the transaction.

              242.303 Record preservation requirements for alternative

             trading systems.

                  (a)  To comply with the condition set forth in

             paragraph (b)(9) of  242.301, an alternative trading system

             shall preserve the following records:

                  (1)  For a period of not less than three years, the

             first two years in an easily accessible place, an

             alternative trading system shall preserve:

                  (i)  All records required to be made pursuant to 

             242.302;

                  (ii) All notices provided by such alternative trading

             system to subscribers generally, whether written or

             communicated through automated means, including, but not

             limited to, notices addressing hours of system operations,

             system malfunctions, changes to system procedures,

             maintenance of hardware and software, instructions

             pertaining to access to the market and denials of, or

             limitations on, access to the alternative trading system;

                  (iii)If subject to paragraph (b)(5)(ii) of  242.301,

             at least one copy of such alternative trading systems

             standards for access to trading, all documents relevant to

             the alternative trading systems decision to grant, deny, or

             limit access to any person, and all other documents made or

             received by the alternative trading system in the course of

             complying with paragraph (b)(5) of  242.301; and

                  (iv) At least one copy of all documents made or

             received by the alternative trading system in the course of

             complying with paragraph (b)(6) of  242.301, including all

             correspondence, memoranda, papers, books, notices, accounts,

             reports, test scripts, test results, and other similar

             records.

                  (2)  During the life of the enterprise and of any

             successor enterprise, an alternative trading system shall

             preserve:

                  (i)  All partnership articles or, in the case of a

             corporation, all articles of incorporation or charter,

             minute books and stock certificate books; and

                  (ii) Copies of reports filed pursuant to paragraph

             (b)(2) of  242.301 of this chapter and records made

             pursuant to paragraph (b)(5) of  242.301 of this chapter.

                  (b)  The records required to be maintained and

             preserved pursuant to paragraph (a) of this section must be

             produced, reproduced, and maintained in paper form or in any

             of the forms permitted under  240.17a-4(f) of this chapter.

                  (c)  Alternative trading systems must comply with any

             other applicable recordkeeping or reporting requirement in

             the Act, and the rules and regulations thereunder.  If the

             information in a record required to be made pursuant to this

             section is preserved in a record made pursuant to  240.17a-

             3 or 240.17a-4 of this chapter, or otherwise preserved by

             the alternative trading system (whether in summary or some

             other form), this section shall not require the sponsor to

             maintain such information in a separate file, provided that

             the sponsor can promptly sort and retrieve the information

             as if it had been kept in a separate file as a record made

             pursuant to this section, and preserves the information in

             accordance with the time periods specified in paragraph (a)

             of this section.

                  (d)  The records required to be maintained and

             preserved pursuant to this section may be prepared or

             maintained by a service bureau, depository, or other

             recordkeeping service on behalf of the alternative trading

             system.  An agreement with a service bureau, depository, or

             other recordkeeping service shall not relieve the

             alternative trading system from the responsibility to

             prepare and maintain records as specified in this section.

             The service bureau, depository, or other recordkeeping

             service shall file with the Commission a written undertaking

             in a form acceptable to the Commission, signed by a duly

             authorized person, to the effect that such records are the

             property of the alternative trading system required to be

             maintained and preserved and will be surrendered promptly on

             request of the alternative trading system, and shall include

             the following provision:

                  With respect to any books and records maintained or

             preserved on behalf of [name of alternative trading system],

             the undersigned hereby undertakes to permit examination of

             such books and records at any time, or from time to time,

             during business hours by representatives or designees of the

             Securities and Exchange Commission, and to promptly furnish

             to the Commission or its designee a true, correct, complete

             and current hard copy of any, all, or any part of, such

             books and records.

                  (e)  Every alternative trading system shall furnish to

             any representative of the Commission promptly upon request,

             legible, true, and complete copies of those records that are

             required to be preserved under this section.

             PART 249 -- FORMS, SECURITIES EXCHANGE ACT OF 1934

                  17.  The authority citation for part 249 continues to

             read in part as follows:

                  Authority: 15 U.S.C. 78a, et seq., unless otherwise

             noted;

                                        ******

                  18.  Section 249.1 and Form 1 are revised to read as

             follows:

             249.1         Form 1, for application for, and amendments

             to applications for, registration as a national securities

             exchange or exemption from registration pursuant to Section

             5 of the Exchange Act.

                  The form shall be used for application for, and

             amendments to applications for, registration as a national

             securities exchange or exemption from registration pursuant

             to Section 5 of the Act, (15 U.S.C. 78e).

                  [Note: Form 1 does not and the amendments will not

             appear in the Code of Federal Regulations.]

                  [INSERT FORM 1]

                  19.  Section 249.1a and Form 1-A are removed.

                  20.  Section 249.636 and Form 17A-23 are removed and

             reserved.

                  21.  Section 249.637 and Form ATS are added to read as

             follows:

             249.637  Form ATS, information required of alternative

             trading systems pursuant to 242.301(b)(2) of this chapter.

                  This form shall be used by every alternative trading

             system to file required notices, reports and amendments

             under 242.301(b)(2) of this chapter.

                  [Note: Form ATS does not and the amendments will not

             appear in the Code of Federal Regulations.]

                  [INSERT FORM ATS]

                  22.  Section 249.638 and Form ATS-R are added to read

             as follows:

             249.638  Form ATS-R, information required of alternative

             trading systems pursuant to 242.301(b)(8) of this chapter.

                  This form shall be used by every alternative trading

             system to file required reports under 242.301(b)(8) of this

             chapter.

                  [Note: Form ATS-R does not and the amendments will not

             appear in the Code of Federal Regulations.]

                  [INSERT FORM ATS-R]

                  23.  Section 249.821 and Form PILOT are added to read

             as follows:

             249.821  Form PILOT, information required of self-

             regulatory organizations operating pilot trading systems

             pursuant to   240.19b-5 of this chapter.

                  This form shall be used by all self-regulatory

             organizations, as defined in Section 3(a)(26) of the Act,

             (15 U.S.C 78c(a)(26)), to file required information and

             reports with regard to pilot trading systems pursuant to 

             240.19b-5 of this chapter.

                  [Note: Form PILOT does not and the amendments will not

             appear in the Code of Federal Regulations.]

                  [INSERT FORM PILOT]

                  By the Commission.

                                           Jonathan G. Katz
                                           Secretary

             December 8, 1998

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

             **FOOTNOTES**

                [1]:  The term "alternative trading system" is defined in Rule 300(a),
                      17 CFR 242.300(a).  This term encompasses some systems that
                      previous Commission releases called proprietary trading systems,
                      broker-dealer trading systems, and electronic communication
                      networks.

                [2]:  Securities Exchange Act Release No. 38672 (May 23, 1997), 62 FR
                      30485 (June 4, 1997).  The comment letters to the Concept Release
                      and a summary of these comments have been placed in Public File
                      S7-16-97, which is available for inspection in the Commissions
                      Public Reference Room.

                [3]:  Securities Exchange Act Release No. 39884 (Apr. 17, 1998), 63 FR
                      23504 (Apr. 29, 1998).  The comment letters to the Proposing
                      Release and a summary of those comments received as of August 25,
                      1998 have been placed in Public File S7-12-98, which is available
                      for inspection in the Commissions Public Reference Room.

                [4]:  See SEC, Report Pursuant to Section 21(a) of the Securities
                      Exchange Act of 1934 Regarding the NASD and the Nasdaq Market
                      (1996) ("NASD 21(a) Report").

                [5]:  See In the Matter of Ian and Lawrence Fishman, Securities Exchange
                      Act Release No. 40115 (June 24, 1998) (finding that the Fishman
                      brothers manipulated the national best bid and offer in violation
                      of Section 10(b) and Rule 10b-5 under the Exchange Act by
                      coordinating the entry of orders routed to alternative trading
                      systems).

                [6]:  Pub. L. No. 29, 89 Stat. 97 (1975).  Congress granted to the
                      Commission authority in 1975 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.  See S. Rep. No.
                      75, 94th Cong., 1st Sess. 8 (1975); H.R. Rep. No. 229, 94th Cong.,
                      1st Sess 92 (1975).  See also Section 11A(a)(1) of the Exchange
                      Act, 15 U.S.C. 78k-1(a)(1).

                [7]:  Section 36 of the Exchange Act, 15 U.S.C. 78mm, was enacted as
                      part of the National Securities Markets Improvement Act of 1996,
                      Pub. L. No. 104-290 ("NSMIA").  See infra Section VII.D.1.

                [8]:  See supra note .

                [9]:  This is the number of comment letters received by the Commission
                      as of the close of business on December 1, 1998.

                [10]: Some commenters, however, suggested that the better approach would
                      be for the Commission to retain its present regulatory framework
                      for alternative trading systems.  See, e.g., Letter from Robin
                      Roger, Principal and Counsel, Morgan Stanley Dean Witter to
                      Jonathan G. Katz, Secretary, SEC, dated Sept. 11, 1998 ("MSDW
                      Letter") at 3-4; Letter from Christopher J. Carroll and W. Hal
                      Hinkle, Co-Chairs, ATS Task Force, The Bond Market Association to
                      Jonathan G. Katz, Secretary, SEC, dated July 28, 1998 ("TBMA
                      Letter") at 2, 8-12; Letter from Lee B. Spencer, Jr., Chairman,
                      SIA Federal Regulation Committee and Perry L. Taylor, Jr.,
                      Chairman, SIA Alternative Trading System Subcommittee, Securities
                      Industry Association to Jonathan G. Katz, Secretary, SEC, dated
                      July 31, 1998 ("SIA Letter") at 2, 5.  Another commenter suggested
                      that the Commission solicit comment again on the broader issues
                      discussed in the Concept Release.  See Letter from Louis C.
                      Magill, President, Corporate Capital Securities, Inc. to Jonathan
                      G. Katz, Secretary, SEC, dated July 27, 1998 ("Corporate Capital
                      Letter") at 4.

                [11]: See, e.g., Letter from Joanne Moffic-Silver, Secretary and General
                      Counsel, Chicago Board Options Exchange to Jonathan G. Katz,
                      Secretary, SEC, dated July 28, 1998 ("CBOE Letter") at 3; Letter
                      from John C. Katovich, Senior Vice President and General Counsel,
                      OptiMark Technologies Inc. to Jonathan G. Katz, Secretary, SEC,
                      dated Aug. 13, 1998 ("OptiMark Letter") at 1.

                [12]: See, e.g., CBOE Letter at 3.

                [13]: See, e.g., SIA Letter at 1, 5-6.

                [14]: See, e.g., Letter from Joan C. Conley, Corporate Secretary,
                      National Association of Securities Dealers, Inc. to Jonathan G.
                      Katz, Secretary, SEC, dated Aug. 10, 1998 ("NASD Letter") at 1-2.

                [15]: See, e.g., Letter from Douglas M. Atkin, Chief Executive Officer,
                      Instinet International to Jonathan G. Katz, Secretary, SEC, dated
                      Aug. 3, 1998 ("Instinet Letter") at 1, 7; Letter from Frederic W.
                      Rittereiser, President and Chief Executive Officer and William W.
                      Uchimoto, Executive Vice President and General Counsel, Ashton
                      Technology Group, Inc. to Jonathan G. Katz, Secretary, SEC, dated
                      July 28, 1998 ("Ashton Letter") at 1; Letter from Mary Sue Fisher,
                      Managing Director, Legal and Compliance, Chicago Board Brokerage,
                      LLC to Jonathan G. Katz, Secretary, SEC, dated July 29, 1998 ("CBB
                      Letter") at 1-2.

                [16]: See, e.g., TBMA Letter at 4; Letter from Larry E. Fondren,
                      President, Integrated Bond Exchange, Inc. to Jonathan G. Katz,
                      Secretary, SEC, dated July 27, 1998 ("IBEX Letter") at 13.

                [17]: See, e.g., Letter from Craig S. Tyle, General Counsel, Investment
                      Company Institute to Jonathan G. Katz, Secretary, SEC, dated July
                      28, 1998 ("7/28/98 ICI Letter") at 5; Letter from James E. Buck,
                      Senior Vice President and Secretary, New York Stock Exchange, Inc.
                      to Jonathan G. Katz, Secretary, SEC, dated July 28 ,1998 ("NYSE
                      Letter") at 9; Letter from Robert H. Forney, President and Chief
                      Executive Officer, Chicago Stock Exchange to Jonathan G. Katz,
                      Secretary, SEC, dated July 30, 1998 ("CHX Letter") at 11; Letter
                      from T. Eric Kilcollin, President and Chief Executive Officer,
                      Chicago Mercantile Exchange to Jonathan G. Katz, Secretary, SEC,
                      dated Aug. 5, 1998 ("CME Letter") at 4; Letter from James F.
                      Duffy, Executive Vice President and General Counsel, Legal and
                      Regulatory Policy, American Stock Exchange, Inc. to Jonathan G.
                      Katz, Secretary, SEC, dated Aug. 18, 1998 ("Amex Letter") at 1;
                      Ashton Letter at 2; CBOE Letter at 3, 8-9.  See infra Section VI
                      for a discussion of the temporary exemption for pilot trading
                      systems.

                [18]: 17 CFR 242.300-303.

                [19]: 15 U.S.C. 78c(a)(1).

                [20]: 17 CFR 240.3b-16.

                [21]: 15 U.S.C. 78c(a)(1).

                [22]: Rule 3b-16(a), 17 CFR 240.3b-16(a).

                [23]: Rule 3b-16(b), 17 CFR 240.3b-16(b).

                [24]: 15 U.S.C. 78s.

                [25]: Rule 3a1-1(b)(1), 17 CFR 240.3a1-1(b)(1).

                [26]: Rule 301(b)(3), 17 CFR 240.301(b)(3).  Alternative trading systems
                      will only have to comply with this rule for fifty percent of
                      securities on [insert date 120 days after publication in the
                      Federal Register].  By [insert date 240 days after publication in
                      the Federal Register], alternative trading systems will have to
                      comply with this rule for all securities.  Prior to [insert date
                      120 days after publication in the Federal Register], the
                      Commission will publish a schedule of those individual securities
                      for which alternative trading systems must comply with Rule
                      301(b)(3) on [insert date 120 days after publication in the
                      Federal Register].  See infra notes - and - and accompanying text.

                [27]: This linkage requirement would not apply to alternative
                      trading systems that do not display participant orders to
                      anyone, including other system participants.  In addition,
                      this requirement would not apply to alternative trading
                      systems to the extent that they trade securities other than
                      national market system securities.  See infra Section
                      IV.A.2.c.(ii).

                [28]: See infra Section IV.B.2.

                [29]: See infra Section VI.

                [30]: 15 U.S.C. 78c(a)(1).

                [31]: Rule 3b-16(a), 17 CFR 240.3b-16(a). In the Proposing Release, the
                      Commission proposed to define the terms in the definition of
                      "exchange" to be "any organization, association, or group of
                      persons that: (1) consolidates orders of multiple parties; and (2)
                      sets non-discretionary material conditions (whether by providing a
                      trading facility or by setting rules) under which parties entering
                      such orders agree to the terms of a trade."  See Proposing
                      Release, supra note .

                [32]: See Securities Exchange Act Release No. 27611 (Jan. 12, 1990), 55
                      FR 1980, 1900 (Jan. 19, 1990) ("Delta Release").  See infra
                      Section VII for a further discussion of the Delta Release and the
                      basis and purpose of the revised interpretation.

                [33]: See infra Section IV.B. (discussing registration as a national
                      securities exchange).  Under Section 5 of the Exchange Act, an
                      exemption may be granted to an exchange from registration as a
                      national securities exchange on the basis of low volume, or
                      expected low volume.  Currently, there is only one exchange, the
                      Arizona Stock Exchange ("AZX"), that is operating under a limited
                      volume exemption.   See Securities Exchange Act Release No. 28899
                      (Feb. 20, 1991), 56 FR 8377 (Feb. 28, 1991).  In addition, the
                      Commission solicited comment on whether Tradepoint Financial
                      Networks, plc should be granted a limited volume exemption.  See
                      Securities Exchange Act Release No. 40161 (July 2, 1998), 45 FR
                      41920 (July 9, 1998).

                      The Commission believes that the low volume exemption continues to
                      be appropriate for some exchanges, such as an exchange that, for
                      example, disciplines its members (other than by excluding them or
                      limiting them from trading based on objective criteria, such as
                      creditworthiness), or has other self-regulatory attributes that
                      exclude it from the definition of alternative trading system, Rule
                      300(a), and therefore preclude it from making the choice to
                      register as a broker-dealer.  Any exchange seeking a low volume
                      exemption would, of course, have to have low volume.  The
                      Commission believes that the low volume exemption would be
                      inappropriate for any alternative trading system that can register
                      as a broker-dealer and comply with Regulation ATS, and that the
                      conditions under Regulation ATS should generally be met by any
                      alternative trading system falling within Rule 3b-16, including an
                      alternative trading system that, for other reasons, seeks a low
                      volume exemption.

                [34]: NASD Letter at 3, n.4.

                [35]: See CME Letter at 2; IBEX Letter at 4.

                [36]: Instinet Letter at 7.

                [37]: A crossing system is, typically, one that allows participants to
                      enter unpriced orders to buy and sell securities.  Orders are
                      crossed at specified times at a price derived from another market.

                [38]: Matching systems allow participants to enter priced limit orders
                      and match those orders with other orders in the system.
                      Participants are able to view unmatched limit orders in the
                      systems book.  The sponsor of a matching system typically acts as
                      riskless principal or a dealer firm on behalf of the system acts
                      as riskless principal, with respect to matched orders, or
                      contracts with another broker-dealer to perform this function.

                [39]: Currently, debt markets are not centrally organized by a single
                      entity, but are nonetheless informally organized around
                      interdealer brokers.  Interdealer brokers (also called blind
                      brokers and brokers brokers) display, on an anonymous basis, the
                      offers to buy and sell securities that are placed with them by
                      subscribers.  In order to place a bid or offer, a subscriber
                      typically telephones the interdealer broker, which enters the
                      order into its system and displays it to other subscribers.  Some
                      interdealer brokers display all bids and offers; others display
                      only the best bid and offer.  To execute against an offer
                      displayed on the computer screen, a subscriber telephones the
                      interdealer broker, although sometimes execution may be
                      electronic.  The identities of the counterparties are, generally,
                      kept confidential through clearance and settlement of the trade.
                      Some interdealer brokers, however, reveal the names of each
                      counterparty after execution.  Traditionally interdealer brokers
                      facilitated trading only between dealers.  Increasingly, however,
                      interdealer brokers are permitting non-dealers to participate in
                      their systems.

                [40]: But see infra notes - and accompanying text (discussing the
                      exclusion from Regulation ATS for alternative trading systems that
                      trade exclusively government, and other related, securities).

                [41]: See Bruce Rule, PSA Panels Embrace Internet for Institutional
                      Trading; and Regulators Love the Audit Trail, Investment Dealers
                      Digest, Nov. 18, 1996 (discussing CP Direct).  The converse
                      situation -- i.e., where there is one buyer and multiple sellers
                      for a given instrument -- would also not meet the "multiple buyers
                      and sellers" requirement.  The Commission, however, is not aware
                      of any system that currently operates this way.

                [42]: This type of system would also be expressly excluded from Rule 3b-
                      16 under paragraph (b)(2).  See infra Section III.C.2.

                [43]: Rule 3b-16(c), 17 CFR 240.3b-16(c).

                [44]: TBMA Letter at 15-16 (stating that the bids and offers associated
                      with telephone-based IDBs are generally "subject," i.e., the
                      broker must check back with the dealer client before finalizing
                      the transaction).

                [45]: Rule 3b-16(c), 17 CFR 240.3b-16(c).

                [46]: TBMA Letter at 15.

                [47]: These bulletin board types of systems were described in no-action
                      letters from the staff.  See Letter dated June 24, 1996 from
                      Catherine McGuire, Chief Counsel, Division of Market Regulation,
                      SEC, Jack W. Murphy, Chief Counsel, Division of Investment
                      Management, SEC, and Martin P. Dunn, Chief Counsel, Division of
                      Corporate Finance, SEC to Barry Reder, Coblentz, Cahen, McCabe and
                      Breyer, LLP (counsel to Real Goods Trading Corporation); Letter
                      dated Aug. 5, 1996 from Catherine McGuire, Chief Counsel, Division
                      of Market Regulation, SEC to: Bruce D. Stuart, Esq. (counsel to
                      PerfectData Corporation); and Letter dated April 17, 1996 from
                      Abigail Arms, Associate Director, Division of Corporate Finance,
                      SEC, and Catherine McGuire, Associate Director, Division of Market
                      Regulation, SEC to Andrew Klein (President and Chief Executive
                      Officer of Spring Street Brewing Company).

                [48]: See Securities Exchange Act Release No. 39086 (Sept. 17, 1997), 62
                      FR 50036 (Sept. 24, 1997).  In approving OptiMark, the Commission
                      stated that OptiMarks unique design warrants a non-traditional
                      approach in determining whether to require the dissemination of
                      trading interest expressed through operation of OptiMark.

                [49]: See Rule 11Ac1-1(c), 17 CFR 240.11Ac1-1(c).

                [50]: MSDW Letter at 11.

                [51]: MSDW Letter, pp. 7-8.

                [52]: Proposed Rule 3b-12(b)(2).

                [53]: See NASD Letter at 3, n.4; TBMA Letter at 3, 14; SIA Letter at 3,
                      10; MSDW Letter at 5-6.

                [54]: See TBMA Letter at 3, 14-15; SIA Letter at 3, 10-11.

                [55]: Whether or not a bulletin board will be considered an exchange
                      under the rule will also depend on whether it meets the other
                      elements of the definition.

                [56]: See Delta Release, supra note .  The Commission notes that the
                      arrangement between these entities no longer exists, and that
                      Delta, in its current form, would not fit the new interpretation
                      of the definition of exchange.

                [57]: See id., at 1897.

                [58]: 15 U.S.C. 78k-1.

                [59]: 15 U.S.C. 78o-3.  The NASD, parent of Nasdaq, is the self-
                      regulatory organization.  The NASD delegates to NASD Regulation,
                      Inc. ("NASDR"), the wholly owned regulatory subsidiary of the
                      NASD, its SRO responsibilities to surveil trading conducted on
                      Nasdaq and the OTC Bulletin Boards, and to enforce compliance by
                      its members (and persons associated with its members) with
                      applicable laws and rules.  Nasdaq also surveils trading conducted
                      on its market and refers potential violations to NASDR.  See also
                      infra note .

                [60]: See infra notes - and accompanying text (discussing Rule 3a1-
                      1(a)(1), which explicitly exempts any system operated by a
                      national securities association from the definition of the term
                      "exchange").

                [61]: 15 U.S.C. 78f.  If Nasdaq registered as an exchange, it would have
                      its own SRO responsibilities, but the Commission does not expect
                      this to increase Nasdaqs current burden.  In view of the NASDs
                      SRO status the Commission could use its authority under Sections
                      17 and 19 of the Exchange Act, 15 U.S.C. 78q and 78s, to delegate
                      any obligations Nasdaq would have as a registered exchange to
                      enforce compliance by its members (and persons associated with its
                      members) with the federal securities laws to NASDR.

                [62]: See SIA Letter at 3, 10-11; DBSI Letter at 3; NASD Letter at 4;
                      TBMA Letter at 3, 14.

                [63]: See TBMA Letter at 14, n.26; SIA Letter at 10-11, n.18.

                [64]: TBMA Letter at 14, n.25 (suggesting that the Commission expressly
                      recognize the possibility that some IDBs may be able to rely on
                      the exclusion for internal broker-dealer systems).

                [65]: SIA Letter at 3-4, 6-7, 9.

                [66]: POSIT is an alternative trading system operated by ITG Inc.
                      Broker-dealers and institutions enter unpriced orders to buy and
                      sell exchange listed and Nasdaq securities into POSIT at any time
                      prior to a pre-selected crossing time.  At the crossing time, buy
                      orders in the system for each security are crossed, where
                      possible, with sell orders and crossed orders are executed at a
                      price derived from the primary market where the security trades.

                [67]: Letter from Timothy H. Hosking, General Counsel, ITG Inc., to
                      Jonathan G. Katz, Secretary, SEC dated Nov. 20, 1998 ("ITG
                      Letter") at 2-3.

                [68]: The indications of interest entered into "passive" or derivative
                      pricing systems are "orders," under Rule 3b-16(c).  While the
                      orders are entered without a specified price, subscribers agree to
                      trade at a price based on the primary market, such as the mid-
                      point of the bid and ask at the time orders are matched or at the
                      primary markets opening price.

                [69]: In addition, there exists the incentive for subscribers to these
                      "passive systems" to manipulate the price in the market from which
                      the "passive system" derives its price in order to obtain a
                      favorable execution on the passive system.

                [70]: See Rules 301(b)(5)(iii) and 301(b)(6)(iii), 17 CFR
                      242.301(b)(5)(iii) and 242.301(b)(6)(iii).  See infra notes , , -
                      and accompanying text.  Further, the Commission did not propose,
                      nor is it adopting, a requirement that alternative trading systems
                      that register as broker-dealers publicly display any orders that
                      are not displayed to that systems subscribers.  Thus, alternative
                      trading systems -- like most "passive" systems -- that do not
                      display subscriber orders at all, are not subject to the public
                      display requirement if they register as broker-dealers under
                      Regulation ATS.

                [71]: SIA Letter at 10.

                [72]: A similar system, also operated by the Amex, is Automated Post
                      Execution Reporting System, or AutoPERS.

                [73]: BRASS is an order routing system operated by Automated Securities
                      Clearance, Ltd. ("ASC").  ASC provides system users with software
                      and hardware that enables users to enter orders into the system
                      which are then routed to an exchange or Nasdaq for execution.
                      BRASS software enables a market maker to execute orders against
                      its inventory at the market makers quoted price, monitor
                      compliance with the Commissions Limit Order Display Rule, infra
                      note , route an order to another market maker or market, report
                      executed transactions, and monitor, among other things, trading
                      positions, and profit/loss margins.  Separately, an entity
                      affiliated with ASC, the BRASS Utility, LLC ("BRUT"), operates an
                      electronic communications network ("ECN") to which orders can be
                      routed through the use of BRASS software.  See infra note .

                [74]: Third market firms are NASD member firms that execute orders for
                      exchange-listed securities.

                [75]: See Letter from David E. Rosedahl, Executive Vice President and
                      Chief Regulatory Officer, Pacific Exchange, Inc. to Jonathan G.
                      Katz, Secretary, SEC, dated Aug. 20, 1998 ("PCX Letter") at 2-6;
                      CHX Letter at 3-4.

                [76]: Rule 11Ac1-4(b)(1)(i), 17 CFR 240.11Ac1-4(b)(1)(i).

                [77]: Proposing Release, supra note , at n.9.

                [78]: Rule 3b-16(b)(2)(ii), 17 CFR 240.3b-16(b)(2)(ii).

                [79]: See SIA Letter at 10; DBSI Letter at 3.

                [80]: DBSI Letter at 3.

                [81]: SIA Letter at 11.

                [82]: Rule 3b-16(b)(4), 17 CFR 240.3b-16(b)(4).

                [83]: Rule 3b-16(b)(2)(i), 17 CFR 240.3b-16(b)(2)(i).

                [84]: These systems may also implicate other provisions of the federal
                      securities laws.

                [85]: In some cases, however, the systems operated by the interdealer
                      brokers may fall within Rule 3b-16.  See supra System F.

                [86]: 15 U.S.C. 78mm.

                [87]: 17 CFR 240.3a1-1.

                [88]: 17 CFR 240.3a1-1(a)(2).  See infra note  and accompanying text for
                      the definition of an alternative trading system.

                [89]: 17 CFR 240.3a1-1(a)(3).  See notes - and accompanying text.

                [90]: 17 CFR 240.3a1-1(a)(1).

                [91]: See infra Section III.F.

                [92]: Rule 3a1-1(b), 17 CFR 240.3a1-1(b).

                [93]: Registration as a national securities association under Section
                      15A of the Exchange Act is voluntary.  15 U.S.C. 78o-3.  Currently
                      the only national securities association is the NASD, which
                      operates Nasdaq.

                [94]: Rule 3a1-1(a)(1).  See also Rule 301(a)(3) (excluding alternative
                      trading systems operated by a national securities association from
                      the scope of proposed Regulation ATS).

                [95]: Instinet Letter at 8, n.11.

                [96]: 17 CFR 240.3a1-1(a)(3).

                [97]: See TBMA Letter at 12-13 (expressing concern that foreign
                      regulators might be influenced by the Commissions categorization
                      of a system as an "exchange," even if that system chose to be
                      regulated in the U.S. as a broker-dealer); Instinet Letter at 3,
                      6-7, 13-14 and 6-7, n.9 (stating that classifying a securities
                      firm as an exchange in the U.S. could significantly impair a
                      firms ability to participate in foreign markets . . . because a
                      number of foreign regulators may regard all broker-dealers covered
                      by the expanded exchange definition as exchanges).  See also
                      CBB Letter at 3.

                [98]: TBMA Letter at 12.

                [99]: See Letter from Mike Cormack, Manager, Equity Trading, American
                      Century to Jonathan G. Katz, Secretary, SEC, dated Aug. 12, 1998
                      ("American Century Letter") at 1-2 (supporting the Commissions
                      proposal to permit alternative trading systems to register as
                      exchanges because it would provide an option for innovators, and
                      noting alternative trading systems objection to the NASDs
                      proposed central limit order book based on the belief that an SRO
                      regulating alternative trading systems should not operate a
                      competing system); NASD Letter at 3 (commenting that both
                      registration as an exchange and Regulation ATS "generally appear
                      to ensure that alternative trading systems operate with the
                      appropriate levels of investor protection, while affording
                      alternative trading systems the necessary flexibility to choose
                      between different models of regulation"); CME Letter at 3
                      (generally supporting the additional requirements for alternative
                      trading systems because they will improve investor protection and
                      lessen the regulatory disparity that currently exists between
                      alternative trading systems and traditional exchanges); Instinet
                      Letter at 7, n.10 (stating that the Commission should modify the
                      exemption in Rule 3a1-1 from exchange registration so that
                      alternative trading systems that, while acting in good faith, fail
                      to comply fully with each of the technical requirements of
                      Regulation ATS do not violate Sections 5 and 6 of the Exchange
                      Act); ICI Letter at 2; IBEX Letter at 4.

                [100]:CHX Letter at 6 (questioning why traditional exchanges should not
                      have the opportunity to make the same choice as alternative
                      trading systems, and commenting that SROs should be permitted to
                      form subsidiaries that were alternative trading systems registered
                      as broker-dealers).

                [101]:In making this significant decision, a national securities
                      exchange would have to follow its constitution and by-laws
                      (including provisions concerning membership votes), and any
                      applicable state law requirements.

                [102]:Section 15(b)(8) of the Exchange Act requires any broker-dealer
                      engaging in transactions other than solely on a national
                      securities exchange of which it is a member, to become a member of
                      a national securities association. 15 U.S.C. 78o(b)(8).

                [103]:The Commission does not mean to imply that national securities
                      exchanges cannot make this choice.  The Commission is merely
                      pointing out that if a national securities exchange does so, it
                      cannot continue to act as its own SRO.

                [104]:Rule 3a1-1(b), 17 CFR 240.3a1-1(b)(1).

                [105]:The Commission does not mean to imply that the NASD will be
                      required to register Nasdaq as a national securities exchange.  As
                      stated above, because Nasdaq is operated by a national securities
                      association, it is currently subject to requirements virtually
                      identical to those applicable to national securities exchanges.
                      Any alternative trading system, however, currently operated by a
                      national securities association could choose to register as an
                      exchange.

                [106]:15 U.S.C. 78s(c)(3).

                [107]:See S. Rep. No. 75, 94th Cong., 1st Sess. 8 (1975) at 2, 8; H.R.
                      Rep. No. 229, 94th Cong., 1st Sess 92 (1975).

                [108]:See supra note .

                [109]:See S. Rep. No. 75. supra note .  "[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."  Id. at 3.

                [110]:S. Rep. No. 75 supra note , at 8-9.

                [111]:S. Rep. No. 75 supra note , at 7; see Section 11A(a)(1)(C) of the
                      Exchange Act, 15 U.S.C. 78k-1(a)(1)(C).

                [112]:See S. Rep. No. 75 supra note , at 104-05.

                [113]:Section 11A(a)(1)(C)(ii) of the Exchange Act, 15 U.S.C. 78k-
                      1(a)(1)(C)(ii).  A fundamental goal of an national market system
                      was to "achieve a market characterized by economically efficient
                      executions, fair competition, [and the] broad dissemination of
                      basic market information."  S. Rep. No. 75 supra note , at 101.

                [114]:See Section 11A(c)(1) of the Exchange Act, 15 U.S.C. 78k-1(c)(1).

                [115]:S. Rep. No. 75 supra note , at 7.

                [116]:In addition to its authority under Section 11A of the Exchange
                      Act, 15 U.S.C. 78k-1, the Commission is adopting Regulation ATS
                      pursuant to its rulemaking power under other parts of the Exchange
                      Act, including Sections 3(b) (power to define terms), 15(b)(1)
                      (registration and regulation of broker-dealers), 15(c)(2)
                      (prescribing means reasonably designed to prevent fraud), 17(a)
                      (books and records requirements), 17(b) (inspection of records),
                      23(a)(1) (general power to make rules and classify persons,
                      securities, and other matters), and 36 (general exemptive
                      authority).  15 U.S.C. 78c(b), 78o(b)(1), 78o(c)(2), 78q(a),
                      78q(b), 78w(a)(1), and 78mm, respectively.  For a discussion on
                      the general exemptive authority in Section 36 of the Exchange Act,
                      15 U.S.C. 78mm, see infra Section VII.D.1.

                [117]:See supra Section III (discussing Rule 3b-16).

                [118]:Rule 300(a), 17 CFR 242.300(a).

                [119]:See supra note  and accompanying text.  The Commission has the
                      authority to require significant markets to remain registered as
                      exchanges.  See supra Section III.F.

                [120]:PCX Letter at 3.

                [121]:Rule 3a1-1(a)(2), 17 CFR 240.3a1-1(a)(2).

                [122]:See supra note .

                [123]:The term "government security" is defined in Section 3(a)(42) of
                      the Exchange Act, 15 U.S.C. 78c(a)(42).

                [124]:See generally Department of the Treasury, Securities and Exchange
                      Commission, and Board of Governors of the Federal Reserve System,
                      Joint Study of the Regulatory System for Government Securities
                      (March 1998); Department of the Treasury, Report of the Secretary
                      of the Treasury on Specialized Government Securities Brokers and
                      Dealers (July 1995) ("1995 Treasury Report").

                      The Government Securities Act of 1986 ("GSA") amended the Exchange
                      Act to incorporate new Section 15C, which, among other things,
                      established registration and notice requirements for government
                      securities brokers and dealers.  Section 15C generally requires
                      government securities brokers and dealers (i.e., 15C firms or
                      specialized government securities brokers and dealers) to register
                      with the Commission and to become members of an SRO (twenty-two
                      firms as of March 1998).  Firms that are registered with the
                      Commission as general securities brokers or dealers (i.e.,
                      traditional broker-dealers registered under Section 15(b) of the
                      Exchange Act) are required to file notice with the Commission of
                      their government securities business (3,023 firms as of April
                      1998).  In addition, financial institutions that engage in
                      government securities broker or dealer activities are required to
                      file notice of such activities with their appropriate regulatory
                      agency (120 institutions as of March 1998).

                      Under the regulatory structure established by the GSA, the
                      Treasury was granted authority to adopt regulations for all
                      government securities brokers and dealers concerning financial
                      responsibility, protection of investors funds and securities,
                      recordkeeping, reporting, and audit requirements, and to adopt
                      regulations governing the custody of government securities held by
                      depository institutions.  The Government Securities Act Amendments
                      of 1993 ("GSAA") expanded the authority of the federal regulators
                      and the SROs over government securities transactions.  The GSAA,
                      among other things, reauthorized the Treasurys rulemaking
                      responsibilities, granted the Treasury authority to prescribe
                      large position recordkeeping and reporting rules, extended the
                      Commissions antifraud and antimanipulation authority to all
                      government securities brokers and dealers, required government
                      securities brokers and dealers to provide to the Commission on
                      request records of government securities transactions to
                      reconstruct trading in the course of a particular inquiry or
                      investigation, removed the statutory restrictions on the authority
                      of the NASD to extend sales practice rules to its members
                      transactions in government securities, and provided the bank
                      regulatory agencies with the authority to issue sales practice
                      rules for financial institutions engaged in government securities
                      broker or dealer activities.

                      The GSA also strengthened the ability of federal regulators to
                      examine, and to bring enforcement actions against, government
                      securities brokers and dealers.  The Commission and the SROs have
                      examination and enforcement authority over government securities
                      brokers and dealers registered under Section 15C and over the
                      government securities activities of general securities brokers and
                      dealers.  The Commissions enforcement authority includes the
                      power to censure, place limitations on the activities, functions,
                      or operations of, suspend for a period not exceeding 12 months, or
                      revoke the registration of the entity.  For financial institutions
                      that are government securities brokers or dealers, the
                      institutions appropriate regulatory agency has examination and
                      enforcement authority over the institution.  The appropriate
                      regulatory agency must notify the Commission of any sanctions
                      imposed on such institutions, and the Commission must maintain a
                      record of the sanctions.

                [125]: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 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).

                [126]:In other words, these systems are not required to register as
                      either an exchange or to comply with the requirements of
                      Regulation ATS.  Rule 301(a)(4), 17 CFR 242.301(a)(4).

                [127]:Rule 301(a)(4)(ii)(E), 17 CFR 242.301(a)(4)(ii)(E).  The term
                      "commercial paper" is defined in Rule 300(m), 17 CFR 242.300(m).
                      This definition is based on the definition of commercial paper as
                      set forth in 12 CFR 541.5, an Office of Thrift Supervision
                      regulation that defines commercial paper, and Section 3(a)(3) of
                      the Securities Act of 1933, which uses identical language to
                      identify these securities as one category of exempted securities.

                [128]:Rule 301(a)(4)(D), 17 CFR 242.301(a)(4)(D).

                [129]:Section 3(a)(42) of the Exchange Act, 15 U.S.C. 78c(a)(42).

                [130]:Rule 301(a)(4), 17 CFR 242.301(a)(4).

                [131]:See, e.g., TBMA Letter at 17-18 (also urging the Commission to
                      clarify the application of proposed Regulation ATS where a trading
                      system trades government securities, as well as non-government
                      securities); CBB Letter at 3 (but requesting guidance from the
                      Commission on whether an ATS trading government securities and
                      relying on such an exemption would be precluded from trading
                      products other than securities); SIA Letter at 3, 11.

                [132]:IBEX Letter at 4-5.

                [133]:TBMA Letter at 13, n.21.

                [134]:See supra note  and accompanying text.

                [135]:TBMA Letter at 17.

                [136]:See TBMA Letter at 17; Instinet Letter at 8, n.11; CBB Letter at
                      3-4.

                [137]:Instinet Letter at 8, n.11.

                [138]:See infra note  and accompanying text for the definition of
                      "covered security."

                [139]:CBB Letter at 3.

                [140]:CBB Letter at 3-4.

                [141]:The proposal would not require an alternative trading system to
                      publicly display its best orders in fixed income securities.

                [142]:15 U.S.C. 78c(a)(29).

                [143]:Rule 300(l), 17 CFR 242.300(l).

                [144]:Rule 300(m), 17 CFR 242.300(m).

                [145]:An initiative by TBMA would also make the MSRB data available on
                      TBMAs web site <http://www.investinginbonds.com>.  See Robert
                      Whalen, Investor Aids: TBMAs Internet-Based Price Reporting Aims
                      to Increase Market Transparency, The Bond Buyer, Nov. 25, 1998, at
                      28.

                [146]:Due to the Commissions concerns regarding the Year 2000 computer
                      technology conversion process, no new Commission rules requiring
                      major computer reprogramming will be made effective between June
                      1, 1999 and March 31, 2000.  See Securities Exchange Act Release
                      No. 40377 (Aug. 27, 1998), 63 FR 47501 (Sept. 3, 1998).
                      Accordingly, because the logistical framework for investment grade
                      and non-investment grade corporate debt data has not been fully
                      developed, the Commission is not making Rules 301(b)(5)(D) and (E)
                      and Rules 301(b)(6)(D) and (E) effective until after the
                      moratorium is lifted.

                [147]:See TBMA Letter at 3, MSDW Letter at 13; SIA Letter at 11; DBSI
                      Letter at 1 (adopting TBMA Letter).

                [148]:See NYSE Letter at 6 (supporting regulation of alternative trading
                      systems that trade debt securities as important for investor
                      protection); IBEX Letter at 2-3 (also generally urging the
                      Commission to take steps to increase transparency, access to best
                      priced orders, and other investor protections in the debt markets,
                      e.g., insider trading and front running rules).

                [149]:See TBMA Letter at 18-20; SIA Letter at 3, 11.

                [150]:TBMA Letter at 19-20.

                [151]:See Robert Zipf, How the Bond Market Works 86-87 (1997) (noting
                      characteristics of general obligation and revenue bonds and the
                      heightened risk of revenue bonds relative to general obligation
                      bonds).

                [152]:As of June 30, 1998, there was approximately $3.4 trillion of U.S.
                      Treasury debt securities outstanding with average daily trading
                      volume of over $200 billion.  By comparison, there was
                      approximately $1.4 trillion of municipal debt securities
                      outstanding with average daily trading volume of approximately $1
                      billion. The Bond Market Association, Research Quarterly (August
                      1998) <http://www.bondmarkets.com/research/9808rschq.pdf>.

                [153]:TBMA Letter at 6-7, 21.

                [154]:TBMA Letter at 24.

                [155]:See TBMA Letter at 23-25; IBEX Letter at 12. IBEX also suggested
                      reactivating the SIA practice of publishing the average daily
                      trading volume of corporate and other bonds on a monthly basis
                      which was discontinued in 1994.  IBEX Letter at 12.

                [156]:TBMA Letter at 23-25.

                [157]:Rule 301(a)(5), 17 CFR 242.301(a)(5).

                [158]:The transparency requirements are discussed infra Section
                      IV.A.2.c.

                [159]:Section 15(b)(8) of the Exchange Act, 15 U.S.C. 78o(b)(8).

                [160]:For example, the structural reforms undertaken by the NASD since
                      August 1996 should aid in ensuring the independence of NASDR and
                      insulating its staff from the commercial interests of Nasdaq .

                [161]:See supra note 4.

                [162]:Section 15A of the Exchange Act, 15 U.S.C. 78o-3.

                [163]:See Rule 301(b)(8), 17 CFR 242.301(b)(8).

                [164]:Rule 301(b)(1), 17 CFR 242.301(b)(1).

                [165]:Rule 301(b)(2)(i) and Form ATS, 17 CFR 242.301(b)(2)(i) and 17 CFR
                      249.637.

                [166]:Most currently operating alternative trading systems have filed
                      Part 1 of Form 17A-23.  To avail themselves of the exemption in
                      Rule 3a1-1(a)(2), these systems must file Form ATS within 20 days
                      of the effective date of these rules.  Internal broker-dealer
                      systems, 17 CFR 240.17a-3(a)(16)(ii)(A), which may also have
                      previously filed Part I of Form 17A-23, do not have to file Form
                      ATS.

                [167]:17 CFR 240.17a-23.  See infra Section V.

                [168]:Rule 301(b)(2)(ii), 17 CFR 242.301(b)(2)(ii).

                [169]:SIA Letter at 17-18.

                [170]:Rule 301(b)(2)(iii), 17 CFR 242.301(b)(2)(iii).  Alternative
                      trading systems would also be required to file an amendment to
                      Form ATS to correct any previously filed information that has been
                      discovered to have been inaccurate when filed.  Rule
                      301(b)(2)(iv), 17 CFR 242.301(b)(2)(iv).

                [171]:Rule 301(b)(2)(v), 17 CFR 301(b)(2)(v).  An alternative trading
                      system is required to provide a duplicate of each of these filings
                      to surveillance personnel designated by the SRO of which it is a
                      member.  Rule 301(b)(2)(vii), 17 CFR 301(b)(2)(vii).

                [172]:See supra note .

                [173]:SIA Letter at 17-18.

                [174]:See SIA Letter at 17-18; American Century Letter at 6.

                [175]:IBEX Letter at 5.

                [176]:See IBEX Letter at 5; SIA Letter at 18; American Century Letter at
                      6.

                [177]: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.  Rule 11Ac-1-1, 17 CFR 240.11Ac1-1.   See also Securities
                      Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290
                      (Sept. 12, 1996) ("Order Handling Rules Adopting Release").

                [178]:Presently, nine alternative trading systems have elected to
                      display quotes under the ECN Display Alternative.  See Letters
                      dated Jan. 17, 1997 from Richard R. Lindsey, Director, Division of
                      Market Regulation, 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).  See also Letter dated October 6, 1997 from
                      Richard R. Lindsey, Director, Division of Market Regulation, SEC
                      to Matthew G. Maloney, Dickstein Shapiro Morin & Oshinsky LLP
                      (counsel to Spear, Leeds & Kellogg) (recognizing the REDI System
                      as an ECN); Letter dated February 4, 1998 from Robert L.D. Colby,
                      Deputy Director, Division of Market Regulation, SEC, to Linda
                      Lerner, General Counsel, All-Tech Investment Group, Inc.
                      (recognizing the Attain System as an ECN); Letter dated April 21,
                      1998 from Richard R. Lindsey, Director, Division of Market
                      Regulation, SEC to Mark Dorsey, Fried, Frank, Harris, Shriver &
                      Jacobsen (counsel to The Brass Utility, LLC) (recognizing BRUT as
                      an ECN); and Letters dated Nov. 13, 1998 from Robert L.D. Colby,
                      Deputy Director, Division of Market Regulation, SEC to: Lloyd H.
                      Feller, Morgan, Lewis & Bockius LLP (counsel to Strike
                      Technologies LLC) (recognizing the Strike System as an ECN); John
                      M. Schaible, PIM Global Equities, Inc. (recognizing the Trading
                      System as an ECN).

                [179]:Quoted spreads, which measure the difference between the inside
                      ask and the inside bid, have declined by forty-one percent.  The
                      effective spread, which takes into account that trades may occur
                      inside or outside the quoted spread, declined by twenty-four
                      percent.  The lower decline in the effective spread is due to a
                      decline in trading inside the spread.  See NASD Economic Research,
                      Market Quality Monitoring:  Overview of 1997 Market Changes (Mar.
                      17, 1998).

                [180]:A covered security is defined in the same way as it is under Rule
                      11Ac1-1(a)(6), 17 CFR 240.11Ac1-1.  Specifically, a "covered
                      security" is any security reported by an effective transaction
                      reporting plan and any other security for which a transaction
                      report, last sale data, or quotation information is disseminated
                      through an automated quotation system as described in Section
                      3(a)(51)(A)(ii) of the Exchange Act, 15 U.S.C. 78c(a)(51)(A)(ii).
                      See Rule 300(g).  Accordingly, a covered security includes all
                      exchange-listed securities, Nasdaq NM securities, and Nasdaq
                      SmallCap securities.

                [181]:See Order Handling Rules Adopting Release, supra note , at 87-96.

                [182]:There is 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.  Several of the nine ECNs that are
                      currently linked to Nasdaq display to the public the best prices
                      of any orders entered into their systems (including both market
                      makers and institutions).

                [183]:Because such trading interest frequently 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
                      disclosed to the public, the Commission believes it would result
                      in improved price opportunities for public investors.

                [184]:See 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) (emphasis added).

                [185]:In the Concept Release, supra note , the Commission considered
                      whether to require certain alternative trading systems to register
                      as exchanges.  This approach would have addressed the Commissions
                      concerns about lack of transparency by requiring certain
                      significant alternative trading systems to participate directly in
                      the national market system plans.  Commenters to the Concept
                      Release, however, expressed concerns about requiring alternative
                      trading systems to register as exchanges, and that a much more
                      workable and realistic approach would be to enhance the system of
                      broker-dealer regulation under which alternative trading systems
                      are currently regulated.  For example, in recommending that the
                      Commission consider allowing alternative trading systems to
                      continue to be regulated as broker-dealers, the SIA commented that
                      "additional steps to integrate aggregate trading interest on
                      alternative trading systems to public view would be a sensible way
                      of addressing concerns that may exist in the aftermath of the
                      Order Handling Rules."  See letter from A. B. Krongard, Chairman,
                      Securities Industry Association Task Force on Alternative Trading
                      System Concept Release to Jonathan G. Katz, Secretary, SEC,
                      received Oct. 6, 1997.

                [186]:Letter from John Markese, President, American Association of
                      Individual Investors, to Jonathan G. Katz, Secretary, SEC, dated
                      Nov. 24, 1998 ("AAII Letter") at 1.

                [187]:See supra note .

                [188]:17 CFR 240.11Ac1-1.

                [189]:One commenter (who does not internally display orders) expressed
                      its support for this aspect of the proposed transparency
                      requirement, stating that, while exchanges and broker-dealers
                      should be subject to the same public display requirement, if an
                      alternative trading system did not display any orders to
                      subscribers, it should not be required to publicly display those
                      orders to non-subscribers through the public quotation stream.
                      See OptiMark Letter at 4.

                [190]:See infra notes - and accompanying text.

                [191]:The Commission plans to monitor the effects of the reserve
                      function on market liquidity and transparency.

                [192]:In addition to phasing in the transparency requirements for
                      institutional orders, affected alternative trading systems may
                      also choose to phase-in the access requirements for the covered
                      securities.  See infra notes - and accompanying text.

                [193]:The Commission notes that the later date will fall within the
                      moratorium to facilitate Year 2000 conversion.  Securities
                      Exchange Act Release No. 40377 (Aug. 27, 1998), 63 FR 47051 (Sept.
                      3, 1998).  The Commission believes that the phase-in will not
                      require major reprogramming, however, and consequently is not
                      subject to the moratorium.  In addition, alternative trading
                      systems may voluntarily publicly display all non-market maker
                      broker-dealer and institutional orders covered by the requirement
                      on or before [insert date 120 days after publication in the
                      Federal Register].

                [194]:See AAII Letter at 1 (suggesting that the volume threshold be much
                      lower than ten percent), NYSE Letter at 5 (stating that it
                      believed a more appropriate level would be five percent of the
                      aggregate daily volume in a security in any two of the three most
                      recent months, because very few registered markets (exchanges and
                      associations) accounted for more than ten percent of the volume in
                      any  security); CHX Letter at 8 (suggesting that the Commission
                      require all alternative trading systems to display their best
                      orders regardless of trading volume); NASD Letter at 1 (suggesting
                      a volume threshold of one percent); American Century Letter at 5
                      (stating opposition to any volume threshold, as volume in any
                      alternative trading system may be sporadic over time).  See also
                      ICI Letter at 3; IBEX Letter at 7-8; Ashton Letter at 4; TBMA
                      Letter pp. 21-22 (stating that it concurred that display of equity
                      securities trading on alternative trading systems was beneficial
                      to the market as a whole).

                [195]:See SIA Letter at 12 (stating that a volume level of ten percent
                      had the potential to capture insignificant market players and
                      therefore recommending that the Commission consider a level of
                      twenty percent).

                [196]:See ICI Letter at 2, n.5 (stating that the display requirement
                      should apply to all securities and to all alternative trading
                      systems, regardless of volume.  The ICI stated that this would
                      avoid the practice of routing to a particular system simply to
                      avoid display); NYSE Letter at 5 (stating that if an alternative
                      trading system developed a "general presence" in the market, for
                      example by reaching the volume threshold in ten or more
                      securities, that alternative trading system should display the
                      best priced orders in all securities it traded); Ashton Letter at
                      4 (stating that once an alternative trading system achieved one
                      percent in a given "category" of securities over a six month
                      period, the system should be required to display its best orders
                      in all the securities in that category); CHX Letter at 8 (stating
                      that any volume threshold should be applied on an alternative
                      trading system as a whole, not on a security-by-security basis,
                      because of the burden of tracking security-by-security); American
                      Century Letter at 5 (commenting that a rule requiring public
                      display of all orders displayed in an alternative trading system
                      was preferable).  See also IBEX Letter at 8; NASD Letter at 11.
                      But see SIA Letter at 12.

                [197]:See SIA Letter at 13-14 (supporting display of orders on a
                      security-by-security basis and recommending that the volume
                      threshold be raised to twenty percent of the trading volume in
                      that security nationwide; also stating that no orders should be
                      required to be displayed in the public quotation stream unless the
                      trading volume in that security on the alternative trading system
                      exceeded twenty percent of the alternative trading systems
                      overall trading activity).  Of course, the Commission assumes that
                      those commenters who opposed display of non-market maker orders
                      generally would also oppose the display of all securities as well,
                      rather than only those above a certain volume threshold.  See
                      infra notes -.

                [198]:See ICI Letter at 3 (stating that the ICI supports display of
                      institutional orders provided that the reserve size feature is
                      retained, and provided that orders are displayed in the public
                      quotation system under the name of the alternative trading system,
                      and not the name of the subscriber placing the order, thereby
                      preserving anonymity); IBEX Letter at 8-9 (stating that the
                      "reserve size" feature permitted alternative trading system
                      subscribers to avoid adverse market impact and negotiate a larger
                      transaction with a single counter-party, two features IBEX
                      believes to be of considerable value.  IBEX stated, however, that
                      reserve size availability to subscribers to an alternative trading
                      system should be contingent on an initial increment being publicly
                      displayed; non-subscribers being able to execute against the
                      reserve size; and the full size and price of each increment being
                      immediately reported, as executed, to the public quotation
                      system); Ashton Letter at 6 (stating that all orders up to 10,000
                      shares should be displayed, and that orders in excess of 10,000
                      shares, should have a minimum of 10,000 shares publicly displayed;
                      also stating that negotiation and reserve size features should be
                      available to non-subscribers, as well as subscribers); American
                      Century Letter at 5 (stating that it was "imperative" that the
                      reserve feature be maintained, because it provided depth of supply
                      and demand at a price, while protecting the order from being used
                      as a "free option" by other participants in the market).  See also
                      Instinet Letter at 11-13 (arguing against total pre-trade
                      transparency); Bloomberg Letter at 19 n.32 (noting reserve feature
                      in the Tradebook System); Letter from Daniel G. Weaver, Associate
                      Professor of Finance, Zicklin School of Business, Barauch College
                      to Jonathan G. Katz, Secretary, SEC dated Nov. 23, 1998 ("Weaver
                      Letter") (stating that institutions will move their trading
                      upstairs even if the full size of their orders is hidden from
                      alternative trading system subscribers through their use of a
                      "reserve size" feature).

                [199]:See Letter from Wessels, Arnold & Henderson, LLC to Jonathan G.
                      Katz, Secretary, SEC, dated Nov. 12, 1997 (commenting on the
                      Concept Release).

                [200]:7/28/98 ICI Letter at 2-3.  In a later letter, the ICI requested
                      clarification of whether certain orders the ICI described as "non-
                      firm" would be subject to display under the Commissions rules.
                      See Letter from Craig S. Tyle, General Counsel, ICI, to Jonathan
                      G. Katz, dated November 13, 1998 ("11/13/98 ICI Letter").  See
                      also the discussion supra at Section III.A.3.

                [201]:American Century Letter at 4-5.

                [202]:NYSE Letter at 6.

                [203]:Ashton Letter at 6

                [204]:Instinet Letter at 3, 12, and 14.

                [205]:Id. at n.18 and n.23.  See also Letter from David K. Whitcomb,
                      Professor of Finance and Economics, Rutgers University to Jonathan
                      G. Katz, Secretary, SEC, dated July 27, 1998 ("Whitcomb Letter")
                      at 2-3 (stating that institutions may, in some instances, feel
                      strongly that displaying their orders more widely than to other
                      participants in the alternative trading system is undesirable, and
                      that, as a result, institutions may be induced to spread their
                      business among firms on the basis of whether the alternative
                      trading system has reached the volume threshold for public display
                      of orders, rather than on the basis of quality of service.);
                      Letter from Ruben Lee, Oxford Finance Group to Jonathan G. Katz,
                      Secretary, SEC, dated July 28, 1998 ("Lee Letter") at 2-3 (stating
                      that while mandatory transparency might help retail investors
                      monitor the quality of their executions and reduce the inequality
                      in access to information that retail investors face, it could
                      compromise efficiency and liquidity).

                [206]:See 7/28/98 ICI Letter; 11/13/98 ICI Letter; Letter from Rick
                      Dahl, Chief Investment Officer, Missouri State Employees
                      Retirement System to Jonathan G. Katz, Secretary, SEC, dated Nov.
                      12, 1998 ("Mosers Letter"); Letter from Russell Rhoads, Director
                      of Equity Trading, and Michael B. Orkin, Chairman and CEO,
                      Caldwell & Orkin, Inc. to Jonathan G. Katz, Secretary, SEC, dated
                      Nov. 20, 1998 ("Caldwell Letter"); Letter from Todd M. Sheridan,
                      Senior Portfolio Manager, Caterpillar Investment Management Ltd.
                      to Jonathan G. Katz, Secretary, SEC, dated Nov. 19, 1998; Letter
                      from Praveen K. Gottipalli, Director of Investments, Symphony
                      Asset Management to Jonathan G. Katz, Secretary, SEC, dated Nov.
                      20, 1998 ("Symphony Letter"); Letter from Cinda A. Carmer, Senior
                      Securities Trader, Heartland Capital Management, Inc. to Jonathan
                      G. Katz, Secretary, SEC, dated Nov. 17, 1998; Letter from Patrick
                      J. McCloskey, Senior Vice President, Wellington Management
                      Company, LLP to Jonathan G. Katz, Secretary, SEC, dated Nov. 23,
                      1998 ("Wellington Letter"); Letter from Carrie Canter, Principal,
                      Equity Trading, Barrow, Hanley, Mewhinney & Strauss, Inc. to
                      Jonathan G. Katz, Secretary, SEC, dated Nov. 12, 1998 ("Barrow
                      Letter").  See also Weaver Letter (stating that if the Commission
                      required institutions to display the full size of their orders,
                      even if the full size is hidden from alternative trading system
                      subscribers through their use of a "reserve size" feature,
                      institutions will move their trading upstairs).

                [207]:See Letter from Gary E. Shugrue, General Partner, Argos Partners
                      Ltd., to Jonathan G. Katz, Secretary, SEC, dated Nov. 11, 1998
                      ("Argos Letter"); Letter from Stacey Matthews, Chelsey Capital, to
                      Jonathan G. Katz, Secretary, SEC, dated Nov. 16, 1998, ("Chelsey
                      Letter"); Letter from John D. Race, Partner, DePrince, Race &
                      Zollo, Inc., to Jonathan G. Katz, Secretary, SEC, dated Nov. 16,
                      1998, ("DePrince Letter"); Letter from Michael W. Masters,
                      Portfolio Manager, Masters Capital Investments, LLC, to Jonathan
                      G. Katz, Secretary, SEC, dated Nov. 16, 1998, ("Masters Letter");
                      Letter from Denise OBrien, Head of Equity Trading, Wanger Asset
                      Management, LP, to Jonathan G. Katz, Secretary, SEC, received Nov.
                      19, 1998, ("Wanger Letter"); Letter from Gerald N. Brown, Becker
                      Capital Management, to Jonathan G. Katz, Secretary, SEC, received
                      Nov. 19, 1998 ("Becker Letter"); Letter from Della L. Hood-Laster,
                      V.P. Equity Trading, Loomis Sayles & Company, LP, to Jonathan G.
                      Katz, Secretary SEC, dated Nov. 12, 1998, ("Loomis Letter").  See
                      also Barrow Letter and Mosers Letter.

                [208]:See Letter from Susan Ellis, Vice President, Trading, Granahan
                      Investment Management, Inc. to Jonathan G. Katz, Secretary, SEC
                      dated Nov. 16, 1998; Letter from Genrald N. Brown, Becker Capital
                      Management to Jonathan G. Katz, Secretary, SEC received Nov. 19,
                      1998; Letter from Teresa M. Brandt, Head Equity Trader, Advantus
                      Capital Management, Inc. to Jonathan G. Katz, Secretary, SEC dated
                      Nov. 19, 1998; Letter from Kristen Straubel, Head Trader and
                      Robert T. Lutts, President, Cabot Money Management, Inc. to
                      Jonathan G. Katz dated Nov. 20, 1998; Letter from Tracy
                      Altebrando, Senior Equity Trader, Metropolitan Capital Advisors,
                      Inc. to Jonathan G. Katz, Secretary, SEC, dated Nov. 25, 1998.
                      See also Wanger Letter, Caldwell Letter, Symphony Letter,
                      Wellington Letter.

                [209]:See, e.g., Loomis Letter, Chelsey Letter.

                [210]:Letter from Ed Restrepo, Head Trader, VanWagoner Capital
                      Management to Jonathan G. Katz, Secretary, SEC, dated Nov. 16,
                      1998 ("VanWagoner Letter").

                [211]:See VanWagoner Letter.  See also Letter from Stacey Carter Fleece,
                      Chief Financial Officer, Brookhaven Capital Management to Jonathan
                      G. Katz, Secretary, SEC dated Nov. 18, 1998 (stating that
                      institutional orders submitted to dealers do not have to be
                      published); Letter from John D. Robinson, Head Trader, Longwood
                      Asset Management to Jonathan G. Katz, Secretary, SEC, dated Nov.
                      25, 1998.

                [212]:Under Rule 301(b)(3), non-market maker broker-dealer orders
                      entered into alternative trading systems must also be displayed.
                      17 CFR 242.302(b)(3).

                [213]:Rule 11Ac1-1(c)(5)(ii), 17 CFR 240.11Ac1-1(c)(5)(ii) ("Quote
                      Rule").  See also Order Handling Rules Adopting Release, supra
                      note .

                [214]:See infra note  and accompanying text.

                [215]:Rule 301(b)(5), 17 CFR 242.301(b)(5).

                [216]:See supra notes - and accompanying text.

                [217]:The Commission emphasizes that, as with the transparency phase-in,
                      alternative trading systems may voluntarily provide access to non-
                      subscribers on or before [insert date 120 days after publication
                      in the Federal Register] in all securities covered by the rule.

                [218]:See ICI Letter at 3; IBEX Letter at 9-10; Ashton Letter at 6;
                      American Century Letter at 2; OptiMark Letter at 4.

                [219]:Instinet Letter at 10.

                [220]:See supra notes - and accompanying text.

                [221]:Instinet Letter at 16-17.

                [222]:American Century Letter at 2.

                [223]:See Proposing Release, supra note , at n. 108.

                [224]:Rule 301(b)(4), 17 CFR 242.301(b)(4).

                [225]:See Order Handling Rules Adopting Release, supra note , at n.272.

                [226]:See, e.g., NASD Rule 4623.  Securities Exchange Act Release Nos.
                      38156 (Jan. 10, 1997), 62 FR 2415 (Jan. 16, 1997); 38008 (Dec. 2,
                      1996), 61 FR 64550 (Dec. 5, 1996).

                [227]:See ICI Letter at 3; Instinet Letter at 17-18; NASD Letter at 12;
                      American Century Letter at 2; OptiMark Letter at 5.  See also IBEX
                      Letter at 11 (opposing allowing SROs to dictate a fee schedule for
                      alternative trading systems, in which fees charged non-subscribers
                      are lower than those charged subscribers), Ashton Letter at 6, n.7
                      (opposed to the idea that non-subscribers be linked through an SRO
                      execution system only).

                [228]:See NYSE Letter at 7; CHX Letter at 8-10.

                [229]:SIA Letter at 17 (stating that fees imposed by alternative trading
                      systems raised a number of procedural, structural and policy
                      issues, and recommending that the Commission make these the
                      subject of a separate release).

                [230]:NASD Letter at 12.  See also ICI Letter at 3 (recommending that
                      alternative trading systems be required to comply with any SRO
                      rules limiting fees).

                [231]:See Order Handling Rules Adopting Release, supra note , at nn.347-
                      65 and accompanying text; Division of Market Regulation, Division
                      of Market Regulation, Market 2000: An Examination of Current
                      Equity Market Developments App V (1994) ("Market 2000 Study").

                [232]:While SRO proposed rule changes relating to fees imposed by the
                      SRO are eligible to become effective upon filing under Section
                      19(b)(3)(A)(ii) of the Exchange Act, and Rule 19b-4(e)(2) of the
                      Exchange Act, the Commission continues to require SROs to file
                      proposed rule changes regarding fees applicable to non-members or
                      non-participants under Section 19(b)(2) for full notice and
                      comment.  See Securities Exchange Act Release No. 35123 (Dec. 20,
                      1994), 59 FR 66692 (Dec. 28, 1994).  Thus, a proposed SRO rule
                      relating to fees that alternative trading systems charge would not
                      be eligible to become effective upon filing.

                [233]:Instinet Letter at 17-18 (also stating that the SRO to which an
                      alternative trading system belonged should not be authorized to
                      set fees).

                [234]:American Century Letter at 2 (also agreeing that decimalization
                      will provide a more valid framework for this pricing structure).
                      See also ICI Letter at 3, n.8 (stating that market makers should
                      be able to assess liquidity fees when their quotes are "hit").

                [235]:OptiMark Letter at 4-5.

                [236]:NYSE Letter at 7 (stating that such fees could make it impossible
                      for market participants to determine the true cost of executing
                      orders, but indicating that if fees were included in the
                      disseminated quotation that would be acceptable); CHX Letter at 8-
                      10 (alternatively, CHX suggested the Commission allow firms to
                      ignore alternative trading system quotes at the NBBO if the next
                      price available after payment of the access fee is worse than the
                      next best available execution).  But see IBEX Letter at 11
                      (opposing including fees in the public quote).

                [237]:See supra note .

                [238]:See Ashton Letter at 6 (suggesting that the Commission consider
                      amending the Quote Rule to require all exchanges, over-the-counter
                      dealers, and alternative trading systems to disseminate to the
                      public quote the actual size behind the best bid and offer
                      quotations).  See also IBEX Letter at 11.

                [239]:Rule 11Ac1-1(c)(5)(ii)(A) and (B), 17 CFR 11Ac1-1(c)(5)(ii)(A) and
                      (B).

                [240]:See supra notes - and accompanying text.

                [241]:Sections 6(b)(2) and 6(c) of the Exchange Act, 15 U.S.C. 78f(b)(2)
                      and (c); Section 15A(b)(8) of the Exchange Act, 15 U.S.C. 78o-
                      3(b)(8).

                [242]:"Restraints 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).

                [243]:See supra Section IV.A.2.c.(ii).

                [244]:Rule 301(b)(5), 17 CFR 242.301(b)(5).  Alternative trading systems
                      that derive their prices for securities from prices for those same
                      securities on another market are not subject to this requirement.

                [245]:The Commission notes that this twenty percent volume threshold is
                      based on current market conditions.  If there is a change in these
                      market conditions, or if the Commission believes that alternative
                      trading systems with less than twenty percent of the trading
                      volume are engaging in inappropriate exclusionary practices or in
                      anticompetitive conduct, the Commission may revisit these fair
                      access thresholds.  The Commission intends to monitor the impact
                      and effect of these fair access rules, as well as the practices of
                      alternative trading systems, and will consider changing these
                      rules if necessary to prevent anticompetitive behavior and ensure
                      that qualified investors have access to significant sources of
                      liquidity in the securities markets.

                [246]:The term "equity security" is defined in Section 3(a)(11) of the
                      Exchange Act, 15 U.S.C. 78c(a)(11) and Rule 3a1-1, 17 CFR 240.3a1-
                      1.  Options and limited partnerships are included within the
                      definition of an equity security.

                [247]:See supra Section IV.A.1.d.

                [248]:See supra note  (discussing the April 1, 2000 effective date).

                [249]:Rule 301(b)(5)(iii), 17 CFR 242.301(b)(5)(iii).

                [250]:Several commenters agreed with the Commission that an alternative
                      trading system should be required to establish standards for
                      granting access to trading in its system. See IBEX Letter at 12;
                      Ashton Letter at 6; SIA Letter at 4, 14.

                [251]:Rule 303(a)(1)(iii), 17 CFR 242.303(a)(1)(iii).  The Commission
                      expects an alternative trading system to maintain a record of its
                      standards at each point in time.  If the alternative trading
                      system amends or modifies its access standards, the records kept
                      should reflect historic standards, as well as current standards.

                [252]:Moreover, if an alternative trading system requires subscribers to
                      open an account with another broker-dealer with which the
                      alternative trading system has a clearing arrangement, the
                      alternative trading system is responsible for ensuring that the
                      clearing broker-dealer does not unfairly deny access to any
                      person.  Thus, the alternative trading system -- as part of its
                      agreement with the clearing firm -- must ensure that the clearing
                      firm establishes standards for customers opening an account and
                      that notices are sent to any prospective customer denied an
                      account.

                [253]:Rule 301(b)(5)(ii), 17 CFR 242.301(b)(5)(ii).

                [254]:Rule 301(b)(5)(ii)(D), 17 CFR 242.301(b)(5)(ii)(D).

                [255]:Rule 301(b)(9), 17 CFR 242.301(b)(9); Form ATS-R, 17 CFR 249.638.

                [256]:For example, the Commission has recognized that the
                      creditworthiness of a counterparty is a legitimate concern of
                      market participants.  See Letter from Richard R. Lindsey,
                      Director, Division of Market Regulation, SEC, to Richard Grasso,
                      Chairman and Chief Executive Officer, NYSE, dated Nov. 22, 1996 at
                      17. The Commission also requested comment on what might be
                      appropriate reasons for an alternative trading system to deny
                      market participants access.  Most commenters also stated that
                      objective standards, such as creditworthiness, would be
                      appropriate, provided that these standards were applied in a non-
                      discriminatory manner.  See IBEX Letter at 12 (stating that
                      credit-worthiness would be the most significant standard); ICI
                      Letter at 4 (requesting that the Commission clarify that the
                      standards for access can take into account factors that are
                      relevant to credit or other forms of counterparty risk); SIA
                      Letter at 14 (recommending that the Commission allow alternative
                      trading systems to limit access to any category of its choosing,
                      provided that the standards are not applied in a discriminatory
                      manner, and stating that an alternative trading system should be
                      permitted to select its standards, publish them, and apply them as
                      stated in a non-discriminatory manner); TBMA Letter at 26
                      (requesting that the Commission clarify that an alternative
                      trading system would still be allowed to set standards describing
                      the customers with whom it wishes to do business, provided its
                      standards are applied in a non-discriminatory manner).  See also
                      OptiMark Letter at 4, n.8 (stating that non-subscribers who wished
                      to become subscribers should not be "unreasonably denied").

                [257]:See, e.g., IBEX Letter at 12 (stating that reasonable credit or
                      capital requirements or past bad faith dealings should be the only
                      basis for denying access); Ashton Letter at 6 (arguing that
                      alternative trading systems should be required to provide
                      equivalent access through nondiscriminatory system fees).

                [258]:See TBMA Letter at 26 (stating that it would support a fair access
                      requirement for exchanges, but not for alternative trading
                      systems); ICI Letter at 4 (stating that it was not aware of any
                      material barriers to entry to the existing ECNs, and so did not
                      believe that the fair access requirement was necessary).

                [259]:OptiMark Letter at 4.

                [260]:See TBMA Letter at 22-23 (recommending that the threshold level be
                      raised to thirty-five percent to avoid capturing insignificant
                      market participants, particularly in regard to the bond market);
                      SIA Letter at 3-4 (recommending that the threshold level be raised
                      to forty percent); ICI Letter at 4 (recommending raising the
                      threshold level to fifty percent).

                [261]:See IBEX Letter at 12 (recommending that the threshold level be
                      lowered to ten percent); American Century Letter at 3.

                [262]:NASD Letter at 12 (stating that twenty percent is an appropriate
                      level).

                [263]:American Century Letter at 3.

                [264]:Rule 301(b)(5)(i), 17 CFR 242.301(b)(5)(i).

                [265]:IBEX Letter at 13.  See also ICI Letter at 4 (stating that the
                      Commission should not provide a right to appeal denial of access,
                      but that complaints should be handled as any other complaint
                      against broker-dealers were handled: through the appropriate SRO
                      or the Commission).

                [266]:Instinet Letter at 19.

                [267]:SIA Letter at 14-15.  See also TBMA Letter at 26.

                [268]:See Proposing Release, supra note , at Section III.A.2.e.

                [269]:Securities Exchange Act Release No. 27445 (Nov. 16, 1989), 54 FR
                      48704 ("ARP I"); Securities Exchange Act Release No. 29185 (May 9,
                      1991), 56 FR 22489 ("ARP II").   ARP I and ARP II were published
                      in response to operational difficulties experienced by SRO
                      automated systems during the October 1987 market break.  These
                      releases predicted future capacity requirements, emphasized the
                      need to maintain accurate trade and quote information, and
                      discussed the degree to which computer automation has become, and
                      is likely to increase as, an integral part of securities trading.

                [270]:ARP II, supra note , set forth guidance concerning the nature of
                      these independent reviews.

                [271]:The Commission notes that the United States General Accounting
                      Office ("GAO") has conducted several studies on the subject of
                      computer systems and their role in the financial markets.
                      Generally, the GAO has recommended that the Commission take steps
                      to improve systems capacity, integrity, and security.  See GAO,
                      Stronger System Controls and Oversight Needed to Prevent NASD
                      Computer Outages (Dec. 1994) (regarding Nasdaq system outages);
                      GAO, Stock Markets: Information Vendors Need SEC Oversight to
                      Control Automation Risks (Jan. 1992) (regarding risk assessments
                      of automated operations of stock market information dissemination
                      vendors); GAO, Computer Security Controls at Five Stock Exchanges
                      Need Strengthening (Aug. 1991) (regarding systems related risks at
                      stock markets); GAO, Active Oversight of Market Automation by SEC
                      and CFTC Needed (Apr. 1991) (regarding automation risks of the
                      securities and futures markets); GAO, Tighter Computer Security
                      Needed (Jan. 1990) (regarding the Common Message Switch System and
                      the Intermarket Trading System operated by the Securities Industry
                      Automation Corporation and the Nasdaq system operated by the
                      NASD).

                [272]:ARP I, supra note , 54 FR at 48705; ARP II, supra note , 56 FR at
                      22490.

                [273]:See ARP I, supra note , 54 FR at 48706, at n.17; ARP II, supra
                      note , 56 FR at 22493, at n.15.

                [274]:With regards to system capacity, integrity, and security
                      standards, the Commission notes that during the past year,
                      Instinet, Island, Bloomberg, and Archipelago (operated by Terra
                      Nova) have all experienced system outages due to problems with
                      their automated systems.  On a number of occasions, ECNs have had
                      to stop disseminating market maker quotations in order to keep
                      from closing altogether, including during the market decline of
                      October 1997 when one significant ECN withdrew its quotes from
                      Nasdaq because of lack of capacity.  Similarly, a major
                      interdealer broker in non-exempt securities experienced serious
                      capacity problems in processing the large number of transactions
                      in October 1997 and had to close down temporarily.  As a result,
                      the Commission believes that the volume thresholds discussed above
                      are necessary to ensure that trading systems have developed
                      systems capacity, integrity, and security standards that are
                      adequate to prevent such system outages.

                [275]:Rule 301(b)(6) applies to the same categories of debt securities
                      as Rule 301(b)(5), discussed supra note  and accompanying text.
                      Specifically, the categories are investment grade corporate debt
                      securities, non-investment grade corporate debt securities, and
                      municipal securities. 17 CFR 242.301(b)(6).

                [276]:See supra Section IV.A.2.d.

                [277]:See supra Section IV.A.1.e.

                [278]:See supra note  (discussing the April 1, 2000 effective date).

                [279]:Rule 301(b)(6)(iii), 17 CFR 242.301(b)(6)(iii).

                [280]:Rule 301(b)(6)(ii)(A) - (F), 17 CFR 242.301(b)(6)(ii)(A) - (F).

                [281]:Rule 301(b)(6)(ii)(G), 17 CFR 242.301(b)(6)(ii)(G).

                [282]:Rule 301(b)(6), 17 CFR 242.301(b)(6).  Regulation ATS also
                      requires alternative trading systems to preserve documentation
                      relating to their efforts to meet the requirements of this rule.
                      See Rule 303(a)(1)(iv), 17 CFR 242.303(a)(iv).

                [283]:See ARP II, supra note .

                [284]:See Proposing Release, supra note , at Section III.A.2.e.

                [285]:See Ashton Letter at 5; NASD Letter at 11; TBMA Letter at 27 (but
                      only if a system plays some role in price discovery such as a
                      traditional exchange does).

                [286]:NASD Letter at 11.

                [287]:See TBMA Letter at 22-23; SIA Letter at 13.

                [288]:See TBMA Letter at 22-23.

                [289]:SIA Letter at 13.

                [290]:Ashton Letter at 5.

                [291]:ICI Letter at 4.

                [292]:The Commission is aware of several incidents involving the
                      manipulation of quotations through alternative trading systems.
                      The participants who engaged in the manipulation were able to
                      profit as a result.  See supra note .

                [293]:Rule 301(b)(7), 17 CFR 242.301(b)(7).

                [294]:Rule 301(b)(8), 17 CFR 242.301(b)(8).

                [295]:Rule 302(a), 17 CFR 242.302(a).

                [296]:Securities Exchange Act Release No. 39729 (Mar. 6, 1998), 63 FR
                      12559 (Mar. 13, 1998).

                [297]:Rule 303(a)(1)(ii), 17 CFR 242.303(a)(1)(ii).

                [298]:See supra Section IV.A.2.d.

                [299]:Rule 303(a)(2), 17 CFR 242.303(a)(2).

                [300]:Rule 303(b), 17 CFR 242.303(b).  Rule 17a-4(f) provides for the
                      maintenance of records on microfilm, microfiche, or electronic
                      storage media.  The Commission recognizes that alternative trading
                      systems may generate much of the information in electronic form
                      and generally may wish to keep records in electronic format.  17
                      CFR 240.17a-4(f).

                [301]:17 CFR 240.17a-3 and 17 CFR 240.17a-4.

                [302]:17 CFR 240.17a-4(i).

                [303]:Rule 303(d), 17 CFR 242.303(d).

                [304]:See ICI Letter at 4; Ashton Letter p. 5.

                [305]:TBMA Letter at 16.  TBMA suggested exempting alternative trading
                      systems that do not exceed fifteen percent of the relevant market
                      from Regulation ATS and, thus, from the recordkeeping
                      requirements.  TBMA stated that the additional recordkeeping
                      requirements would not provide the Commission significant new
                      information beyond what is currently included within broker-dealer
                      recordkeeping requirements.  Id.

                [306]:Ashton Letter at 5.  Ashton pointed out that, because SRO-
                      sponsored systems compete directly with alternative trading
                      systems, SROs should not be able to gain confidential information
                      through the regulatory reporting process.  Id.

                [307]:Rule 301(b)(7), 17 CFR 242.301(b)(7).

                [308]:See also Securities Exchange Act Release No. 35124 (Dec. 20,
                      1994), 59 FR 66702 (Dec. 28, 1994 (addressing similar concerns in
                      the context of Rule 17a-23).

                [309]:Instinet Letter at 20-21.  Instinet stated that the Commission
                      should work with SROs to establish recordkeeping requirements that
                      minimize duplication and inconsistency as well as providing
                      alternative trading systems substantial flexibility in structuring
                      their recordkeeping operations.  Id.

                [310]:Rule 301(b)(9), 17 CFR 242.301(b)(9).

                [311]:17 CFR 230.144A.  Brokers and others who use alternative trading
                      systems to trade Rule 144A eligible securities and other types of
                      restricted securities should ensure those systems are structured
                      to permit the traders compliance with their obligations under
                      Rule 144A and under the Securities Act of 1933.

                [312]:See supra notes - and accompanying text.

                [313]:See infra Section V.  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 information 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).

                [314]:Rule 301(b)(2)(vii), 17 CFR 242.301(b)(2).

                [315]:See ICI Letter at 4 (supporting the proposal to require reports
                      quarterly); Ashton Letter at 5; IBEX Letter at 5.

                [316]:Ashton Letter at 5.

                [317]:See IBEX Letter at 5; American Century Letter at 6.

                [318]:Ashton Letter at 5.  Ashton pointed out that, because SRO-
                      sponsored systems compete directly with alternative trading
                      systems, SROs should not be able to gain confidential information
                      through the regulatory reporting process.  Id.

                [319]:See supra Section IV.A.2.g.

                [320]:See ICI Letter at 4-5 (stating that it agreed that the failure to
                      keep trading information confidential created the potential for
                      abuse); Instinet Letter at 21 (requesting that the Commission
                      clarify whether or not the proposed confidentiality provisions
                      would prohibit registered representatives from providing customers
                      with information (other than confidential customer information)
                      regarding the trading activity of the alternative trading system);
                      American Century Letter at 1-2 (stating that agency broker-dealer
                      functions should be separate from intermediated broker-dealer
                      functions that allow an alternative trading system employee to
                      "work" an order on behalf of customers, and that these employees
                      should not have access to the orders of customers who choose to
                      work their orders without the assistance of employees of the
                      alternative trading system).

                [321]:Rule 301(b)(10), 17 CFR 242.301(b)(10).

                [322]:Alternative trading systems that continue to be regulated as
                      broker-dealers would remain subject to oversight by national
                      securities exchanges and the NASD, in their self-regulatory
                      capacities.  See supra Section IV.A.2.a.

                [323]:Options Clearing Corporation By-laws, Art. VII, Sections 1 and 4.
                      Registered exchanges that are members of the OCC determine such
                      matters as listing, registration, clearance, issuance and exercise
                      of options contracts.  Exchange members of the OCC are also able
                      to use registration and disclosure materials tailored for
                      standardized options.

                [324]:The Commission has the authority to review final disciplinary
                      sanctions imposed by SROs on members or associated persons of
                      members, including sanctions imposed for violations of SRO rules.
                      The Commission may only affirm a sanction imposed by an SRO on one
                      of its members, participants or associated persons of its members
                      for a violation an SROs rules, if the Commission finds that:  (1)
                      the member, participant, or associated person of the member
                      engaged in the acts or practices that the SRO found were engaged
                      in; (2) such acts or practices are in violation of the SROs
                      rules; and (3) the SROs rules, and the application by the SRO of
                      its rules, are consistent with the purposes of the Exchange Act.
                      Sections 19(d)(2) and 19(e) of the Exchange Act, 15 U.S.C.
                      78s(d)(2) and 78s(e).

                [325]:15 U.S.C. 78f.

                [326]:See S. Rep. No. 75, supra note .

                [327]:Section 6(a) of the Exchange Act, 15 U.S.C. 78f(a)

                [328]:17 CFR 240.6a-1

                [329]:17 CFR 202.3(b)(2).  The Commission is not required to propose
                      changes to its Rules of Practice prior to adoption.  See 5 U.S.C.
                      553(b)(3)(A).

                [330]:Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b).

                [331]:Section 6(b)(1) of the Exchange Act, 15 U.S.C. 78f(b)(1).

                [332]:15 U.S.C. 78c(a)(39).  See also 15 U.S.C. 78o(b).

                [333]:See Section 12(d) of the Exchange Act, 15 U.S.C. 78l(d); Rule
                      12d2-2, 17 CFR 240.12d2-2 (requiring national securities exchanges
                      to file an application with the Commission to strike a security
                      from listing and registration).

                [334]:See 15 U.S.C. 78f(b)(9).

                [335]:Section 6(b)(5) of the Exchange Act, 15 U.S.C. 78f(b)(5).  See
                      also Section 6(b)(8) of the Exchange Act, 15 U.S.C. 78f(b)(6).

                [336]:The Commission notes that, according to the audited financial
                      statements for 1997, the NYSE had total assets of $1,174,887,000
                      and total expenses of $488,811,000; the Amex had total assets of
                      $195,547,000 and total expenses of $173,742,000; the PCX had total
                      assets of $67,622,000 and total expenses of $60,636,000; the CSE
                      had total assets of $13,124,585 and total expenses of $5,343,403;
                      and the Boston Stock Exchange ("BSE") had total assets of
                      $33,339,961 and total expenses of $16,106,837.

                [337]:Section 6(b)(4) of the Exchange Act, 15 U.S.C. 78f(b)(4).

                [338]:15 U.S.C. 78q and 78s.  See also 17 CFR 240.17d-2; 17 CFR
                      240.19g2-1.

                [339]: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).

                [340]:See Securities Exchange Act Release No. 23192 (May 1, 1986) 51 FR
                      17426 (May 12, 1986).  Moreover, Section 108 of NSMIA, supra note
                      , 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.

                [341]:For example, the Commission has approved a regulatory plan filed
                      by the Amex, CBOE, NASD, NYSE, PCX, and the Philadelphia Stock
                      Exchange ("Phlx") that divides the oversight responsibilities
                      among these SROs for common members, by designating each
                      participating SRO as the options examination authority for a
                      portion of the common members.  This designated SRO has sole
                      regulatory responsibility for certain options-related trading
                      matters.  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.

                [342]:17 CFR 240.17d-2.  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 Exchange Act  17(d).  15 U.S.C. 78q(d).  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 Nos. 13326 (Mar. 3, 1977), 42 FR 13878 (Mar. 14, 1977)
                      (NYSE/Amex); 13536 (May 12, 1977), 42 FR 26264 (May 23, 1977)
                      (NYSE/BSE); 14152 (Nov. 9, 1977), 42 FR 59339 (Nov. 16, 1977)
                      (NYSE/CSE);  13535 (May 12, 1977), 42 FR 26269 (May 23, 1977)
                      (NYSE/CHX); 13531 (May 12, 1977), 42 FR 26273 (May 23, 1977)
                      (NYSE/PSE); 14093 (Oct. 25, 1977), 42 FR 57199 (Nov. 1, 1977)
                      (NYSE/Phlx); 15191 (Sept. 26, 1978), 43 FR 46093 (Oct. 5, 1978)
                      (NASD/BSE, CSE, CHX and PSE); and 16858 (May 30, 1980), 45 FR
                      37927 (June 5, 1980) (NASD/BSE, CSE, CHX and PSE).

                [343]:See Section 6(b)(6) of the Exchange Act, 15 U.S.C. 78f(b)(6).  See
                      also Section 6(b)(7) of the Exchange Act, 15 U.S.C. 78f(b)(7).

                [344]:See, e.g. Section 19 of the Exchange Act, 15 U.S.C. 78s

                [345]:Section 6(b)(3) of the Exchange Act, 15 U.S.C. 78f(b)(3).

                [346]:Id.

                [347]:See NASD 21(a) Report, supra note .

                [348]:See Delta Release, supra note , at 1900.  In Board of Trade of the
                      City of Chicago v. Securities and Exchange Commission, 923 F.2d
                      1270 (7th Cir. 1991) ("Delta II"), the court 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.

                      Id. at 1272-73.

                [349]: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 PCX).

                [350]:The New Amex Board consists of eighteen total governors.  Floor
                      governor nominees will be proposed by either the Amex Nominating
                      Committee (consisting of three floor members and two public
                      members) or a petition signed by twenty five members and will be
                      selected by a plurality of the Amex Regular and Options Principal
                      members voting together as a single class.  The Amex membership
                      elects the members of the Amex Nominating Committee.

                [351]:The Chief Executive Officer of New Amex will also be a governor on
                      the NASD Board.

                [352]:The New Amex Floor Governor is nominated by the Amex Membership
                      and will be able to directly express the Amex members viewpoint
                      and concerns within the NASD Board forum.  In addition, the Chief
                      Executive Officer of New Amex will be able to provide information
                      about, and communicate the needs of, New Amex to the NASD Board.

                [353]:See Securities Exchange Act Release No. 40622 (Oct. 30, 1998), 63
                      FR 59819 (Nov. 5, 1998).

                [354]:15 U.S.C. 78q-1(b)(3)(c).  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 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
                      (Mar. 6, 1978), 43 FR 10288 (Mar. 10, 1978).  See also Securities
                      Exchange Act Release No. 16900 (June 17, 1980), 45 FR 41920 (June
                      23, 1980).

                [355]:The proprietary foreign 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.

                [356]:The Commission in the past has approved exchange rules limiting
                      the voting rights of "special access" or non-equity members as
                      consistent with Section 6(b)(3) of the Exchange Act, 15 U.S.C.
                      78f(b)(3).  See, e.g., Securities Exchange Act Release No. 22959
                      (Feb. 28, 1986), 51 FR 8060 (Mar. 7, 1986) (approving rule change
                      by NYSE establishing "electronic access membership" with
                      restricted voting rights).

                [357]:See CBOE Letter at 5-6; NASD Letter at 4-5.

                [358]:American Century Letter at 6.

                [359]:See Ashton Letter at 4 (for-profit exchanges should be afforded
                      considerable flexibility in their formative business stages in
                      meeting fair representation obligations); OptiMark Letter at 3-4
                      (users of alternative trading systems should be treated fairly,
                      but are not entitled to exercise any formal rights in regard to
                      the management of the system, and are adequately protected through
                      a combination of regulatory safeguards and market forces); Lee
                      Letter at 1-2 (owners of exchanges already have incentives to
                      create suitable governance structures).

                [360]:NASD Letter at 4-5.

                [361]:15 U.S.C. 78s(a).

                [362]:15 U.S.C. 78f(a) and 78s(a).  See NASD Letter at 4-5 (commenting
                      that the public should have an opportunity to comment on the
                      proposed governance structure of an exchange before the Commission
                      approves its application for registration).

                [363]:15 U.S.C. 78f(b)(3)-(4) and 78f(c).

                [364]:15 U.S.C. 78f(c)(1).  Section 6(c)(1), adopted in 1975, prohibits
                      exchanges from granting new memberships to non-broker-dealers.  At
                      the time this Section was adopted, 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.

                [365]:CBOE Letter at 6 ("it would be difficult, if not impossible, for
                      the Commission to adequately regulate or oversee the array of non-
                      broker-dealer institutions that currently are, or may become,
                      participants on [alternative trading systems]"); NASD Letter at 8
                      (institutions should not be members of alternative trading systems
                      that register as exchanges); IBEX Letter at 13 (institutional and
                      individual investors should be granted exchange access through the
                      sponsorship of discount or full-service broker-dealers).

                [366]:American Century Letter at 4.

                [367]:Sections 6(f) and 15(e) of the Exchange Act, 15 U.S.C. 78f(f) and
                      78o(e), would permit the Commission to subject institutional
                      members to all exchange rules and relevant Exchange Act
                      provisions.

                [368]:The Commission could adopt such requirements pursuant to its
                      authority under Section 15(c) of the Exchange Act, 15 U.S.C.
                      78o(e).

                [369]:The Commission notes that institutions currently have the option
                      to establish a broker-dealer affiliate, which can become a member
                      in an exchange.  The institution can then direct its order flow
                      through its affiliated entity.  Many investment companies already
                      have affiliated broker-dealers.

                [370]:15 U.S.C. 78f(c)(1).

                [371]:Exchange members are subject to regulatory action by the NYSE for
                      violations of NYSE rules by their customers entering orders
                      through the members SuperDOT terminals.

                [372]:See infra note .

                [373]:NASD Letter at 8.

                [374]:15 U.S.C. 78f(b)(6)-(7) and 15 U.S.C. 78s(g).  These provisions
                      require that a registered exchange be able to enforce compliance
                      by its members with the federal securities laws, appropriately
                      discipline its members for violations of such laws, and provide a
                      fair disciplinary procedure.  The Commission notes, however, that
                      unless a broker-dealer effects transactions in securities solely
                      on a national securities exchange of which it is a member, it must
                      become a member of a national securities association or another
                      national securities exchange.  Section 15(b)(8) of the Exchange
                      Act, 15 U.S.C. 78o(b)(8).

                [375]:15 U.S.C. 78f(b)(2).

                [376]:15 U.S.C. 78f(c).

                [377]:A denial of access would be reasonable, for example, if it were
                      based on objective standards, such as capital and credit
                      requirements, and if these standards were applied fairly.

                [378]:IBEX Letter at 13-14.

                [379]:Section 6(b)(8) of the Exchange Act, 15 U.S.C. 78f(b)(8); Section
                      15A(b)(9) of the Exchange Act, 15 U.S.C. 78o-3(b)(9).

                [380]:Section 6(b)(6) of the Exchange Act, 15 U.S.C. 78f(b)(6).

                [381]:Section 23(a) of the Exchange Act, 15 U.S.C. 78w(a).

                [382]:See supra notes - and accompanying text.

                [383]:PCX Letter at 7-8.

                [384]:In this regard, those exchanges applying for registration in 1999
                      should also be prepared to demonstrate that their systems are year
                      2000 compliant.

                [385]: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 has been filed
                      with the Commission and 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.  15 U.S.C. 78l(a).  Section
                      12(b) of the Exchange Act, 15 U.S.C. 78l(b), contains procedures
                      for the registration of securities on a national securities
                      exchange.  Section 12(a) does not apply to an exchange that the
                      Commission has exempted from registration as a national securities
                      exchange.  See, e.g., Securities Exchange Act Release No. 28899
                      (Feb. 20, 1991), 56 FR 8377 (Feb. 29, 1991).  See also Securities
                      Exchange Act Release No. 37271 (June 3, 1996), 61 FR 29145 (June
                      7, 1996).

                [386]:Section 12(f) of the Exchange Act, 15 U.S.C. 78l(f).  Under
                      Section 12(f) of the Exchange Act, 15 U.S.C 78l(f), exchanges
                      cannot trade securities not listed on an exchange or classified as
                      Nasdaq NM securities (such as Nasdaq SmallCap or OTC securities)
                      without Commission action.  Section 12(f) of the Exchange Act
                      authorizes the Commission to permit the extension of UTP to any
                      security listed otherwise than on an exchange.  The OTC-UTP plan
                      which provides UTP for Nasdaq NM securities, is the only extension
                      to date approved by the Commission.  See OTC-UTP plan, infra note
                      .  Thus, registered exchanges cannot currently trade Nasdaq
                      SmallCap securities or exempted securities that are not separately
                      listed on the exchange.

                [387]:Rule 12f-5, 17 CFR 240.12f-5.

                [388]:See OTC-UTP plan, infra note  and accompanying text.

                [389]:The OTC-UTP plan provides for the collection, consolidation, and
                      dissemination of quotation and transaction information for Nasdaq
                      NM securities by its participants.  Any registered Exchange where
                      Nasdaq NM securities are traded may become a full participant in
                      the OTC-UTP plan.  See infra note .  See also Securities Exchange
                      Act Release Nos. 24407 (Apr. 27, 1987), 52 FR 17349 (May 7, 1987);
                      36985 (Mar. 18, 1996), 61 FR 12122 (Mar. 25, 1996).

                [390]:OptiMark Letter at 3.

                [391]:The CTA provides vendors and other subscribers (including
                      alternative trading systems) with consolidated last sale
                      information for stocks admitted to dealings on any exchange
                      pursuant to a plan approved by the Commission ("CTA plan").  See,
                      e.g.,  Securities Exchange Act Release Nos. 10787 (May 10, 1974),
                      39 FR 17799 (final rules approving CTA plan); 16983 (July 16,
                      1980), 45 FR 49414 (July 24, 1980); 37191 (May 9, 1996), 61 FR
                      24842 (May 16, 1996).

                [392]:The CQS gathers quotations from all market makers in exchange-
                      listed securities and disseminates them to vendors and other
                      subscribers pursuant to a plan approved by the Commission ("CQ
                      plan").  Securities Exchange Act Release No. 16518 (Jan. 22,
                      1980), 45 FR 6521 (final rules approving CQ plan); 37191 (May 9,
                      1996), 61 FR 24842 (May 16, 1996).

                [393]: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) (CSE/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) (CBOE/ITS linkage).

                [394]:See infra note  and accompanying text for a description of the
                      OPRA plan.

                [395]:See infra note  and accompanying text for a description of the
                      OTC-UTP plan.

                [396]:See Rules 11Ac1-1(b)(1) and 11Aa3-2(c), 17 CFR 240.11Ac1-1(b)(1)
                      and 240.11Aa3-2(c).

                [397]:Both the CTA and the CQS are presently operated by the eight
                      national securities exchanges and the NASD.

                [398]: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.  Alternative trading
                      systems that do not elect to register as exchanges would be
                      eligible for participation in the CTA plan pursuant to this
                      provision; however, as non-member participants, these systems
                      would neither be obligated to pay the required fees and expenses
                      to the plan, nor able to share in the plans profits.

                [399]:See Securities Exchange Act Release No. 37191 (May 9, 1996), 61 FR
                      24842 (May 16, 1996).

                [400]:These fees represent the "tangible and intangible assets" provided
                      by the plans to the new participant.  See Proposing Release, supra
                      note  at nn.342-43 (discussing entry fees for the CTA, CQS, and
                      ITS plans).

                [401]:Similar to the CTA and CQ plans, the OTC-UTP plan governing
                      trading of Nasdaq NM securities provides for the collection,
                      consolidation, and dissemination of quotation and transaction
                      information for Nasdaq NM securities by its participants.   Any
                      national securities exchange where Nasdaq NM securities are traded
                      may become a full participant of the OTC-UTP plan. The plan also
                      provides that new participants pay a share of development costs,
                      share ongoing operating costs, and are entitled to share in the
                      plans profits.  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).  See
                      also Securities Exchange Act Release No. 36985 (Mar. 18, 1996), 61
                      FR 12122 (Mar. 25, 1996).

                      The OPRA plan also provides for the collection and dissemination
                      of last sale and quotation information with respect to options
                      that are traded on the participant exchanges.  Under the terms of
                      this 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.  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) ("OPRA
                      plan").

                [402]: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 , at section
                      3(c).

                [403]:ITS also establishes a procedure that allows specialists to
                      solicit pre-opening interest in a security from specialists and
                      market makers in other markets, 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.

                [404]: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.  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.

                [405]: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.

                [406]: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).

                [407]:American Century Letter at 3 (citing instances of downtime on
                      alternative trading systems that are attributable to SelectNet,
                      rather than the alternative trading system).

                [408]:Ashton Letter at 4 (also stating that the Commission should be
                      sensitive to the "veiled anti-competitive motives" of the existing
                      plan participants and be prepared to direct any new qualified
                      exchanges to be accepted into all national market system plans).

                [409]:Securities Exchange Act Release No. 40204 (July 15, 1998), 63 FR
                      390306 (July 22, 1998) (proposal providing for the linkage of the
                      PCX application of the OptiMark system to the ITS system);
                      Securities Exchange Act Release No. 40260 (July 24, 1998), 63 FR
                      40748 (July 30, 1998) (proposal expanding the ITS/CAES linkage to
                      all listed securities, including non-Rule 19c-3 securities).

                [410]:See CBOE Letter at 4-5; NYSE Letter at 8-9. The NYSE also stated
                      that consideration of this issue can be better evaluated at the
                      time an alternative trading system registers as an exchange and
                      seeks to become a member of ITS.  Id.  But see CHX Letter at 7
                      (expressing concern about a for-profit exchange becoming a full
                      participant in the national market system plans because such
                      exchanges would be subject to pressures not to expend significant
                      resources on maintaining surveillance and enforcement capability
                      and would not have the same commitment to the public interest and
                      the investing public as traditional not-for-profit exchanges).

                [411]:CBOE Letter at 4-5.

                [412]:NASD Letter at 7.

                [413]:OptiMark Letter at 4-5 (also asking that the Commission consider
                      how members of exchanges, other than the exchange through which an
                      alternative trading system registered as a broker-dealer
                      disseminates its quotations, could access such alternative trading
                      systems quotes).

                [414]:Letter from Gerald D. OConnell, Susquenhanna Investment Group to
                      Jonathan G. Katz, Secretary, SEC, dated July 23, 1998
                      ("Susquehanna Letter") at 1-2.  See also OptiMark Letter at 4
                      (asking the Commission to clarify that participation in national
                      market system plans is not conditioned on any universal public
                      display requirement).

                [415]:Instinet Letter at 1-2, 3, 6.

                [416]:See supra note .

                [417]: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 pursuant to Sections 12(k)(1)(A) and
                      (B) of the Exchange Act, 15 U.S.C. 78l(k)(1)(A) and (B).

                [418]:For example, a newly registered exchange would be required under
                      Rule 11Ac1-1, 17 CFR 240.11Ac1-1, to halt trading when neither
                      quotation nor transaction information can be disseminated.

                [419]:The Commission has found that trading halt rules instituted by a
                      national securities exchange or a national securities association
                      are consistent with the objectives of Section 6(b)(5) of the
                      Exchange Act, 15 U.S.C. 78f(b)(5).  See, e.g., Securities Exchange
                      Act Release Nos. 39582 (Jan. 26, 1998), 63 FR 5408 (Feb. 2, 1998);
                      26198 (Oct. 19, 1988), 53 FR 41637 (Oct. 24, 1988).  See, e.g.,
                      Amex Rule 117, NASD Rule 4120(a)(3), and NYSE Rules 80B and 717.
                      There is no requirement that exchanges or associations of
                      securities dealers employ identical trading halt rules, and these
                      rules may vary according to the needs of the individual market.

                [420]:15 U.S.C. 78f.

                [421]:If circuit breakers are imposed in one market, but not in another,
                      overall market disruptions caused by trading imbalances can
                      migrate from one market to the next, and efforts to stabilize such
                      imbalances during periods of heavy trading and extreme volatility
                      would be subverted.  See also Securities Exchange Act Release No.
                      39846 (Apr. 9, 1998), 63 FR 18477 (Apr. 15, 1998) (approving
                      proposed changes to SRO rules regarding circuit breakers).

                [422]:Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b).

                [423]:17 CFR 240.6a-1, 240.6a-2 and 240.6a-3.

                [424]:Exhibit E requires an exchange to describe, among other things,
                      the means of access to the electronic trading system, the
                      procedures governing display of quotes and/or orders, execution,
                      reporting, clearance, and settlement.  Exhibit L requires an
                      exchange to describe its criteria for membership, conditions under
                      which members may be subject to suspension or termination, and
                      procedures that would be involved in such suspension or
                      termination.

                [425]:Exhibit K requires non-member owned exchanges to provide a list of
                      direct owners and control persons.

                [426]:See NYSE Letter at 11; Amex Letter at 6.

             [427]:A technical modification was made to the amendments as
             proposed to include Exhibit H in Rule 6a-2(a)(2).

             [428]:Rule 6a-2(a), 17 CFR 240.6a-2(a).

             [429]:A technical modification was made to the amendments as
             proposed  to  remove  Exhibit  I from Rule 6a-2(a)(2) and to
             include Exhibit I in Rule 6a-2(b)(1).

             [430]:A technical modification was made to the amendments to
             include Exhibit N in Rule 6a-2(b)(2).

             [431]:A technical modification was made to the amendments to
             include Exhibit J in Rule 6a-2(c).

             [432]:Rule 6a-2(d), 17 CFR 240.6a-2(d).

             [433]:Securities Exchange Act Release  No.  35123  (Dec. 20,
             1994), 59 FR 66692 (Dec. 28 1994).

             [434]:17  CFR 240.6a-3.  This rule is now found at paragraph
             (c) of Rule 6a-3.

             [435]:In addition,  the  owner  of  the  alternative trading
             system  would  continue  to  be  liable  for securities  law
             violations.

             [436]:But see supra note .

             [437]:Section  3(a)(2)  of  the  Exchange  Act,   15  U.S.C.
             78c(a)(2).   See  also  supra note  (discussing the OptiMark
             System as a facility of the  PCX); 35030 (Nov. 30, 1994), 59
             FR 63141 (Dec. 7, 1994) (discussing the Chicago Match system
             as a facility of the CHX); 29237 (May 24, 1991), 56 FR 24853
             (May 31, 1991) (discussing the Off-Hours Trading system as a
             facility of the NYSE).

             [438]:17 CFR 240.17a-23.

             [439]:The term "internal broker-dealer system" is defined as
             "any facility, other than a national securities exchange, an
             exchange exempt from registration  based  on limited volume,
             or  an alternative trading system as defined  in  Regulation
             ATS . . . that provides a mechanism, automated in full or in
             part,   for   collecting,   receiving,   disseminating,   or
             displaying  system  orders and facilitating agreement to the
             basic terms of a purchase  or  sale  of a security between a
             customer and the sponsor, or between two  customers  of  the
             sponsor, through use of the internal broker-dealer system or
             through  the broker or dealer sponsor of such system."  Rule
             17a-3(a)(16)(ii)(A), 17 CFR 240.17a-3(a)(16)(ii)(A).

             [440]:17 CFR 240.17a-3 and 240.17a-4.

             [441]:Only one commenter addressed the Commissions proposal
             to repeal Rule 17a-23 and amend Rules 17a-3 and 17a-4.  This
             commenter  agreed  that  amended Rules 17a-3 and 17a-4 would
             impose similar obligations  as  current  Rule  17a-23.  TBMA
             Letter at 25-26.

             [442]:Rules  17a-3(a)(16)(i)(B)  and  (C),  17  CFR 240.17a-
             3(a)(16)(i)(B) and (C).

             [443]:See supra note .

             [444]:The term "sponsor" is defined as "any broker or dealer
             that organizes, operates, administers, or otherwise directly
             controls  an  internal  broker-dealer  system  or,  if   the
             operator  of  the  internal  broker-dealer  system  is not a
             registered  broker  or  dealer,  any  broker or dealer that,
             pursuant to contract, affiliation, or other  agreement  with
             the  system  operator,  is  involved materially on a regular
             basis with executing transactions  in connection with use of
             the internal broker-dealer system, other than solely for its
             own  account or as a customer with access  to  the  internal
             broker-dealer  system."   Rule  17a-3(a)(16)(ii)(B),  17 CFR
             240.17a-3(a)(16)(ii)(B).

             [445]:The  term  "system order" is defined as "any order  or
             other communication  or indication submitted by any customer
             with access to the internal  broker-dealer  system for entry
             into a trading system announcing an interest  in  purchasing
             or selling a security," but specifically excludes "inquiries
             or  indications  of  interest that are not entered into  the
             internal broker-dealer  system."   Rule 17a-3(a)(16)(ii)(C),
             17 CFR 240.17a-3(a)(16)(ii)(C).

             [446]:Rules 17a-4(b)(1) and (10), 17 CFR 240.17a-4(b)(1) and
             (10).

             [447]:See Concept Release, supra note , 62 FR at 30518-19.

             [448]:See   Proposing   Release,  supra  note    (discussing
             comments responding to the Concept Release).

             [449]:Id. at n.252.

             [450]:15 U.S.C. 78s(b).

             [451]:The Commission is also  adopting  measures  to relieve
             SROs  of  the  requirement  to  file  rule  changes with the
             Commission  when  an  SRO  wishes  to  list  or  trade   new
             derivative  securities  products.   Securities  Exchange Act
             Release No. 40761 (Dec. 8, 1998).

             [452]:For  example,  in November 1990, the NYSE submitted  a
             rule filing proposing  an  after-hours  crossing  system  to
             automate the execution of single stock orders and baskets of
             securities  and  received  Commission  approval in May 1991.
             See  Securities  Exchange Act Release Nos.  29237  (May  24,
             1991), 56 FR 24853  (May 31, 1991); 32368 (May 25, 1993), 58
             FR 31565 (June 3, 1993).   In August 1993, the CHX submitted
             a  rule  filing  to operate the  Chicago  Match  system,  an
             electronic matching  system  that  crossed orders entered by
             the  CHXs  members and non-members including  institutional
             customers, and  obtained  Commission  approval  in  November
             1994.   See Securities Exchange Act Release No. 35030  (Nov.
             30, 1994),  59  FR 63141 (Dec. 7, 1994).   More recently, in
             May 1997, the PCX  submitted  a  rule filing for approval of
             the  OptiMark  System  and received Commission  approval  in
             September 1997.  See Securities  Exchange  Act  Release  No.
             39086 (Sept. 17, 1997), 62 FR 50036 (Sept. 24, 1997).

             [453]:See  ICI  Letter  at 5; Corporate Capital Letter at 2;
             CBOE Letter at 8; CHX Letter  at 11; NASD Letter at 13; Amex
             Letter at 1-2; NYSE Letter at 9;  American Century Letter at
             6. See also Ashton Letter at 2; CME  Letter at 4; SIA Letter
             at 15; PCX Letter at 8.

             [454]:Section  19(b)(1)  of  the  Exchange  Act,  15  U.S.C.
             78s(b)(1), requires an SRO to file  with  the Commission any
             proposed  rule  or any proposed rule change ("proposed  rule
             change") accompanied  by  a concise general statement of the
             basis and purpose of the proposal.   Once  a  proposed  rule
             change has been filed, the Commission is required to publish
             notice  of it and provide an opportunity for public comment.
             The proposed  rule  change  may not take effect unless it is
             approved  by the Commission or  is  otherwise  permitted  to
             become effective  under  Section  19(b) of the Exchange Act.
             Section 19(b)(2) of the Exchange Act,  15  U.S.C. 78s(b)(2),
             sets  forth  the  standards and time periods for  Commission
             action  either to approve  a  proposed  rule  change  or  to
             institute  and  conclude a proceeding to determine whether a
             proposed rule change  should  be disapproved. The Commission
             may also approve a proposed rule  change  on  an accelerated
             basis  if the Commission finds good cause for so  doing  and
             publishes  its  reasons for so finding.  Section 19(b)(2) of
             the Exchange Act, 15 U.S.C. 78s(b)(2)(B).

             [455]:See paragraph  (c) of Rule 19b-5, 17 CFR 240.19b-5(c),
             for the definition of "pilot trading system."

             [456]:17 CFR 249.821

             [457]:Rule 19b-5(f)(1)  and  (f)(2),  17 CFR 240.19b-5(f)(1)
             and (f)(2).  See also infra Section VI.C.

             [458]:Rule 19b-5(c)(3), 17 CFR 240.19b-5(c)(3).

             [459]:See infra Section VI.B.

             [460]:See Proposing Release, supra note  ,  at ns.256-61 and
             accompanying text.

             [461]:See Proposing Release, supra note , at n.261.

             [462]:See Ashton Letter at 2; SIA Letter at 15;  CME  Letter
             at 3; Amex Letter at 1; Bloomberg Letter at 6.

             [463]:Rule 19b-5(c)(2), 17 CFR 240.19b-5(c)(2).

             [464]:A  pilot  trading  system  is  "independent"  of other
             trading  systems if it meets one of the standards set  forth
             in paragraph (d) of Rule 19b-5.

             [465]:Rule 19b-5(c)(1), 17 CFR 240.19b-5(c)(1).

             [466]:Rule  19b-5(c)(3),  17  CFR 240.19b-5(c)(3).  See also
             infra Section VI.C.

             [467]:Rule 19b-5(d), 17 CFR 240.19b-5(d).   For  purposes of
             the pilot trading system rule, a specialist means any member
             subject  to  a  requirement  of  an  SRO  that  such  member
             regularly maintain a market in a particular security.   Rule
             19b-5(a), 17 CFR 240.19b-5(a).

             [468]:NYSE Letter at 9.

             [469]:ICI Letter at 5.

             [470]:See  CBOE Letter at 2, 9; CHX Letter at 11; CME Letter
             at 4; PCX Letter at 8-10.

             [471]:See CME Letter at 4; PCX Letter  at 9-10.

             [472]:See NASD Letter at 13; PCX Letter at 9-10.

             [473]:PCX Letter at 9-10.

             [474]:Amex Letter at 1, 3.

             [475]:See CBOE Letter at 9; CHX Letter at 11.

             [476]:See CBOE Letter at 9; NASD Letter at 2, 14.

             [477]:CHX Letter at 11.

             [478]:15 U.S.C. 78f(b)(5).

             [479]:See supra note  and accompanying text.

             [480]:Rule 19b-5(b), 17 CFR 240.19b-5(b).

             [481]:See supra notes - and accompanying text.

             [482]:See Section  6(b)(2)  of  the  Exchange Act, 15 U.S.C.
             78f(2).   See  also Order Handling Rules  Adopting  Release,
             supra note .

             [483]:The  Commission   is   not  adopting  the  requirement
             concerning  the  procedures  to  ensure   the   confidential
             treatment  of  trading  information  because  SROs  are  not
             currently  required  to  do  this with regard to their other
             trading systems.

             [484]:See discussion infra VI.B.3.i.

             [485]:CBOE Letter at 10.

             [486]:Examples include computer  companies  that  design and
             maintain systems and clearing agencies.

             [487]:Rule 19b-5(e)(1), 17 CFR 240.19b-5(e)(1).

             [488]:Rule 19b-5(g), 17 CFR 240.19b-5(g).

             [489]:Rule   19b-5(e)(1),   17   CFR  240.19b-5(e)(1).   The
             Commission requires that SROs identify filings made pursuant
             to Rule 19b-5 by including a file  number on Form PILOT that
             appears  as follows:  PILOT - name of  SRO  -  year  -  file
             number.

             [490]:CBOE Letter at 9.

             [491]:NYSE Letter at 9.

             [492]:Amex Letter, p. 2.

             [493]:American Century Letter, p. 6.

             [494]:Rule 19b-5(e)(11), 17 CFR 240.19b-5(e)(11).

             [495]:The  Commission  notes  that  registered exchanges and
             national securities associations already have obligations to
             ensure that their markets treat investors  and  other market
             participants  fairly.   The Exchange Act requires registered
             exchanges and national securities  associations  to consider
             the  public interest in administering their markets  and  to
             establish rules designed to admit members fairly.   Sections
             6(b)(2)  and  6(c)  of the Exchange Act, 15 U.S.C. 78f(b)(2)
             and (c); Section 15A(b)(8)  of  the  Exchange Act, 15 U.S.C.
             78o-3(b)(8).  See also supra notes - and accompanying text.

             [496]:Rule 19b-5(e)(2)(i), 17 CFR 240.19b-5(e)(2)(i).

             [497]:Rule 19b-5(e)(2)(ii), 17 CFR 240.19b-5(e)(2)(ii).

             [498]:Rule 19b-5(e)(2)(iii), 17 CFR 240.19b-5(e)(2)(iii).

             [499]:Rule 19b-5(e)(3), 17 CFR 240.19b-5(e)(3).

             [500]:The  Commission  believes  that  a  comprehensive  ISA
             requires  that  the  parties  provide  to  each other,  upon
             request,   information   about   market   trading,  clearing
             activity,  and the identity of the ultimate  purchasers  and
             sellers of securities.   See Securities Exchange Act Release
             No. 31529 (Nov. 27, 1992),  57  FR  57248  (Dec.  3,  1992).
             Similarly, an SRO that operates a pilot trading system  that
             trades  securities,  or  derivatives  of securities that are
             listed  or  traded  on  a  foreign  market,  should  have  a
             comprehensive ISA with such foreign markets.   In  addition,
             the SRO should ensure there are no blocking or secrecy  laws
             in  the foreign country that would prevent or interfere with
             the transfer of information under the comprehensive ISA.  If
             securing a comprehensive ISA is not possible, the SRO should
             contact  the  Commission.  In such instances, the Commission
             may determine that  it  is  appropriate instead to rely on a
             Memorandum of Understanding ("MOU")  between  the Commission
             and  the  foreign regulator.  Generally, the Commission  has
             permitted an  SRO  to  rely  on  an  MOU in the absence of a
             comprehensive ISA only if the SRO receives an assurance from
             the  Commission  that  such  an  MOU can be  relied  on  for
             surveillance  purposes  and  includes,  at  a  minimum,  the
             transaction, clearing, and customer information necessary to
             conduct  an  investigation.   See  Securities  Exchange  Act
             Release No. 35184 (Dec. 30, 1994),  60  FR  2616  (Jan.  10,
             1995).   In  addition,  an  SRO  should  endeavor to develop
             comprehensive ISAs with foreign exchanges  even  if  the SRO
             receives  prior  Commission  approval  to  rely on an MOU in
             place of a comprehensive ISA.

             [501]:See ISG Agreement, dated July 14, 1983,  amended  Jan.
             29, 1990.  The ISG members are:  Amex, BSE, CBOE, CHX, NASD,
             NYSE,   PCX,  and  Phlx.   The  major  stock  index  futures
             exchanges joined the ISG as affiliate members in 1990.

             [502]:Rule 19b-5(e)(4), 17 CFR 240.19b-5(e)(4).

             [503]:Rule 19b-5(e)(5), 17 CFR 240.19b-5(e)(5).

             [504]:15 U.S.C. 78l(f).

             [505]:See  Securities  Exchange  Act Release No. 39505 (Dec.
             31, 1997), 63 FR 1515 (Jan. 9, 1998 ).

             [506]:Rule 19b-5(e)(6), 17 CFR 240.19b-5(e)(6).

             [507]:See, e.g., Securities Exchange  Act Release Nos. 21759
             (Feb. 14, 1985), 50 FR 7250 (Feb. 21, 1985) (order approving
             NYSE proposal to trade options on NYSE-listed  stocks  in  a
             separate  physical  location from the equity trading floor);
             26147 (Oct. 3, 1988),  53  FR  39556  (Oct.  7, 1988) (order
             approving the trading on the Amex of options on  Amex-listed
             stocks,  concluding  that side-by-side trading or integrated
             market-making issues did not arise because the Amex proposed
             to trade stocks and related  options  in physically separate
             locations); and 28556 (Oct. 19, 1990), 55 FR 43233 (Oct. 26,
             1990)  (order  approving  rule  changes to  establish  rules
             governing  the  trading  of  stocks,   warrants,  and  other
             securities instruments and contracts on the CBOE conditioned
             on  the fact that trading in securities other  than  options
             will  take  place  on  a  trading  floor  separate  from the
             location where options are traded).

             [508]:Amex Letter at 4.

             [509]:CBOE Letter at 10.

             [510]:Rule 19b-5(e)(3), 17 CFR 240.19b-5(e)(3).

             [511]:Rule  19b-5(e)(7)(iii),  17  CFR 240.19b-5(e)(7)(iii),
             defines  related securities to mean any  two  securities  in
             which the  value  of one security is determined, in whole or
             significant part, by  the performance of the other security;
             or the value of both securities  is  determined, in whole or
             significant part, by the performance of  a  third  security,
             combination  of securities, index, indicator, interest  rate
             or other common factor.

             [512]:A specialist, for purposes of the pilot trading system
             rule, means any member that is subject to an SRO requirement
             to regularly maintain  a  market  in  a particular security.
             Rule  19b-5(a),  17  CFR  240.19b-5(a).  The  definition  of
             specialist is meant to preclude  member firms with exclusive
             information about buy and sell orders  from  using  unfairly
             such   non-public   material  market  information  to  their
             competitive advantage.   For  instance, a member acting as a
             specialist on the NYSE also could  not simultaneously act as
             a specialist in related securities on a pilot trading system
             sponsored  by the NYSE.  Similarly, a  member  acting  as  a
             designated primary  market  maker on the CBOE also could not
             simultaneously act as a designated  primary  market maker in
             related  securities  on a pilot trading system sponsored  by
             the CBOE.

             [513]:An   SRO  also  may  request  an  exemption  from  the
             limitation   under   Rule  19b-5(e)(7)(i)   by   filing   an
             application for an order  for exemptive relief under Section
             36.  See 17 CFR 240.0-12.

             [514]:Rule 19b-5(e)(7), 17 CFR 240.19b-5(e)(7).

             [515]:Rule 19b-5(e)(8), 17 CFR 240.19b-5(e)(8).

             [516]:Rule 19b-5(e)(9), 17 CFR 240.19b-5(e)(9).

             [517]:Rule  19b-5(e)(10),  17  CFR  240.19b-5(e)(10).   This
             specific  requirement is necessary  because  Rule  6a-2,  as
             amended, requires  exchanges  to  file its trading rules and
             procedures  only  once  every  three years,  while  national
             securities associations have no such publication requirement
             except through the rule filing process  under  Section 19(b)
             of the Exchange Act.

             [518]:Rule 19b-5(f)(1), 17 CFR 240.19b-5(f)(1).

             [519]:Rule  19b-5(f)(1)  and  (f)(2), 17 CFR 240.19b-5(f)(1)
             and (f)(2).

             [520]:It was recognized at the  time  the  Exchange  Act was
             enacted that a regulatory structure for securities exchanges
             would  "be  of  little  value tomorrow if it is not flexible
             enough to meet new conditions  immediately as they arise and
             demand attention in the public interest."   See  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 (1963) ("Special Study"),  at 6.  See
             also  S.  Rep.  No. 792, 73rd  Cong., 2d Sess. (1934)  at  5
             (noting  that "exchanges  cannot  be  regulated  efficiently
             under a rigid  statutory  program,"  and  that "considerable
             latitude  is  allowed  for  the  exercise  of administrative
             discretion in the regulation of both exchanges and the over-
             the-counter market.")

             [521]:15 U.S.C. 78c(a)(1).

             [522]:Delta Release, supra note .  In 1988,  the  Commission
             granted 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  of  the  City of Chicago v. Securities  and  Exchange
             Commission, 883 F.2d  525  (7th  Cir. 1989) ("Delta I").  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.

             [523]:See Delta Release, supra note .  The  Commission  also
             identified   the   following   factors   as  supporting  the
             conclusion that the system in Delta should not be classified
             as an exchange.  Unlike a traditional exchange,  the  system
             (1) was not open to the participation of retail investors on
             an  agency  basis; (2) did not offer limit order protection;
             and (3) provided a forum for trading instruments that lacked
             certain indicia  of  standardization.   These  factors  were
             admittedly  outside  the  Commissions  "central  focus"  in
             Delta.  Id.  Moreover, most alternative trading systems that
             will  fall  now under the Commissions new interpretation in
             Rule 3b-16 allow  broker-dealer subscribers to act on behalf
             of retail customers  in  placing and executing orders on the
             system;  function as limit  order  books  where  orders  are
             executed according  to  time,  price, and size priority; and
             trade standard securities.

             [524]:Board of Trade of the City of Chicago v. SEC, 923 F.2d
             1270 (7th Cir. 1991).

             [525]:For  a  list  of no-action letters  issued  to  system
             sponsors until the end  of  1993  and a short history of the
             Commissions  oversight  of  such  systems,  see  Securities
             Exchange Act Release No. 33605, 59 FR  8368,  8369-71  (Feb.
             18,  1994).   See  also  Letters from the Division of Market
             Regulation to: 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).

             [526]:Delta Release, supra note , at 1899.

             [527]:Id.

             [528]:Id.

             [529]:See supra note .

             [530]:The  rules  adopted  today   reflect   and  facilitate
             multiple  sources  of  liquidity.   Increasing the  linkages
             among markets where significant trading  activity  occurs --
             both exchanges and alternative trading systems -- will  make
             the  overall  market  for  securities  more  transparent and
             liquid.

             [531]:See Order Handling Rules Adopting Release,  supra note
             at Section III.

             [532]:In fact, an alternative trading system that posts firm
             orders  to  buy  or  sell  a  security  does raise a certain
             expectation  of  execution  at  those  quoted  prices.   The
             expectation is based on the life of the  outstanding  orders
             in   the   system,   rather  than  on  continuous  two-sided
             quotations published by specialists or market makers.

             [533]:See Delta Release, supra note , at 1900.

             [534]:Delta Release, supra note , at 1895 (quoting Delta I,
             supra note , at 535).

             [535]:Delta II, supra note , at 1273.  The court held that,
             because the statutory provision is ambiguous, the Commission
             had the discretion to interpret the definition the way it
             did.

             [536]:See Division of Market Regulation, Market 2000: An
             Examination of Current Equity Market Developments app IV
             (1994) ("Market 2000 Study").

             [537]:See Proposing Release, supra note , at n.290.

             [538]:For example, the evidence in the Commission's report
             on the NASD and the Nasdaq market pursuant to Section 21(a)
             of the Exchange Act suggests that widespread use of Instinet
             by market makers as a private market has had a significant
             impact on public investors and the operation of the Nasdaq
             market.  See NASD 21(a) Report, supra note .

             [539]: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 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)).  See also Arkansas AFL-
             CIO v. FCC, 11 F.3rd 1430, 1441 (8th Cir. 1993) (deferring
             to Federal Communications Commission decision to alter its
             interpretation of the statutory term "operated in the public
             interest" to meet the changing realities of the broadcast
             industry).

             [540]:See Concept Release, supra note , at nn.125-133 and
             accompanying text.

             [541]:This broad conception of "bringing together" buyers
             and sellers is consistent with the Delta Release, which
             emphasized that the means employed for bringing together
             buyers and sellers "may be varied, ranging from a physical
             floor or trading system ... 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)."  Delta Release, supra note ,
             at 1899.

             [542]:The elements of the interpretation are discussed in
             greater detail in Section III, supra.

             [543]:See TBMA Letter at 3-4.

             [544]:The Commission also notes that the statutory
             definition of "exchange" is written in the disjunctive:
             facilities for bringing together purchasers and sellers or
             facilities performing functions commonly performed by stock
             exchanges.  Section 3(a)(1) of the Exchange Act, 15 U.S.C.
             78c(a)(1).  See TBMA Letter, at 8-9 (recommending that the
             Commission continue to rely on its interpretation in the
             Delta Release); SIA Letter at 2, 6-7 (a significant
             characteristic of exchanges is structural features that
             create a reasonable expectation of the regular execution of
             orders at posted prices).  See also Letter from Christopher
             J. Carroll, Managing Director, Deutsche Bank Securities,
             Inc. to Jonathan G. Katz, Secretary, SEC, dated July 31,
             1998 ("DBSI Letter") at 2 ; NYSE Letter at 2-3, 4-5, 8
             (commenting that only alternative trading systems meeting
             the Delta interpretation of exchange should have the ability
             to register with the Commission as an exchange); Instinet
             Letter at 8 (recommending that the Commission retain its
             current interpretation of "exchange"); CBB Letter at 3
             (recommending that if the Commission believed its current
             interpretation of "exchange" in the Delta Release was
             inadequate, that the Commission should simply withdraw that
             interpretation and rely solely on the statutory definition
             of  "exchange").

             [545]: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 inappropriately
             subject many broker-dealers to exchange regulation.  One key
             factor in the Commission's decision not to regulate the
             Delta system as an exchange was the concern that doing so
             would subject traditional broker-dealer activities to
             exchange regulation.  Delta Release, supra note .

             [546]:Pub. L. 104-290, 110 Stat. 3416 (1996).  15 U.S.C.
             78mm.

             [547]: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, the
             Commission considered the implications of evolving market
             conditions on exchange regulation.  See Securities Exchange
             Act Release Nos. 8661 (Aug. 4, 1969), 34 FR 12952 (initially
             proposing Rule 15c2-10); 11673 (Sept. 23, 1975), 40 FR 45422
             (withdrawing then-proposed Rule 15c2-10 and providing for
             registration of securities information processors); 26708
             (Apr. 13, 1989), 54 FR 15429 (reproposing Rule 15c2-10);
             33621 (Feb. 14, 1994), 59 FR 8379 (withdrawing proposed Rule
             15c2-10).

             [548]:15 U.S.C. 78mm(a)(1).

             [549]:Prior to the addition of Section 36 to the Exchange
             Act, the Commission could only exempt an exchange from the
             registration provisions of Sections 5 and 6 on the basis of
             an exchanges limited volume of transactions.  See Section 5
             of the Exchange Act, 15 U.S.C. 78e.

             [550]:See S. Rep. No. 104-293, 104th Cong. 2d Sess. 15
             (1996).

             [551]:See supra Section IV.A.

             [552]:See supra IV.A.2.

             [553]:Because the rules and rule amendments regarding
             Regulation ATS, exchange registration, and Rule 19b-5
             constitute "major rules" within the meaning of the Small
             Business Regulatory Enforcement Act of 1996, 5 U.S.C. 801 et
             seq., the rules and rule amendments cannot take effect until
             60 days after the date of publication in the Federal
             Register.  Although the amendments to Rules 17a-3 and 17a-4
             and repeal of Rule 17a-23 and Form 17A-23 do not constitute
             "major rules," they will become effective at the same time
             as Regulation ATS because they operate in an integrated
             fashion with Regulation ATS.

             [554]:See ICI Letter at 4 (stating that requirements would
             be overly burdensome for alternative trading systems); IBEX
             Letter at 13 (arguing that appeal process should begin at
             the SRO level); Instinet Letter at 19 (stating that a right
             of appeal to the Commission could lead to frequent frivolous
             appeals).

             [555]:TBMA Letter at 16.

             [556]:SIA Letter at 17-18.  But see IBEX Letter at 5
             (stating that the reporting requirements under proposed
             Regulation ATS were not inappropriately burdensome).

             [557]:CBB Letter at 4.

             [558]:Instinet Letter at 20.

             [559]:Instinet Letter at 10.

             [560]:See supra  Section IV.A.2.c.

             [561]:See IBEX Letter at 5; SIA Letter at 18; American
             Century Letter at 6.

             [562]:See TBMA Letter at 6-7, 21; SIA Letter at 3, 11; DBSI
             Letter at 1; MSDW Letter at 13.

             [563]:See NYSE Letter at 6; IBEX Letter at 2-3.

             [564]:Rule 301(b)(5), 17 CFR 242.301(b)(5).

             [565]:Rule 301(b)(6), 17 CFR 242.301(b)(6).

             [566]:The Office of Management and Budget has recognized
             that although it may be difficult to quantify the benefits
             of price transparency, "[t]here is a strong consensus among
             economists that regulations requiring the disclosure of
             information about the price and quality of products and
             services can produce significant benefits for consumers and
             improve the functioning of markets when this information
             would not otherwise be available."  Office of Management and
             Budget, Draft Report to Congress on the Costs and Benefits
             of Federal Regulations, 63 FR 44034 (Aug. 17, 1998).

             [567]:See supra note .  Under the Order Handling Rules,
             market makers who enter orders on ECNs are required to
             reflect those prices in their public quotations.  In the
             alternative, the ECN can make the best market maker prices
             publicly available through an SRO.

             [568]:See supra note .

             [569]:This estimate is based on filings made with the
             Commission under Rule 17a-23.  At the time of the Proposing
             Release, the Commission estimated that forty-three
             alternative trading systems would be required to register as
             exchanges or broker-dealers and comply with Regulation ATS.
             The Commission now estimates that there are forty-five
             alternative trading systems operating.

             [570]:Based on the Commissions experience over the last
             three years with Rule 17a-23, it appears that there are more
             than three new alternative trading systems per year.
             However, we expect that in the future, there will be
             approximately three new alternative trading systems per
             year.  The rapid growth experienced over the last several
             years is unlikely to continue in perpetuity.

             [571]:A number of ECNs, however, currently display the best
             order in their system in the public quote,  regardless of
             whether that order is entered by an institution, market
             maker or another broker-dealer although the Commissions
             Order Handling Rules only require the display of market
             maker orders.  Thus, institutional orders sent to these
             systems are already displayed to the public.

             [572]:When the Order Handling Rules were implemented on
             January 17, 1997, four ECNs linked to Nasdaq.  Today there
             are a total of nine ECNs linked to the public quote stream.
             See supra note .

             [573]:Section 11A(a)(1)(C) of the Exchange Act, 15 U.S.C.
             78k-1(a)(1)(C).

             [574]:Under the Order Handling Rules, ECNs are limited to
             charging non-subscribers fees consistent with equivalent
             access.

             [575]:Section 3(f) of the Exchange Act, 15 U.S.C. 78c(f).

             [576]:The amount to be paid to the CTA plan will vary on a
             case-by-case basis and may reflect a current independent
             valuation of the CTA facilities, prior valuations, an
             assessment of costs contributed to the plan by existing
             members, the estimated usage of the plan facilities by the
             applicant, costs for anticipated system modifications to
             accommodate the applicant, and other relevant factors as
             determined by the current participants.  CTA Plan:  Second
             Restatement of Plan Submitted to the Securities and Exchange
             Commission Pursuant to Rule 11Aa3-1 under the Securities
             Exchange Act of 1934, May 1974 as restated March 1980 and
             December 1995, at 8-9.  See supra note .  The terms of the
             CQ plan are substantially similar with respect to the
             assessment of a payment upon entry into the system.  CQ
             Plan: Restatement of Plan Submitted to the Securities and
             Exchange Commission Pursuant to Rule 11Ac1-1 under the
             Securities Exchange Act of 1934, July 1978, as restated
             December 1995, at 8-9.  See supra note .

             [577]:Plan for the Purpose of Creating and Operating an
             Intermarket Communication Linkage Pursuant to Section
             11A(a)(3)(B) of the Securities Exchange Act of 1934,
             Composite: Amendments through May 30, 1997, at 78-79.

             [578]:17 CFR 240.11Ac1-1.

             [579]:The Commission estimates that each national securities
             exchange or national securities association will submit
             information to vendors approximately 24,266,000 times per
             year, which reporting is generally done through automated
             facilities that conduct the reporting on a continuous basis.
             Due to the continuous nature of the information feeds, the
             Commission does not believe that it is feasible to estimate
             the average cost per response or annual burdens hours
             involved in complying with Rule 11Ac1-1(b) for a new
             registered exchange.  17 CFR 240.11Ac1-1(b).

             [580]:See supra Section III.B.1.

             [581]:See NYSE Letter at 10; Amex Letter at 5-6.

             [582]:For example, the International Securities Exchange,
             which announced its intentions to register as a national
             securities exchange on November 10, 1998, would not be able
             to register as a national securities exchange without the
             changes to the rules as adopted today.  See International
             Securities Exchange Will be First Fully Electronic Options
             Exchange in U.S., International Securities Exchange Press
             Release, Nov. 10, 1998.

             [583]:TBMA Letter at 25-26.

             [584]:The costs and benefits associated with these
             recordkeeping requirements are discussed in Section
             IX.A.2.a. supra.

             [585]:CBOE Letter at 8-9.

             [586]:See CME Letter at 3-4; PCX Letter at 8.

             [587]:The Commission estimates that the current preparation
             and filing of proposed rule changes pursuant to Section
             19(b)(2) of the Exchange Act to operate a pilot trading
             system constitute major market impact filings requiring
             approximately 100 hours and $10,000 to $15,000 of SRO time
             and money, respectively, for each proposal.  This does not
             include the cost to the SRO of any delay in obtaining
             Commission approval or in disclosing business information;
             nor does this include the benefit to an SRO of bringing its
             new pilot trading system to market in a shorter amount of
             time.  The cost per hour and per filing is derived from
             information supplied by the SROs.  For the purposes of our
             estimates, we have valued related overhead at thirty-five
             percent of the value of legal work.  See GSA Guide to
             Estimating Reporting Costs (1973).

             [588]:The Commission estimates that under current
             procedures, a rule filing for a new pilot trading system
             takes 90 days, on average, from the date of the original
             submission to be approved.  In contrast, the expedited
             treatment of SRO rule changes for pilot trading systems in
             this release permits SROs to operate a pilot trading system
             twenty days after submitting an initial operation report on
             Form PILOT, so long as such system complies with Rule 19b-5
             under the Exchange Act.

             [589]:15 U.S.C. 78w(a)(2).

             [590]:15 U.S.C. 78c(f).

             [591]:The Commission further believes that repealing Rule
             17a-23 and amending Rules 17a-3 and 17a-4 under the Act will
             help to create a more efficient market, encourage
             competition, and stimulate capital formation innovation.

             [592]:As previously stated, alternative trading systems are
             able to attract subscribers because prices in their systems
             are often better than the prices available in the public
             markets.  Because alternative trading systems are now
             required to publicly display their best priced orders for
             securities in which they represent more than 5 percent of
             the trading volume, the best priced orders for certain
             securities will also be available through the public
             markets.  Consequently, some subscribers could leave an
             alternative trading system if they think there are fewer
             advantages than before in having direct access to the
             alternative trading system.  However, the growth of ECNs
             since the Order Handling Rules were implemented indicates
             that alternative trading systems can, and are, attracting
             subscribers.  As mentioned above, there are still
             significant benefits to being a subscriber to an alternative
             trading system, including, but not limited to:  the ability
             to enter orders and the use of such features as a
             negotiation feature or a "reserve size" feature; the ability
             to access the best priced orders for securities in which an
             alternative trading system represents less than 5 percent of
             the trading volume and therefore is not subject to the
             transparency requirements; and access to the entire "book,"
             not merely the "top of the book," that contains important
             real-time market information regarding depth of trading
             interest.

             [593]:5 U.S.C. 604.

             [594]:17 CFR 240.3a1-1.

             [595]:17 CFR 240.3b-16.

             [596]:17 CFR 240.19b-5.

             [597]:17 CFR 242.300 et seq.

             [598]:17 CFR 242.637.

             [599]:17 CFR 242.638.

             [600]:17 CFR 249.821.

             [601]:17 CFR 240.6a-1.

             [602]:17 CFR 240.6a-2.

             [603]:17 CFR 240.6a-3.

             [604]:17 CFR 240.11Ac1-1.

             [605]:17 CFR 240.17a-3.

             [606]:17 CFR 240.17a-4.

             [607]:17 CFR 202.3.

             [608]:17 CFR 240.17a-23.

             [609]:15 U.S.C. 78a et seq.

             [610]:See supra note .

             [611]:44 U.S.C.  3507.

             [612]:For a further discussion of the changes, see the
             discussions of Rule 301, Form ATS, Form ATS-R, Rule 302, and
             Rule 303, infra.

             [613]:The estimated average additional cost per response of
             $30 is derived from two additional hours of clerical work at
             $15 per hour.

             [614]:Since 1991, the Commission has received three total
             applications for registration as a national securities
             exchange.

             [615]:The estimated average cost per response of $9.50 is
             composed of $7.50 for clerical work (0.5 hours at $15 per
             hour) and $2 for printing, supplies, copying, and postage
             (approximately thirty-five percent of the total labor
             costs).  The Commission staff has estimated overhead for
             this collection of information burden, and all other
             collection of information burdens discussed below, based on
             thirty-five percent of total labor costs based on the GSA
             Guide to Estimating Reporting Costs (1973).  The estimated
             average annual cost of $237.50 is derived from twenty-five
             annual filings at a cost of $9.50 per filing.

             [616]:The Commission staff has estimated that an employee of
             a broker-dealer charged to ensure compliance with Commission
             regulations receives annual compensation of $100,000.  This
             compensation is the equivalent of $48.08 per hour ($100,000
             divided by 2,080 payroll hours per year).  The estimated
             annual cost of $1,298.16 is derived from twenty-seven burden
             hours per respondent at $48.08 per hour.

             [617]:The estimated aggregate burden of 2,619 hours is
             derived from ninety-four broker-dealer respondents incurring
             an average burden of twenty-seven hours each.  The estimated
             aggregate cost of $122,027.04 is derived from ninety-four
             broker-dealer respondents incurring an average burden of
             $1,298.16 each.

             [618]:The Commission staff has estimated that an employee of
             a broker-dealer charged to ensure compliance with Commission
             regulations receives annual compensation of $100,000.  This
             compensation is the equivalent of $48.08 per hour ($100,000
             divided by 2,080 payroll hours per year).  The estimated
             annual cost of $144.24 is derived from three burden hours
             per respondent at $48.08 per hour.

             [619]:The estimated aggregate burden of two hundred eighty-
             two hours is derived from ninety-four broker-dealer
             respondents incurring an average burden of three hours each.
             The estimated aggregate cost of $13,558.56 is derived from
             ninety-four broker-dealer respondents incurring an average
             burden of $144.24 each.

             [620]:This estimate is based on a review of past SRO filings
             under Section 19(b) of the Exchange Act.  The Commission
             staff has estimated that approximately 6 rule filings per
             year in the past could have been filed under Rule 19b-5.

             [621]:The estimates for burden hours involved with filing
             Form PILOT are based on the Commissions experience with
             similar reporting requirements under Rule 17a-23.

             [622]:This estimate is based on the Commissions experience
             with collection of similar information under Rule 17a-23.

             [623]:The estimated average cost of $1,242 to file an
             initial Form PILOT is composed of $800 for in-house
             professional work (sixteen hours at $50 per hour), $120 for
             clerical work (eight hours at $15 per hour) and $322 for
             printing, supplies, copying, and postage (approximately
             thirty-five percent of the total labor costs).

                  The estimated average cost of $155 to file quarterly
             reports and system change notices on Form PILOT is composed
             of $100 for in-house professional work (two hours at $50 per
             hour), $15 for clerical work (one hour at $15 per hour) and
             $40 for printing, supplies, copying and postage
             (approximately thirty-five percent of the total labor
             costs).

             [624]:The estimated average burden of one hundred forty-four
             hours is derived from six SRO respondents incurring an
             average burden of twenty-four hours per filing.  The
             estimated average cost of $7,452 is derived from six SRO
             respondents making six initial Form PILOT filings at $1,242
             per filing.

             [625]:The estimated average burden of one hundred eight
             hours is derived from six SRO respondents filing four
             quarterly reports and two systems change notices at three
             burden hours per filing. The estimated average cost of
             $5,580 is derived from six SRO respondents filing four
             quarterly reports and two systems change notices at $155 per
             filing.

             [626]:This estimate is based on filings made with the
             Commission under Rule 17a-23.  At the time of the Proposing
             Release, the Commission estimated that forty-three
             alternative trading systems would be required to register as
             exchanges or broker-dealers and comply with Regulation ATS.
             Since that time, two such alternative trading systems have
             started to operate.

             [627]:Based on the Commissions experience over the last
             three years with Rule 17a-23, it appears that there are more
             than three new alternative trading systems per year.
             However, we expect that in the steady state over time, there
             will be approximately three new alternative trading systems
             per year.  The rapid growth experienced over the last
             several years is unlikely to continue at such a high rate in
             perpetuity.

             [628]:This estimate for burden hours of filing Form ATS is
             based on the burdens associated with filing Form 1, adjusted
             for differences between Form 1 and Form ATS.  The division
             between professional and clerical time is based on estimates
             of the proportions used in the estimates of burdens for
             filing Form 1.

             [629]:The estimated average cost per response of $1,019 is
             composed of $650 for in-house professional work (thirteen
             hours at $50 per hour), $105 for clerical work (seven hours
             at $15 per hour) and $264 for printing, supplies, copying,
             and postage (approximately thirty-five percent of the total
             labor costs).

             [630]:This estimated cost of $45,855 is derived from forty-
             five alternative trading systems filing at an average cost
             of $1,019 each.

             [631]:This estimated cost of $3,057 is derived from three
             new alternative trading systems filing at an average cost of
             $1,019 each.

             [632]:This estimate is based on the Commissions experience
             with collection of similar information under Rule 17a-23.

             [633]:The estimated average cost per response of $111.50 is
             composed of $75 for in-house professional work (1.5 hours at
             $50 per hour), $7.50 for clerical work (0.5 hours at $15 per
             hour), and $29 for printing, supplies, copying, and postage
             (approximately thirty-five percent of the total labor
             costs).

             [634]:This estimated cost of $30,105 is composed of $111.50
             cost per amendment for forty-five alternative trading
             systems filing six times per year.

             [635]:The estimated cost of $223 per response is composed of
             $150 for in-house professional work (three hours at $50 per
             hour), $15 for clerical work (one hour at $15 per hour) and
             $58 for printing, supplies, copying, and postage
             (approximately thirty-five percent of the total labor
             costs).

             [636]:The estimated annual cost of $892 to file Form ATS-R
             is derived from four quarterly reports at an estimated
             annual cost of $223 per filing.

             [637]:This estimated cost of $40,140 is derived from forty-
             five alternative trading systems with an estimated annual
             filing cost for each of $892.

             [638]:The estimated cost of  $111.50 per response is
             composed of  $75 for in-house professional work (1.5 hours
             at $50 per hour), $7.50 for clerical work (0.5 hours at $15
             per hour), and $29 for printing, supplies, copying and
             postage (approximately thirty-five percent of the total
             labor costs).

             [639]:The estimated cost of $334.50 is derived from an
             average of three alternative trading systems filing one
             cessation of operations report per year on Form ATS at an
             estimated cost of $111.50 each.

             [640]:The estimated burden of seventeen hours is derived
             from five hours for establishing and maintaining standards
             for fair access and twelve hours to report fair access
             information on Form ATS-R on a quarterly basis (four
             responses at three hours per response).  The estimated cost
             of $958.50 is derived from $650 for professional work
             (thirteen hours at $50 per hour), $60 for clerical work
             (four hours at $15 per hour), and $248.50 for printing,
             supplies, copying, and postage (approximately thirty-five
             percent of the total labor costs).  The Commission staff has
             estimated overhead based on thirty-five percent of total
             labor costs based on the GSA Guide to Estimating Reporting
             Costs (1973).  The estimated burden of thirteen hours of
             professional work is derived from five hours for
             establishing and maintaining standards for fair access and
             eight hours (two hours for four quarterly reports on Form
             ATS-R) to compile and report fair access information.  The
             estimated burden of four hours of clerical work is derived
             from one hour per quarter to compile and send information on
             Form ATS-R.

             [641]:The Commission notes that compliance with the notice
             provision can be achieved by a telephone call, so the burden
             for each notice is minimal.  The Commission staff has
             estimated only 0.25 hours per notice will be required.  The
             estimate of five system outage notices per year is based on
             the Commissions experience with the Automated Review
             Program.

             [642]:The estimated average cost per response of $17 is
             composed of $12.50 for in-house professional work (0.25
             hours at $50 per hour) and $4.50 for printing, supplies,
             copying, and postage (approximately thirty-five percent of
             the total labor costs). The estimated annual cost of $85 is
             derived from five notices at $17 per notice.

             [643]:The total estimated cost of $675 is composed of $500
             for in-house professional work (ten hours at $50 per hour)
             and $175 for printing, supplies, copying, and postage
             (approximately thirty-five percent of the total labor
             costs).

             [644]:The estimated aggregate cost of $1,520 is derived from
             two alternative trading systems incurring an estimated
             annual cost of $760 each ($85 for providing systems outage
             notices and $675 for recordkeeping requirements).

             [645]:The estimated cost of $1,730.88 is derived from an
             average of thirty-six hours of compliance time at $48.08 per
             hour.  The value of compliance time is estimated as follows:
             an employee of a broker-dealer charged to ensure compliance
             with Commission regulations receives estimated annual
             compensation of $100,000.  This compensation is the
             equivalent of $48.08 per hour ($100,000 divided by 2,080
             payroll hours per year).

             [646]:This estimated cost of $77,889.60 is derived from
             forty-five alternative trading systems incurring an annual
             cost of $1,730.88 each.

             [647]:The estimated cost of $192.32 is derived from an
             average of four hours of compliance time at $48.08 per hour.
             The value of compliance time is estimated as follows: an
             employee of a broker-dealer charged to ensure compliance
             with Commission regulations receives estimated annual
             compensation of $100,000.  This compensation is the
             equivalent of $48.08 per hour ($100,000 divided by 2,080
             payroll hours per year).

             [648]:This estimated cost of $8,654.40 is derived from
             forty-five alternative trading systems incurring an annual
             cost of $192.32 each.