U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

22–158 PDF 2005

THE SEC’S MARKET STRUCTURE PROPOSAL:

WILL IT ENHANCE COMPETITION?

HEARING

BEFORE THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE AND 

GOVERNMENT SPONSORED ENTEREPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

FEBRUARY 15, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–2

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

JIM GERLACH, Pennsylvania 

KATHERINE HARRIS, Florida 

JEB HENSARLING, Texas 

RICK RENZI, Arizona 

GEOFF DAVIS, Kentucky 

MICHAEL G. FITZPATRICK, Pennsylvania 

MICHAEL G. OXLEY, Ohio 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

ARTUR DAVIS, Alabama 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

February 15, 2005 ............................................................................................ 1

Appendix: 

February 15, 2005 ............................................................................................ 53

WITNESSES 

TUESDAY, FEBRUARY 15, 2005

Andresen, Matt, President, Citadel Execution Services ....................................... 16

Bang, Kim, President and Chief Executive Officer, Bloomberg Tradebook 

LLC ........................................................................................................................ 22

Britz, Robert G., President and Co-Chief Operating Officer, New York Stock 

Exchange, Inc. ...................................................................................................... 12

Dwyer, Carrie E., General Counsel, The Charles Schwab Corporation .............. 14

Greifeld, Robert, President and Chief Executive Officer, The Nasdaq Stock 

Market, Inc. .......................................................................................................... 25

Joyce, Thomas M., President and Chief Executive Officer, Knight Trading 

Group, Inc. ............................................................................................................ 20

McCooey, Robert H. Jr., President and Chief Executive Officer, The Griswold 

Company, Inc. ....................................................................................................... 18

Nicoll, Edward J., Chief Executive Officer, Instinet Group Incorporated .......... 9

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 54

Kanjorski, Hon. Paul E. ................................................................................... 56

King, Hon. Peter T. .......................................................................................... 58

Gillmor, Hon. Paul E. ....................................................................................... 60

Andresen, Matt ................................................................................................. 62

Bang, Kim ......................................................................................................... 89

Britz, Robert G. ................................................................................................ 114

Dwyer, Carrie E. ............................................................................................... 129

Greifeld, Robert ................................................................................................ 135

Joyce, Thomas M. ............................................................................................. 166

McCooey, Robert H. Jr. .................................................................................... 176

Nicoll, Edward J. (with attachments) ............................................................. 184

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

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

(1)

THE SEC’S MARKET STRUCTURE PROPOSAL: 

WILL IT ENHANCE COMPETITION? 

Tuesday, February 15, 2005

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE

AND GOVERNMENT SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to call, at 3:00 p.m., in Room 

2128, Rayburn House Office Building, Hon. Richard H. Baker 

[chairman of the subcommittee] Presiding. 

Present: Representatives Baker, Shays, Bachus, Fossella, 

Biggert, Kennedy, Barrett, Brown-Waite, Feeney, Harris, 

Hensarling, Davis, Fitzpatrick, Oxley (ex officio), Kanjorski, Ackerman, Sherman, Hinojosa, Israel, Clay, McCarthy, Baca, Miller of 

North Carolina, Scott, Watt, Bean, and Wasserman Schultz. 

Chairman BAKER. I would like to call the meeting of Capital 

Markets Subcommittee to order and welcome all of our witnesses 

at our rather cramped quarters today. The subcommittee meets 

today for the purpose of reviewing the market structure proposal 

under consideration currently by the SEC. 

The proposed regulation NMS is aimed at the subject of modernization of United States securities markets. Supplemented in 

May of this year or, excuse me, of 2004 with the filing extending 

the comment period till June, the regulation has provoked a great 

deal of discussion and controversy. 

Comments on the proposed rule were due January 26 of this 

year. It centers around three principal aspects of the current securities market. The 212-year-old New York Stock Exchange, which 

is clearly the leading stock option market not only in the United 

States but in the world, lists over 2,800 countries. New York Stock 

Exchange members representing individual and institutional investors bring their orders to buy and sell New York list stocks to specialists on the floor, electronically, or through a floor broker. 

On a similar but slightly different path, the NASDAQ is the largest U.S. electronic market, listing over 3,300 companies and unlike 

the New York exchange, NASDAQ is a dealer market where buyers 

and seller purchase a share from the dealer or market maker 

through telecommunications capabilities. 

The most recent development in market centers is the growth of 

the electronic communications network. Until the 1990s, NASDAQ 

was the dominant trading in NASDAQ listed securities. ECNs have 

initiated a different methodology of operation from the New York 

exchange or from the NASDAQ. There are no third party middleVerDate 0ct 09 2002 14:06 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\DOCS\22158.TXT FIN1 PsN: MICAH
2

men, specialist market makers. Buyers and sellers actually meet 

directly and electronically. And today, two of the leading ECNs, 

Instinet and Bloomberg, account for about 25 percent of the trading 

volume in NASDAQ listed securities. 

These developments have obviously caused market observers and 

participants to question the current regulatory structure and 

whether any efficiencies might accrue by a change of rule. The rule 

does focus on the question of the trade-through rule, its appropriateness, market access, market data and sub-penny quotations. 

Via the trade-through rule, market participants are prohibited 

from ignoring or trading through to the best price available and 

executing a trade at an inferior price, even if the investor so chooses. Some broker dealers and investment advisors contend this rule 

has a resulting anti-competitive effect. 

There is also a discussion as to whether disclosure of top of book, 

Market Best Bid and Offer should be the required disclosure or 

whether depth of book which would allow participants to voluntarily display several levels of bids and offers away from the Best 

Bid and Offer. 

I can go on with what really is ultimately a complex subject and 

the decisions of which will have broad and long standing effect on 

market function in this country. I do wish to make a comment at 

the outset, however, that without regard to one’s view of the tradethrough’s applicability in the New York exchange, I am hoping 

today to get a good understanding of the proposal’s intent to apply 

the trade-through to the NASDAQ and the logic of making that the 

order of the day. 

I do believe that our hearing will be productive. We have diverse 

opinions represented, and more importantly, we have very educated and insightful individuals as market participants who have 

been willing to come here today. 

And let me extend a brief word of apology to all. I was ready this 

morning. Delta said they were ready; you know, they are ready 

when you are. I got there at 5:50 this morning, and they were not 

ready. So for that reason, I had to make the untimely announcement of the delay. And I know that caused each of you some personal inconvenience, for which I regret. 

But to put a fine point on it, I really wanted to be here for this 

hearing and felt it appropriate to make that request. So thank you 

for your courtesies extended. 

With that, I would recognize Mr. Kanjorski for his opening statement. 

Mr. KANJORSKI. Thank you, Mr. Chairman. Mr. Chairman, as the 

old joke goes, that is one. So you have two more shots, and then 

we shoot you. Mr. Chairman——

Chairman BAKER. I will save you the trouble. Just do it now. 

Mr. KANJORSKI. Mr. Chairman, today, we meet for the fifth time 

in the last 16 months to evaluate the need for further reforms in 

the organization of our capital markets. The ongoing deliberations 

over the National Market System have engendered strong emotions 

and considerable debate. 

As I have regularly observed in our previous hearings, a variety 

of agents in our equities markets have questioned one or more aspect of the regulatory system during the last several years. TechnoVerDate 0ct 09 2002 14:06 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\DOCS\22158.TXT FIN1 PsN: MICAH
3

logical advances and competitive developments have also led us to 

a crossroads in the securities industry, forcing us to confront a 

number of decisions that could fundamentally alter its organization 

for many years to come. 

One year ago, the Securities and Exchange Commission put forth 

four interrelated proposals to reshape the structure and operations 

of our equities markets. After reviewing the comments that it received regarding these matters, the commission made a number of 

striking changes in its original plan and republished them for comment this past December. 

Mr. Chairman, as you already know, I have made investor protection one of my highest priorities for work on this committee. It 

is therefore my very strong expectation that the commission first 

and foremost will ensure that it protects the interests of average 

American investors in any decision it finally reaches regarding the 

future of the National Market System. 

Given my interest in protecting retail investors, I was very 

pleased that the commission decided to retain the trade-through 

rule when issuing its latest regulatory proposal. As one of the foundations of our National Market System this regulation has insured 

that all investors get the best price that our securities markets 

have to offer regardless of the location of the transaction. 

The approval of an opt-out provision for the trade-through rule 

will have likely splintered our securities markets, decreased liquidity, limited price discovery and damaged our economy. Today, I also 

suspect that many of our witnesses will focus on the commission’s 

newest proposal to alter the trade-through rule. 

In addition to applying the trade-through rule to all securities 

marketplaces, the commission’s latest plan for updating the National Market System includes two alternatives for implementation, the Market Best Bid or Offer Alternative and the Volunteer 

Depth Alternative. 

Although some of our witnesses may disagree, the former approach, in my view, is the one that the commission should choose 

as it better protects investors, fosters competition between and 

within markets, and incentivizes markets to attract the most aggressive orders. 

Also, the Voluntary Depth Alternative seems inconsistent with 

the goals of the National Market System in that it would undercut 

efforts to promote robust competition between markets. Moreover, 

the Voluntary Depth Alternative will almost certainly result in 

only one way for the markets to differentiate themselves, namely, 

how much they are willing to pay other market participants for 

their order flow. 

In my view, promoting competition based on payment for order 

flow will improve—will prove detrimental in the long-term to average retail investors because the conflicts of interest it creates. This 

issue is one that the commission should carefully study and one 

that I hope our panelists will address in their comments and answers today. 

Ultimately, the commission can best ensure that investors obtain 

the best price by balancing competition between markets with protection of the best prices in each marketplace. From my perspective, the incremental approach contained in the Market Best Bid 

4

or Offer Alternative is preferable. The adoption of this alternative 

will also help to ensure that the United States maintains its global 

leadership in our financial markets. 

In closing, Mr. Chairman, it is appropriate for our panel to conduct continued oversight on these complex issues. The observation 

of today’s witnesses about these matters will further help me to 

discern how we can maintain the efficiency, effectiveness and competitiveness of our Nation’s capital markets for many years to 

come. 

[The prepared statement of Hon. Paul E. Kanjorski can be found 

on page 56 in the appendix.] 

Chairman BAKER. I thank the gentleman. 

Mr. Shays, do you have a statement? 

Mr. SHAYS. Just for the purposes of introduction, I want to extend a warm welcome to Bob Greifeld of the NASDAQ market 

whose nerve center is located in the Fourth Congressional District. 

As I do this, I am thinking probably some of you also live in the 

Fourth Congressional District. 

Bob has done a tremendous job improving NASDAQ strategy direction since he joined the company in 2003, and I am told his 

graduate thesis at Stern School, where I also went, was on operation of the NASDAQ marketplace. So it seems to me he was the 

perfect match for the company and probably why he actually did 

his thesis. 

Bob is an active speaker on market structure and regulatory 

issues, and I am pleased he could join our other distinguished 

guests here today to provide his thoughts on the SEC proposal. 

Could I ask, is there anyone else in the Fourth Congressional 

District? 

Bob lives in New Jersey. 

Welcome. Thank you. 

I tell people, being on the Finance Committee from the Fourth 

Congressional District of Connecticut is like being—living in Iowa 

and being on the Agriculture Committee. 

Chairman BAKER. Thank you Mr. Shays. 

Mr. Ackerman. 

Mr. ACKERMAN. I just want to thank the Chairman and the 

Ranking Member for calling this hearing, and I am anxious to hear 

from the witnesses. 

Chairman BAKER. I thank the gentleman. 

Mr. Bachus. 

Mr. BACHUS. I thank the chairman. 

I am not going to ask how many of you are from Alabama. First 

of all, I thank Chairman Baker for his leadership on the issue. As 

you know, a significant part of the proposed reg NMS purports to 

reform the so-called trade-through rule and extend its application 

marketwide or intermarket. While the repeal of the trade-through 

rule makes more sense, the SEC appears to be past that point. 

According to the SEC’s own studies, the trade-through problems 

in the New York Stock Exchange and NASDAQ markets are roughly the same and not very large. About 2.5 percent of the trades are 

traded through in both markets. 

So why extend the rule into the market that does not have one, 

the NASDAQ? 

5

A trade-through rule is unnecessary for the NASDAQ market 

and, if anything, would reduce execution quality by slowing down 

the execution times. A more appropriate approach, I would suggest 

would be to reform the trade-through rule and the listed market, 

the NYSE, where there is already such a rule but where clearly the 

rule is flawed. 

Once the SEC is confident that they have reformed, that they 

have a reform rule or they have the reform rule right, then consideration could be given to extending the rule’s application to the 

NASDAQ market. 

Just a short suggestion, short statement. 

Thank you Chairman Baker. 

Look forward to hearing from our witnesses. 

Chairman BAKER. I thank the gentleman. 

Mr. Israel. 

Mr. ISRAEL. Thank you Mr. Chairman. Thank you for convening 

this hearing. 

In the interest of the committee’s time, I will insert my statement for the record. I want to give them more time to speak than 

me. 

Chairman BAKER. I thank the gentleman for his leadership. 

Mr. Fossella. 

Mr. Hensarling, did you have a statement? 

Mr. HENSARLING. Thank you Mr. Chairman. 

First, hailing from the Dallas Fort Worth metroplex, home of 

American Airlines, I might point out, Mr. Chairman, they got me 

here on time this morning. And as we explore increased competition within the securities market, we may want to explore it in the 

airline arena as well. 

I appreciate the chairman for holding this hearing. As a believer 

in the free market system, I believe that Congress must constantly 

search for ways to foster more competition within our financial 

markets and allow them to become more efficient. 

Along these lines, I have paid particularly close attention to the 

SEC’s reg NMS proposal. It is my opinion that the nearly 30-yearold trade-through rule is too limited in scope to take into account 

the many factors that investors consider when executing trades in 

today’s modern high-speed markets. And I have great concerns 

about any expansion of this arguably antiquated rule. And I certainly do not need to be convinced that more government mandates 

typically lead to less private sector innovation. 

I hope that this debate will continue to focus on what enhances 

competition and thus what is best for the American consumer, because only each individual investor knows what his short-term and 

long-term goals are. And certainly, institutional investors have different priorities. I question whether this rule truly protects investors in today’s, much less tomorrow’s, high-speed markets. 

I am additionally unconvinced that reg NMS should favor one 

particular market or market structure. Instead, shouldn’t we be 

trying to foster and encourage competition between markets? 

So as the SEC continues to determine how best to revise the regulation, it is my hope that they will keep in mind the importance 

of free and open competition in the American economy and the role 

that we have as a world leader in financial services. 

6

Thank you Mr. Chairman. I yield back. 

Chairman BAKER. I thank the gentleman. 

Mrs. McCarthy. 

Mrs. MCCARTHY. Thank you, Mr. Chairman, I also will submit 

my questions, and I am actually looking forward to hearing from 

the committee. 

Chairman BAKER. I thank the gentlelady. 

Mr. Fitzpatrick. 

Mr. FITZPATRICK. Thank you Mr. Chairman. 

And to the distinguished panel of experts who are prepared to 

give testimony today, I appreciate your taking the time to be here. 

Even though I am new to this committee and to these rather complicated market structure issues, it seems that market forces and 

technological advances have made trading stocks today much more 

efficient and transparent than ever before. 

With decimalization and the rise of electronic trading, investors 

today are receiving better prices and faster trades than they were 

say just 5 years ago. Despite the wide-ranging viewpoints of our exceptional panel of witnesses, we can all agree that the work must 

still be done to fully modernize the structure of our equity markets. 

I commend the Securities and Exchange Commission for its timely 

proposal, regulation NMS, which aims to complete this modernization. 

However, one part of the proposal, extending the trade-through 

rule, does not appear to much offer efforts to modernize our equity 

markets. I am apprehensive about government regulations that can 

strain competition. Competition in the marketplace generates innovation, which leads to greater productivity. Automatic market 

structures and mechanisms have lower trading costs, bypassing obsolete market mechanisms that cost public investors unnecessary 

trading costs. 

It seems this rule may be an unnecessary second layer of regulation. 

Aren’t investors protected by their brokers best execution obligations? 

Nonetheless, we must be certain that we are protecting the investor, in particular small investors. These investors happen to be 

my constituents, the residents of Pennsylvania’s Eighth Congressional District who have pensions, 401(k) plans, mutual funds and 

investments in stocks and bonds. I need to know in what way the 

SEC’s proposal affects the everyday lives of my constituents. But 

before I make that final judgment, I would like to hear from our 

distinguished panelists. I yield back my time. 

Chairman BAKER. I thank the gentleman. 

Mr. Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

I certainly want to thank you, Mr. Baker and Ranking Member 

Kanjorski, for holding this hearing today regarding the Securities 

and Exchange Commission’s proposal to modernize the National 

Market System. I understand that the proliferation of electronic 

computer networks have changed the way that investors trade in 

the markets, which is the reason the Securities Exchange Commission needs to update the current National Market System. 

7

It is clear from the written testimony of the witnesses that there 

are a wide range of opinions on the best approach for assuring 

intermarket price protection. Indeed, some of our witnesses today 

believe that, in light of current best execution obligations and other 

existing practices, no such assured protection is necessary. 

However, one question that I would like to focus on today is, if 

the ultimate policy decision is to try to strengthen and expand existing trade-through protection, would it make sense to do so in an 

incremental fashion? 

And also I would like to weigh the potential costs to participants 

in relation to the benefits that new rules would provide to markets. 

And then, of course, there is the fundamental question, is there a 

need for a trade-through rule, or does a broker’s responsibility to 

obtain best execution of customer orders provide the sufficient protection for customers? 

As this subcommittee reviews these proposed regulations, we 

must keep in mind the need to have an efficient national system 

that provides the best prices for a wide variety of investors. With 

that in mind, Mr. Chairman, I look forward to hearing from the 

distinguished panel of witnesses, and I yield back the balance of 

my time. 

Chairman BAKER. Thank the gentleman. 

Mr. Davis. 

Mr. DAVIS. Thank you, Mr. Chairman and Ranking Member 

Kanjorski. 

I do want to mention, Delta was ready when I was this morning 

at 5:55, so we are here. 

It is a great opportunity to have this dialogue today. The dramatic improvement of communication technology, just literally a 

generational leap in the last 5 years, demands that we evaluate the 

applicability of all regulations, policies and procedures from the 

Federal Government that could assist or impair the function of our 

markets and ultimately the functioning of our economy. 

I am looking forward to this dialogue to address regulations, the 

process and procedures to ultimately assure that we can protect investors, especially working Americans who are building a nest egg 

for the future and whose future economic growth rests largely on 

our work in this room on both sides of the table. 

I am excited about this discussion. And I hope the outcome will 

be ensuring free and fair markets that encourage investments and 

create jobs. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

Chairman BAKER. I thank the gentleman. 

Ms. Wasserman Schultz. 

Ms. WASSERMAN SCHULTZ. Thank you, Mr. Chairman. 

It is a pleasure to be here with you today and with Ranking 

Member Kanjorski and members of the panel. Appreciate you taking this time to articulate your concerns with regard to the SEC’s 

revised National Market System proposal. I am looking forward to 

hearing from the panelists, and I am sure that the differences 

among them with regard to the efficacy of trade-through reform 

will only reinforce the contentious nature of this issue and the absence of a clear regulatory solution. As this process moves forward, 

I encourage the commission to be as fair as possible and to proceed 

8

with restraint when considering reforms that will affect our nation’s financial markets. 

I personally have reservations about imposing regulations that 

may damage our internationally competitive investor-driven markets. I believe we must always be wary of the unintended consequences that reforms may impose upon the very markets that 

sustain our national economy. Thank you, and I yield back the balance of my time. 

Chairman BAKER. Thank the gentlelady. 

Mr. Fossella, did you have a statement, sir? 

Mr. Barrett? 

Mrs. Biggert? 

Mr. Feeney? 

Mr. Watt? 

Mr. WATT. I pass. 

Chairman BAKER. Mr. Miller. 

Mr. MILLER OF NORTH CAROLINA. I will pass. 

Chairman BAKER. We are on a role. Mr. Clay. 

Mr. CLAY. None. 

Chairman BAKER. Mr. Hinojosa. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

Chairman Baker and Ranking Member Kanjorski, I want to express my sincere appreciation for you holding this very important 

and very timely hearing. Unfortunately, I will not be able to stay 

for the entire hearing due to a scheduling conflict with another 

committee, but I look forward to reading the testimony of today’s 

witnesses and the transcript of today’s hearing. 

This subcommittee has held a number of hearings on the Securities and Exchange Commission’s proposed National Market System 

regulation, and we have heard from a number of witnesses on the 

proposal. Today, we will hear from some witnesses, including exchanges, ECNs and others, on yet another aspect of the Securities 

and Exchange Commission’s National Market System proposal 

originally designed to update and strengthen our national securities markets. 

As most everyone in this room and those listening or watching 

knows, the Securities and Exchange Commission proposed regulation NMS last year in the attempt to modernize U.S. market structure. In May 2004, the SEC decided to extend the comment period 

to June 30, 2004, in part likely due to the amazing amount of interest in the importance of and the controversy surrounding this 

proposed regulation. 

Once all the comments were in, the SEC decided to propose two 

alternatives to the original NMS proposal. The commission republished the two alternatives to the proposed regulation for comment. 

And now that all those comments are in, the SEC is reviewing all 

of them and will issue its final regulation reportedly at the end of 

this quarter. 

While working on proposed changes to the Real Estate Settlement Procedures Act last year, I was amazed and surprised by the 

number of steps that can be taken by certain groups to interfere 

with the regulatory process in an attempt to either slow down the 

process or to use certain ways and means to arrive at the end they 

desire. 

9

The fundamentally flawed proposed changes to the Real Estate 

Settlement Procedures Act were ultimately and thankfully withdrawn as the result of efforts by myself, Mrs. Biggert, Senator 

Wayne Allard and our letter in opposition cosigned by well over 

250 Members of Congress. All this to say that it is amazing what 

a few of us here in Congress can defeat when we put our hearts 

into it. 

I realize that the SEC is now considering two alternatives to the 

NMS regulation. And Mr. Chairman, I have serious reservations 

about the Voluntary Depth Alternative. It could radically change 

the structure of the U.S. capital markets and damage our internationally competitive investor-driven markets. 

I urge the SEC to reject the Voluntary Depth Alternative. In this 

instance, I hope that the SEC will complete the task that we set 

out to do last year and will issue a final regulation soon. 

Mr. Chairman, Ranking Member Kanjorski, again, I wish to express my sincere appreciation for you holding this important hearing today. I yield back the remainder of my time. 

Chairman BAKER. I thank the gentleman. 

Ms. Bean, did you have a statement? 

Is there any member wishing to make a further statement? 

If not, at this time, I would like to proceed to call on our panel, 

and I am, again, appreciative for so many of our distinguished participants willing to give us their time this afternoon. 

Our first is Mr. Edward J. Nicoll, chief executive officer, Instinet 

group incorporated. As is the usual custom, we ask that you try to 

limit your statement to 5 minutes. Your full statement will be 

made part of the official record. And otherwise, proceed as you like. 

STATEMENT OF EDWARD J. NICOLL, CHIEF EXECUTIVE 

OFFICER, INSTINET GROUP INCORPORATED 

Mr. NICOLL. Mr. Chairman, I am wondering whether I should 

draw any inferences from the fact that I am seated at this—apparently at the children’s table here today. 

But thank you Chairman Baker, Ranking Member Kanjorski and 

members of the subcommittee. Thank you for inviting me to appear 

today to discuss the SEC’s latest version of reg NMS. 

This subcommittee has held hearings throughout the formation 

of the rule, and I greatly appreciate the time and effort you have 

taken to understand the complexity of this issue. 

Chairman BAKER. Mr. Nicoll, if you could pull that mike a little 

closer. They are not real sensitive. You almost have to——

Mr. NICOLL. How about that? 

Chairman BAKER. That is much better. Thank you. 

Mr. NICOLL. As I said, I greatly appreciate the time and the effort that the committee has taken to understand the complexity of 

this issue. In particular, I want to thank Chairman Baker for your 

leadership. 

This afternoon, I would like to spend a few minutes on the tradethrough rule. When the SEC re-proposed regulation NMS last December, Commissioner Cynthia Glassman encouraged those submitting comments not just to consider what type of trade-through 

they preferred, but if any trade-through rule was even necessary. 

10

We have taken Commissioner Glassman’s words to heart and 

continue to advocate for the elimination of the trade-through rule. 

Its repeal would foster competition without favoring one market 

model over another. 

I must say that I was surprised by the re-proposed rule, since, 

even at this late date, the case for the trade-through rule has not 

been made. Sound economic principle, solid data and real-world experience must be our guides when implementing rules that will impact our nation’s capital markets. 

Let’s look at the facts surrounding the trade-through rule. First, 

it is said that the rule is necessary to protect investors from unscrupulous brokers that may execute customer orders at inferior 

prices. But once it became apparent that the inclusion of an optout provision could have addressed such concerns, advocates of regulation had to shift their rationale for preserving the rule. 

The new defense of the trade-through rule is that it encourages 

limit orders. The example given by supporters is of the retail investor who posts a limit order only to watch in dismay as other markets ignore his order. All of this causes the investor to lose confidence in the market and stop posting limit orders. With fewer 

limit orders, spreads widen and market quality is compromised. 

It is a good story, but with a significant flaw. There is no evidence to support it. Moreover, the absence of a trade-through rule 

in other markets shows no evidence of such a loss in confidence. 

In fact, retail investors have shown a preference for placing limit 

orders in NASDAQ where there is no trade-through rule. 

I am concerned that the SEC has adopted the position that the 

trade-through rule promotes limit orders based on research that 

seems to prove just the opposite. In its own study, the SEC examined 4 days of trading in 2003. And what did it find? The tradethrough rate for NASDAQ listed securities was just 2.5 percent of 

the trades. This finding can only mean that supporters of the 

trade-through rule believe that even though more than 97.5 percent of the time a limit order is not traded through, the mere 2.5 

percent risk of being traded through is enough to discourage limit 

orders. 

This just does not seem to be the case. In fact, some of the largest brokerage firms that represent individual investors, including 

Schwab, Ameritrade, Morgan Stanley, Scottrade, and even Goldman Sachs, report that they receive more limit orders for NASDAQ 

stocks where there is no trade-through rule than for New York 

Stock Exchange stocks where there is. 

Further, the SEC’s own study also noted that there were more 

limit orders placed in NASDAQ stocks than New York Stock Exchange stocks. So based on these numbers, shouldn’t the SEC be 

eliminating the rule entirely, as commissioner Glassman suggests? 

Unfortunately, the SEC instead has indicated that it will impose 

the regulation on both the NASDAQ and the New York Stock Exchange and has only asked for a public comment on its two ways 

to apply this expanded trade-through rule, top of book and voluntary depth of book. This is a false choice. Neither is a step forward. 

Moreover, public comment letters to the SEC make it clear that 

there are sharp divisions on this issue. The New York Stock ExVerDate 0ct 09 2002 14:06 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\DOCS\22158.TXT FIN1 PsN: MICAH
11

change and some others are strong defenders of the regulation. Yet 

37 members of the House and Senate signed comment letters last 

year calling for a repeal of the trade-through rule or, at a minimum, the inclusion of an opt-out provision. They were joined by 

statewide officials from coast to coast, ranging from California Controller Steve Westly to Florida Attorney General Charlie Crist. 

Also calling for a repeal or opt-out were more than a dozen State 

pension funds and labor unions, including some of the largest like 

CalPERS, OPERS, the Teachers’ Retirement Systems of Louisiana, 

Indiana, and California; and TIAA-CREF. Major financial institutions, such as UBS, Morgan Stanley, JP Morgan, Merrill Lynch, 

and Citigroup joined retail firms like Ameritrade, Fidelity and 

Schwab as they all called for the rule’s repeal or an opt-out exception. 

Such sharp divisions should be taken very seriously. We are considering fundamental changes in how our markets operate and 

compete. While we should not expect full consensus across our industry, I would think the SEC would be wary of sweeping changes 

with their related costs to investors in the face of such a deep split 

and with so many questions still unanswered. 

Let me conclude with Instinet Group’s position on the key issues. 

First, the trade-through rule is an unnecessary burden that 

hinders competition, ultimately harming rather than protecting investors. 

Second, on no account should the trade-through rule be extended 

to the NASDAQ marketplace. The NASDAQ market is an example 

of a highly liquid and highly competitive market where the competition has reduced investor costs, narrowed spreads and improved performance for all investors. 

As Chairman Donaldson himself said when re-proposing reg 

NMS, quote, We need to identify real problems, consider the practical consequences of possible solutions, and then move pragmatically and incrementally towards the goals Congress staked out, unquote. 

Applying the trade-through rule to the NASDAQ marketplace is 

not a pragmatic and incremental move. It should be taken only 

when it is clear that the market is failing and less drastic remedies 

are inadequate. 

And third, if the SEC still feels the overwhelming need to protect 

limit orders by strengthening the trade-through rule and imposing 

it on the NASDAQ marketplace, it should implement a consistent 

rule that protects all limit orders to its voluntary depth of book 

proposal and not one that protects the lucky few at the top of the 

book. 

I have commented in greater technical detail on our positions in 

the documents accompanying my remarks today and ask that they 

be included in the record. I thank you for your time and effort and 

would happily answer any questions you might have. 

[The prepared statement of Edward J. Nicoll can be found on 

page 184 in the appendix.] 

Chairman BAKER. Thank you very much, sir. Our next witness 

is Mr. Robert G. Britz, president and the co-chief operating officer 

of the New York Stock Exchange. 

Welcome, sir. 

12

STATEMENT OF ROBERT G. BRITZ, PRESIDENT AND CO-CHIEF 

OPERATING OFFICER, NEW YORK STOCK EXCHANGE, INC. 

Mr. BRITZ. Thank you Chairman Baker, Ranking Member Kanjorski and members of the subcommittee. Appreciate the opportunity to be with you this afternoon to articulate the NYSE views 

on this important issue. 

Mr. Chairman, while we have filed written testimony addressing 

a variety of the aspects of reg NMS, I thought I would address my 

verbal remarks to the question that is posed in the title of this 

hearing: Will reg NMS actually enhance the competitive position of 

our markets? 

In my view, the answer to that question is categorically yes. In 

that regard, I would offer the following general observations. Reg 

NMS approach to the trade-through utilizing the Market Best Bid 

effort will incent markets to compete for investor orders by offering 

them speedy executions and, importantly, at the best price. It will 

incent someone seeking counter-party interest to improve upon the 

existing market, thereby reducing bid offer spreads. It will require 

markets to adhere to a minimum standard of speed in order to 

compete. It will reward those who create the most marketable bids 

and offers, thereby encouraging quote competition. And then, very 

importantly, it strikes a balance between the pure order competition of a consolidated limit order book and market competition that 

arises from linking competing markets. Specifically by continuing 

to encourage intermarket competition, reg NMS will help to boost 

the U.S. capital markets’ competitive position globally and particularly when compared with the government monolith that would inevitably spring from a consolidated limit order book. 

More specifically, I would offer as Exhibit A of the pro-competitive benefits of reg NMS the NYSE’s proposal for a hybrid market. 

While the hybrid is driven by our evolving customer needs and by 

our own productivity initiatives, wanting to be aligned with the 

provisions of reg NMS was clearly a part of our thinking. Without 

getting into the specifics, through a series of hardware and software initiatives between now and this time next year, the hybrid 

market will enable our customers to execute in our market electronically, anonymously, in subseconds and with no size restrictions. They will see the complete limit order book in real time. 

They will have the opportunity to reach into that book at multiple 

prices or sweep to a particular price if they care to do that. They 

will be able to place undisclosed interest to a broker in the quote 

or on the book at various price points as they see fit. Their orders 

will be auto routed to other markets to the extent that better prices 

exist in other markets. Incoming orders from other markets will be 

automatically executed in the NYSE market, and in general, both 

brokers and specialists and by extension the NYSE market will be 

significantly more productive. 

I think reg NMS is particularly pro-competitive in the way that 

it adeptly deals with the trade-through issue. Amid calls, albeit 

from a small minority, to allow markets to ignore investors’ betterpriced orders in other markets, the reg NMS proposes to strengthen and extend the current trade-through rule. The commission correctly recognizes that trade-throughs inherently involve treating investors unfairly, never a good idea, and especially so in an environVerDate 0ct 09 2002 14:06 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\DOCS\22158.TXT FIN1 PsN: MICAH
13

ment already tainted by questionable practices on the part of some 

corporate officials, some auditors, some research analysts, some 

mutual fund executives, and some securities dealers. 

Trade-throughs are symptomatic of inefficient markets. Indeed, 

only an inefficient market could give rise to a trade-through. They 

are a violation of the trust investors place in the market and inconceivable with any notion of fair dealing. Trade-throughs devalue 

price as an order execution element and weaken the equity pricing 

mechanism. They create a disincentive for investors and traders to 

post better prices because there can be no assurance that doing so 

will be rewarded. 

When competing to establish the best price is no longer the key 

to attracting orders, markets will regress to the lowest common denominator relative to price. When one considers that the fundamental mission of the stock market is to efficiently price securities, 

how can the price at which investors trade not be paramount? Remember, in a trade-through scenario, several things occur, none of 

which is desirable. In the first case, one investor pays more or sells 

for less than is possible. Another investor gets completely ignored, 

notwithstanding being willing to pay the best price. And importantly, the company shares are mispriced, and trading is more 

volatile than would otherwise be the case. And so the SEC has proposed reg NMS to create an environment where investor orders 

will be rapidly executed and at the best prevailing price. 

This proposed trade-through rule has the practical and desirable 

effect of directing investor orders to markets that deliver the best 

prices. And in so doing, it incents competition among those markets 

to establish efficient prices. Through reg NMS, the SEC is wisely 

not dictating market structure. It is creating a framework that allows markets to choose the combination of services they wish to 

offer and lets investors decide which services best meet their needs. 

Reg NMS encourages well functioning capital markets and highlights the importance of investor confidence in ensuring that result. 

Were trade-throughs to be sanctioned by the SEC and, therefore, 

commonplace, how long will it take investors whose orders are ignored to lose confidence in the systems’ ability to meet their needs? 

How long before corporations experience a higher cost of capital 

due to the increased volatility in their shares? And how long before 

U.S. capital markets lose ground to foreign competition due to a decline in the efficacy of the securities pricing mechanism? 

At the end of the day, Mr. Chairman, the investor willing to pay 

the highest price and his counterpart willing to sell for the lowest 

price ought to trade. Anything else is not only counter-intuitive, it 

is downright inefficient. Worst than that, it is anti-investor. 

In closing, I would like to commend the committee for conducting 

this hearing and particularly for correctly framing this in terms of 

the competitiveness of our markets. Speaking for my own organization, the NYSE is by far the largest and most important equity 

market in the world. Its growth parallels the growth of the U.S. 

economy. It has helped to both fuel the growth of U.S. enterprise 

and maintain the global preeminence of the U.S. as a capital market. 

At the risk of stating the obvious, there is a lot riding on the 

markets, the SEC and policymakers. Making sure that the question 

14

posed in the title to this hearing, the answer to that question is a 

resounding yes. Thank you, Mr. Chairman. 

[The prepared statement of Robert G. Britz can be found on page 

114 in the appendix.] 

Chairman BAKER. I thank you very much sir. 

Our next witness is Ms. Carrie E. Dwyer, general counsel of the 

Charles Schwab Corporation. 

Welcome. 

STATEMENT OF CARRIE E. DWYER, GENERAL COUNSEL, THE 

CHARLES SCHWAB CORPORATION 

Ms. DWYER. Chairman Baker, Ranking Member Kanjorski and 

members of the subcommittee, my name is Carrie Dwyer. I am 

general counsel of the Charles Schwab Corporation. I also have the 

distinction, along with some colleagues at the New York Stock Exchange, of being one of the drafters of the original trade-through 

rule. 

I am pleased to be here today to present our perspective on an 

issue that has direct consequences for the individual investors that 

we serve. For more than three decades, Charles Schwab has been 

providing individual investors with efficient access to the markets 

and the tools they need to make informed investment decisions. 

Today, we serve more than 7.3 million clients with nearly $1.1 trillion in client assets. On an average day, our customers trade about 

3.6 million shares on the New York Stock Exchange and NASDAQ 

combined. 

Whether investing in equities, mutual funds or through an investment advisor, our customers’ investment returns depend on efficient execution. Our customers demand ever greater efficiency, 

better service and lower cost from us. We believe a regulatory 

structure that promotes vigorous competition between markets will 

generate the innovation that will deliver those benefits now and in 

years to come. 

As you know, Mr. Chairman, Congress has historically rejected 

the idea of a government-designed central market. Instead, over 

the years, this committee has wisely decided to allow market structure to evolve through the interplay of competitive forces while limiting the SEC’s role to market oversight. 

Members have generally agreed that legislators and government 

regulators cannot foresee how technology and investing will resolve, nor should they choose which competitor should succeed and 

which should fail. This policy has served us well over the years, 

fostering the highly efficient and technologically advanced market 

that we enjoy today, which makes it difficult to justify the SEC’s 

plan to abandon this approach. 

Regulation NMS and the proposals for expanding the tradethrough rule represent a fundamental redesign of the equity markets. In this proposal, the commission seeks to substitute its own 

algorithm for the interaction of competitive market forces, creating 

in effect a central market system. Brokers will be forced to route 

to markets that may not necessarily get the customer the best 

overall price and which they would otherwise seek to avoid because 

of a variety of factors, old-fashioned order handling procedures, 

cumbersome technology or capacity or reliability concerns. 

15

Should this design be adopted, there will be no incentive for markets to compete on how orders are executed or how they discover 

prices or depth because exchanges are guaranteed to receive orders 

no matter how moribund their technology. Without an incentive to 

innovate, technological and operational efficiency will suffer. 

As numerous experts have pointed out, with every broker forced 

to route to the same market to take out the same quote where they 

trade, there is a serious risk of market gridlock. With the advent 

of Internet trading, our customers are used to getting the price 

they see on the screen within seconds of entering the order. What 

will we say to them when their orders start taking longer to execute and at worse prices? What is the SEC’s justification for this 

radical change? It is hard to find a solid empirical basis in the commission’s release. Is the rationale for a trade-through rule the quality of effective and quoted spreads? 

Our experience with our own order flow has shown us market 

quality improvements in the transfer just last fall of the QQQQs 

from the listed markets which have a trade-through rule to 

NASDAQ which does not. 

Is the rationale high rates of trade-throughs? The commission 

found reported rates of the trade-throughs, as Ed has said, of about 

2 percent. Seems too small to justify changing how the other 98 

percent of orders are handled. In any case, the commission reports 

that the trade-through rate is about the same for the New York 

Stock Exchange which has a trade-through rule and NASDAQ, despite the differences in market structure. 

Is the rationale to encourage greater use of limit orders? Our 

own customers choose to enter twice as many limit orders on 

NASDAQ, which has no trade-through rule, than the New York 

Stock Exchange. 

Do not be misled by those who will argue that a trade-through 

rule is merely about requiring that customers get the best price. 

From the customer’s perspective, the issue is not whether the first 

part, the first hundred shares of their order is executed at the best 

quote. The issue is whether they are getting the best price overall 

for their whole order. There are many factors that go into that 

analysis, such as speed and the ability to discover additional liquidity for an order. 

Contrary to the claims of others, the SEC’s top of book proposal 

will result in situations in which individual investors do not receive 

the best prices for their trades. The SEC’s experimentation with 

the new market design stands in striking contrast to its slow response to a well documented problem that has continued to disadvantage investors. Under the current SEC rules, the exchanges 

operate as a cartel to fix the price of market data and restrict access to data to the detriment of all investors, but especially individual investors who cannot afford the hundreds of dollars a year 

the exchanges charge for access to quote services that display market depth information. 

Needless to say, access to quality market data is vital to the 

functioning and fairness of our markets. We are talking about a 

depth of book proposal, but no one can see, other than institutional 

customers, can see depth of book today. Despite 5 years of study, 

comment, and debate, the commission proposal is only a first step 

16

that merely reapportions the pool of money and fails to address the 

root cause of the problem and the inequities it creates. 

Mr. Chairman, facilitating competition means eliminating barriers to competition, such as the trade-through rule, that guarantee 

a market will receive business even if it refuses to evolve. And it 

means facing up to cartels that place individual investors at a disadvantage. Regulation NMS represents a step that requires reconsideration by the commission with the thoughtful input of this committee. 

While Congress has traditionally respected the SEC’s historic 

role in terms of market oversight, it has consistently reaffirmed 

that competitive market forces should shape market structure, and 

it should do so again. Thank you for allowing me to share my 

views, and I look forward to answering any questions. 

[The prepared statement of Carrie E. Dwyer can be found on 

page 129 in the appendix.] 

Chairman BAKER. I thank the gentlelady. 

Our next witness is Mr. Matt Andresen, President Citadel Execution Services. 

Welcome, sir. 

STATEMENT OF MATT ANDRESEN, PRESIDENT, CITADEL 

EXECUTION SERVICES 

Mr. ANDRESEN. Thank you. Chairman Baker, Ranking Member 

Kanjorski and members of the subcommittee, I am Matt Andresen, 

president of Citadel Execution Services, an affiliate of Citadel Investment Group. Prior to joining Citadel, I was CEO of Island, at 

the time the largest electronic communications network. On behalf 

of Citadel, I welcome this opportunity to present our views on the 

proposed National Market System regulations issued by the SEC. Citadel manages approximately $11 billion in investment capital 

from its headquarters in Chicago and offices in New York, San 

Francisco, London, and Tokyo. On average, Citadel accounts for between 1 and 2 percent of the daily dollar volume traded on both 

the New York Stock Exchange and NASDAQ and for more than 10 

percent of daily U.S. options volume. With nearly a thousand employees and as an active and substantial investor in the U.S. and 

throughout the world, Citadel has a vital interest in the development of fair, efficient, transparent, and liquid markets. 

Because the trade-through rule implicates fundamental questions 

regarding the transparency and efficiency of the markets, the 

issues to be addressed at this hearing are of great importance to 

all investors. American investors, whether retail or institutional, 

have a vested interest in insuring that U.S. markets remain the 

strongest and most efficient markets in the world. 

I would like to refer the committee to our written testimony, 

which I have submitted and briefly summarizes our position. The 

status quo is not acceptable. Citadel is not an exchange but rather 

a customer of exchanges. And as such, Citadel is well acquainted 

with the limitations of the current regulatory regime. Citadel believes that the existing trade-through rule is unnecessary and 

should be eliminated. 

However, the top of book proposal, if adopted, would be substantial improvement over the current regulatory framework. Specific 

17

benefits would include, one, the ability to bypass manual markets 

where appropriate; two, the ability to use an intermarket sweep exemption to execute large institutional orders cleanly and efficiently; 

and three, the creation of a clear incentive for manual markets to 

automate. Citadel has asked the commission to act quickly to either eliminate the existing trade-through or to adopt a revised rule. 

In addition, given that the US options markets are plagued with 

the same market structure problems as the NYSE and AMEX listed equity markets, Citadel has requested the SEC extend any proposed trade-through changes to the options markets. 

We would now like to respond specifically to the questions raised 

by the committee. First, Citadel does not believe that a compelling 

empirical case has been made for the extension of the tradethrough rule to all NMS stocks. Specifically, Citadel does not believe there is any discernable policy justification for any application 

of the trade-through rule to electronic markets. In the marketplace 

for NASDAQ stocks, where there is not a trade-through rule and 

quotes are generally immediately and electronically accessible, 

market quality is superior and trade-throughs are not an issue. 

With regard to questions on top of book versus depth of book, 

Citadel would support a top of book provided there is an ability to 

bypass manual markets, an intermarket suite exemption, and a 

clear definition of an automated market. 

You have also asked what the consequences are if this proposal 

is adopted. Citadel believes the markets and, therefore, all investors would be better served by an abolition of the trade-through 

rule rather than by incremental reforms. 

Nevertheless, Citadel believes that the SEC’s proposal, if adopted, will be a meaningful improvement over the model we have now. 

Tangible benefits that would accrue on the listed equity markets 

from the proposed rule include an increase in market transparency 

and liquidity; a decrease in effective spreads and execution costs; 

and a dramatic improvement of execution speed and certainty. 

Finally, with regard to your question on the SEC’s empirical justifications for the proposal, the SEC has correctly recognized the 

serious weakness in the current trade-through rule, its failure to 

reflect the disparate speed of response between manual and automated quotations. A proposed or revised trade-through rule by excluding manual quotations would reduce impact of this fundamental flaw in the current National Market System and thereby 

improve the system. 

A number of commentators have pointed out flaws in the SEC’s 

analysis in regard to the question of whether to extend the tradethrough rule to the NASDAQ marketplace. Based on our own experience trading large volumes of both NASDAQ and NYSE listed equities, we believe strongly that the execution quality of the 

NASDAQ marketplace is significantly superior to that of the listed 

marketplace. 

In conclusion, let me be very clear about Citadel’s position here. 

We do not believe there should be a trade-through rule. However, 

the current status quo is unacceptable. If an immediate and complete abolition of the trade-through rule across all markets, overthe-counter, listed and option, is not on the table, then Citadel 

strongly recommends taking a positive incremental step that, in 

18

our opinion, will substantially improve the execution quality of 

NYSE listed stocks. Thank you. 

[The prepared statement of Matt Andresen can be found on page 

62 in the appendix.] 

Chairman BAKER. Thank you, sir. 

Our next witness is Mr. Robert H. McCooey, Jr., president and 

chief executive officer of the Griswold Company, Incorporated. 

Welcome. 

STATEMENT OF ROBERT H. MCCOOEY, JR., PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, THE GRISWOLD COMPANY, INC. 

Mr. MCCOOEY. Thank you Chairman Baker, Ranking Member 

Kanjorski and members of the subcommittee. Good afternoon. 

Thank you for inviting me here to testify in connection with your 

review of the SEC’s re-proposed regulation NMS. 

I am privileged to be here to share my thoughts, again, before 

the committee. For those of you who do not know me, my name is 

Robert McCooey. I am a member of the New York Stock Exchange 

and one of the agent representatives from the floor to the New 

York Stock Exchange Board of Executives. In my primary job, I am 

the president and chief executive officer of the Griswold Company, 

an agency broker executing institutional orders on the floor of the 

New York Stock Exchange. I am a practitioner. 

Chairman Baker, I am pleased to be part of this group you have 

assembled here today. I hope that I am going to be able to bring 

some perspective on the impact of the re-proposed reg NMS as well 

as insight into why, of the two proposals, alternatives, proposed by 

the SEC, I favor the market BBO alternative over the Volunteer 

Depth Alternative. 

Over the past few years we have witnessed a great transformation taking place throughout the National Market System. At 

the New York Stock Exchange alone, change has been a prevalent 

theme in our business. We have welcomed new management who 

have brought with them new ideas and a new perspective. Our 

Chairman John Reed and our CEO John Thain has been singularly 

focused on listening to our multiple constituent groups and responding with an aggressive approach to meeting customer needs. 

A product of this response has been the NYSE’s proposed hybrid 

market initiative. This was created as a direct response to the feedback from our customers. With this initiative, we aim to create a 

market that enhances choice and best serves the demands of all of 

our customers. 

Some of our customers have asked for speed others require certainty and still others desire the opportunity for price improvement. The Hybrid Market offers all of these options. If they want 

speed, certainty, and anonymity of execution, they can choose the 

NYSE’s automated execution service, an enhancement to a service 

that already exists today. If they want the opportunity for price improvement offered through the auction process, they can still employ the services of a professional agent to meet that goal. 

The SEC, too, has been actively listening to constituents. I praise 

the Commission for its thoughtful proposals and for all the hard 

work put forth in creating the best marketplace for all investors. 

I share this goal, and therefore I support a Reg NMS where cusVerDate 0ct 09 2002 14:06 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\DOCS\22158.TXT FIN1 PsN: MICAH
19

tomers receive the best price for their transactions while also giving them the benefit of competition between marketplaces. I support a trade-through rule that extends to all NMS stocks, as I believe that creates a level playing field for investors and promotes 

healthy competition among markets. 

In the SEC’s most recent trade-through proposal, two options 

were presented. I support the first of the two alternatives, the market BBO alternative, in which the best bid and offer in each market would be protected. This top of book alternative will promote 

competition to provide the best bid or offer within a market with 

the assurance that their quotes will not be traded through. It will 

also encourage market participants to quote aggressively, to be 

that best bid in offer in order to be afforded that protection. This 

will narrow spreads and foster more display liquidity. Market participants have consistently ranked these two benefits of the proposal as two of their top priorities. 

I strongly disagree with the second proposal, the voluntary depth 

alternative, that mandates depth of book order routing which will 

essentially create a consolidated limit order book, or CLOB, in the 

marketplace. This alternative, periodically debated and always rejected, harms competition among markets by taxing technology and 

regulation. One of the great features of the New York Stock Exchange is the interaction between large and small orders. The creation of a government mandated order file would significantly limit 

customers’ ability to achieve the best price as the interaction of orders from institutional clients and individual investors would be 

dramatically hindered. This bifurcated market where the largest 

institutions would trade in a different arena than small investors 

would have a significant negative impact on price discovery. 

Furthermore, in a CLOB environment, customers’ orders would 

have to be exposed in the market, making them difficult to trade 

and more costly to execute. All institutional customers worry about 

the market impact that their orders will have, especially those in 

small and midcap stocks. The forced display of these orders in a 

CLOB in order to receive protection is not in the customers’ best 

interest since it undermines the goal of minimizing market impact. 

I cannot support a model that does not promote the customer’s best 

interest. Additionally, the cost of this model to investors is unjustifiable. The implementation operating costs would eventually fall on 

investors, and these costs would greatly outweigh any potential 

benefits. 

I cannot imagine a reason to unnecessarily alter today’s highly 

competitive system that accrues tremendous benefits to my customers and your constituents. 

I hope my comments today presented before the committee have 

underscored the importance of a trade-through rule for all NMS 

stocks and the overwhelming value of the market MBB alternative 

versus the negative impact of the voluntary depth alternative in 

the reproposed Reg NMS. 

If best serving investors is a goal that we all share, then we 

must agree on a comprehensive Reg NMS that guarantees the best 

price for all investors as well as fosters competition. We must continue to put the interest of investors first and provide healthy, competitive, and robust domestic markets. 

20

I am pleased that the SEC has recognized the value in maintaining the trade-through rule. It is reassuring that we can collectively 

recognize the value of updating this important customer protection 

rule as we make significant changes to the structure of the NYC 

in response to suggestions from our competitors and, more importantly, constructive dialogue with our customers. 

I am privileged to be part of this process in creating a better 

marketplace for all investors and again applaud the SEC for all 

their efforts. 

Finally, I want to commend the work that you, Mr. Chairman, 

your staff, and the committee has done on this issue. Thank you 

for the opportunity to speak before you today, and I will be happy 

to answer any questions. 

Chairman BAKER. Thank you, sir. 

[The prepared statement of Robert H. McCooey can be found on 

page 176 in the appendix.] 

Chairman BAKER. Our next witness is Mr. Thomas M. Joyce, 

president and chief executive officer, Knight Trading Group, Incorporated. Welcome. 

STATEMENT OF THOMAS M. JOYCE, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, KNIGHT TRADING GROUP, INC. 

Mr. JOYCE. Mr. Chairman, thank you. I apologize in advance; I 

am wrestling with a cold. 

Chairman Baker, Ranking Member Kanjorski, and members of 

the subcommittee, thank you for the opportunity to participate in 

this important hearing regarding regulation NMS. I am the chairman and CEO of Knight Trading Group. We manage investor assets of over $3-1/2 billion as well as being the largest market 

maker in the industry, trading well over 1 billion shares on a typical day. 

I commend this subcommittee for its interest in ensuring that 

the capital markets remain competitive and innovative. Although 

the SEC’s regulation NMS addresses some inefficiencies in the equity markets such as ECN access fees to nonsubscribers and 

subpenny quotations, we have very serious concerns about its proposal to extend the trade-through rule to all markets. Due to competitive forces and the lack of data supporting such a rule, we respectfully submit that the SEC has not demonstrated a meaningful 

justification of the proposed rule. As such, we firmly believe that 

neither of the two alternative trade-through rules, market BBO alternative and voluntary depth, are warranted. 

The solution is simple: Require linkages that efficiently connect 

all markets and ensure that all display quotations can be accessible 

and executable. If there are efficient linkages, then the need for a 

trade-through rule on any market is effectively eliminated. 

There is no evidence to support the extension of a trade-through 

rule. In fact, the SEC’s data on trade-through rates is nearly the 

same on the NYSE, which has a trade-through rule, and the 

NASDAQ market, which does not have a trade-through rule. So it 

is unclear what is to be gained by instituting such a rule across all 

markets. Government-mandated paths of trading could have serious unintended consequences and negatively impact the technoVerDate 0ct 09 2002 14:06 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\DOCS\22158.TXT FIN1 PsN: MICAH
21

logical innovations that have served to greatly benefit the U.S. investor. 

The driver of this innovation can be summed up in a single word: 

competition. Competition in securities markets has allowed the typical U.S. investor to now experience trades at blinding speed and 

at the best price. By forcing all trades to take a similar route and 

be handled in a similar manner, we will undermine the very foundation of competition. That is the distinctions in execution offerings 

that motivate the investor. 

It is those very distinctions which drive the markets to improve. 

Rather than a centralized way of trading, the U.S. investors want 

fast trades, complete fills, minimal impact, superior pricing, and 

minimal costs. These investor demands force the markets to create 

and innovate in a highly efficient manner. Too many unnecessary 

rules create roadblocks and reduce competition. 

The reproposal significantly underestimates the cost of instituting the trade-through rule for all markets. No trade-through 

rule has existed in the NASDAQ market, so firms like Knight will 

face a significant technology cost burden. The costs of these system 

and compliance technologies and personnel changes will be significant; yet the benefits of a trade-through rule are minimal. The ultimate costs of investors will also be great as they will inevitably suffer from reduced efficiencies brought about by a centralized mandated trading protocol. 

Competition rather than mandatory—rather than regulatory 

mandates should drive market participants. Unlike a trade-through 

rule mandate, the SEC’s rule 11Ac1-5 is an example of regulation 

that increases competition. The rule requires market participants 

to post execution stats, and as a result, rule 5 transparency and 

comparability of execution, which order routing firms can and do 

use to make informed routing decisions, has increased competition 

and pressured markets to become more efficient, greatly reducing 

execution times and the cost to investors. This is due to competitive 

forces, not regulatory fiat. 

Innovations and increased efficiencies may never occur if we do 

not encourage and foster a competitive market environment rather 

than pursuing and expanding antiquated command-and-control 

methods of trading. An approach such as rule 5 provides a far less 

invasive and less costly way to achieve the goals of a trade-through 

rule. 

There is no evidence to suggest that a trade-through rule will increase limit orders. Charles Schwab data supports the view that 

small investors would not benefit from an extension of the tradethrough rules of the NASDAQ market as their customers, quote, 

tend to use limit orders approximately twice as often for NASDAQ 

stocks as for listed stocks, end quote. A trade-through rule simply 

will not encourage more limit orders since retail investors appear 

to use limit orders on NASDAQ stocks, which are not governed by 

a trade-through rule, more than twice as often than on Exchangelisted stocks. This explains why many large retail-based brokers 

argue there is no need to extend the rule. And let us face facts. 

Even though the New York Stock Exchange already has a tradethrough rule, large institutional investors do not populate the specialist book with limit orders. They simply don’t do it. 

22

In short, these real market behaviors tell us that a trade-through 

rule will not encourage limit orders. Rather than imposing a tradethrough rule at this time, a phased approach to addressing market 

structure issues should be implemented. 

Requiring connectivity would go a long way towards ensuring 

that investors receive best execution of their orders. Once 

connectivity and access are established, the SEC would then be 

better able to determine whether there is a need for further investor protections. If necessary, then a pilot program could be implemented to examine the impact of proposing a trade-through rule. 

Knight supports the Commission’s proposals relating to limiting 

access fees, banning subpenny quotations, and locked and crossed 

markets. Each of these by the SEC will help maintain an orderly 

marketplace, so we urge adoption of those proposals. 

In conclusion, competition fosters innovation and efficiencies, ultimately benefiting the markets and investors. Connected markets 

and efficient and fair access will do more to benefit investors than 

a costly unproven command-and-control trade-through rule. Knight 

recommends the SEC minimize unintended consequences by taking 

a market-oriented approach that requires connectivity, efficient and 

fair access, and then later considers whether a trade-through rule 

is necessary. 

Thank you. I look forward to any questions. 

Chairman BAKER. Thank you, sir. 

[The prepared statement of Thomas M. Joyce can be found on 

page 166 in the appendix.] 

Chairman BAKER. Our next witness is Mr. Kim Bang, president 

and chief executive officer, Bloomberg Tradebook, LLC. Welcome. 

STATEMENT OF KIM BANG, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, THE NASDAQ STOCK MARKET, INC. 

Mr. BANG. Thank you, Mr. Chairman, and members on the committee. My name is Kim Bang. I am pleased to testify on behalf 

of Bloomberg Tradebook. Bloomberg Tradebook is owned by 

Bloomberg L.P. and is located in New York City. Bloomberg L.P. 

Provides multimedia, analytical, and news services to more than 

250,000 financial professionals in over 100 countries worldwide. 

Bloomberg News is syndicated in over 350 newspapers and on 550 

radio and television stations worldwide. Bloomberg Tradebook is a 

global electronic agency broker serving institutions and other 

broker dealers. We count among our clients many of the Nation’s 

largest institutional investors representing, through pension funds 

and mutual funds, the savings of millions of ordinary Americans. 

Bloomberg Tradebook specializes in consolidating what has otherwise been a fragmented marketplace by increasing transparency 

and by providing direct market access to those points of liquidity. 

We are not competitors of the exchanges; we are liquidity agnostic, 

if you like. Our challenge is to provide the best possible tools to our 

clients to empower them to find the best price, whether it is at the 

New York Stock Exchange, NASDAQ, or any of the other 40 exchanges we route to globally. 

Currently the trade-through rule protects manual markets by 

mandating that investors pursue the advertised theoretical best 

price rather than the available firm price. The rules should be abolVerDate 0ct 09 2002 14:06 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\DOCS\22158.TXT FIN1 PsN: MICAH
23

ished. If manual markets are to continue on the New York Stock 

Exchange when they exist at no other significant exchange in the 

world, they must earn that position as a result of competition, not 

because of regulatory protection. 

We would respectfully submit that the goals of the National Market System can be most fully and efficiently realized with greater 

transparency and unintermediated access to firm quotations. 

Greater mandatory display of liquidity beyond the national best bid 

and offer, the NBBO, and immediate electronic access would make 

for a more competitive National Market System. 

Decimalization has been a boon to investors and an enormous 

spur to market efficiency. This committee has played a critical role 

in producing this market evolution. However, the rules governing 

the display of market data, rules crafted in an era of eighths and 

sixteenths, have never been updated to reflect this change in 

decimalization. 

Since decimalization introduced 100 price points to the dollar in 

place of the previous 8 or 16, the amount of liquidity now available 

at the NBBO is much smaller than it was before. As a result, there 

has been a dramatic decrease in transparency and liquidity found 

at the inside quotation. The Securities Industry Association in commenting on Reg NMS accurately observed, beginning quote, ‘‘The 

value of the NBBO, the cornerstone of the market data system, is 

less than it was prior to decimalization. We believe that the SEC 

has the responsibility to address this issue in light of the operation 

of its quote and display rules,’’ et cetera, end of quote. 

We agree. Bloomberg publishes data on en route orders to equity 

securities markets throughout the world. Every significant market 

other than the New York Stock Exchange and Mexico currently 

publishes realtime quotations at a minimum of five levels deep for 

all investors to see and immediately access electronically. As the 

largest equity market in the world, the New York Stock Exchange 

should not continue to deny investors and fiduciaries that same 

transparency and access. 

Rather than introduce a new trade-through rule, we believe the 

Commission should consider amending the limit order display rule 

to require exchanges, market makers, and other market senders, 

including ECNs, to publish any customer limit orders within 5 

cents of their best published quotations; to require all market centers to have their published quotations, not just the top of file, be 

firm and immediately touchable electronically. 

Three, amend the vendor display rule to require vendors such as 

Bloomberg to carry the depth-of-book quotations on the same terms 

as top-of-file quotations. 

Four, review and implement with appropriate modifications the 

New York Stock Exchange open book and hybrid market proposal 

before making decisions on Reg NMS. 

And, fifth, enforce meaningful compliance with fiduciary standards by brokers and investment managers so they use their reasonable means to seek best execution for clients. 

This is a modest proposal. As a policy matter, it is hard to argue 

that decimalization should leave investors with less transparency 

and liquidity. The impact of simply updating the display rules 

could be profound, positive, encouraging the display of limit orders 

24

in a fashion that relies on market forces instead of governmental 

regulation. It is far less intrusive than a trade-through rule which 

would be expensive to implement and difficult to monitor and enforce. 

With better transparency and access to market quotations, brokers and investment managers would have powerful incentives particularly given their best execution duties to reach out for the best 

prices available in any market, which would improve execution 

quality, promote intermarket competition, and lower transaction 

cost. 

We think the New York Stock Exchange, in fact, has made some 

very encouraging progress under the constant and effective prodding on the investors and the SEC. Its open book proposal has 

some shortcomings, we believe, but if implemented properly, it 

would enhance transparency. The hybrid market proposal and its 

direct plus element offers enhanced electronic access to the published quotations. Both of those developments represents a welcomed modernization of the market, and we think the Commission 

should pause to let them be properly implemented before given further consideration as to whether a trade-through rule is necessary 

or indeed desirable. 

As to market data itself, the chairman of this committee has observed that market data is the oxygen of the markets. Ensuring 

that the market data is available in a fashion where it is both affordable to investors and where market participants have the 

widest possible latitude to add value to that data are high priorities. According to the SEC, the SRO networks spend about 40 million on collecting and disseminating market data, and in return receive over 10 times that much in revenues, 424 million. And those 

revenue come from investors. 

We believe the SEC was closer to the mark in 1999 when it proposed market data revenues should be cost-based—excuse me, and 

that—and its current Reg NMS proposal, which sets forth a new 

formula for dispensing market data revenue without addressing the 

underlying question of how to effectively regulate this monopoly 

function. 

Regulation NMS is a bold step to bring our markets into the 21st 

century. This committee and the SEC are to be commended for 

prompting what has already been a productive debate. Elimination 

of the trade-through rule, restoring the transparency lost to 

decimalization, coupled with greater efforts to ensure access to liquidity, and finally control the cost of market data would help promote a National Market System that best serves investors. Thank 

you. 

Chairman BAKER. Thank you, sir. 

[The prepared statement of Kim Bang can be found on page 89 

in the appendix.] 

Chairman BAKER. And our next witness is Mr. Robert Greifeld, 

president and chief executive officer of the NASDAQ Stock Market, 

Incorporated. Welcome. 

25

STATEMENT OF ROBERT GREIFELD, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, THE NASDAQ STOCK MARKET, INC. 

Mr. GREIFELD. Thank you. Chairman Baker, Ranking Member 

Kanjorski, and members of the subcommittee, thank you for the opportunity to discuss NASDAQ’s views on the reproposed Regulation 

NMS. NASDAQ supports much of the proposed Regulation NMS, 

including the restrictions on subpenny trading, the proposed access 

standards, and restrictions on access fees. 

With regard to the SEC’s proposal on market data, we support 

the SEC’s liberalization of proprietary market data; however, we 

believe the quote credit element is seriously flawed and will be 

gamed by market participants. Examples of this gaming would be 

flickering quotes, security targeting, market targeting, shredding 

quotes, and shifting quotes. This will serve to distort market data 

and increase investor costs. 

With regard to the trade-through rule, NASDAQ opposes it because it is not needed. It is costly, and it will not serve the best 

interest of investors. 

We are proud of the market quality experienced by investors 

every day on the NASDAQ Stock Market. We achieve that high 

quality without the anticompetitive effects of a trade-through rule. 

We do not believe that extending the trade-through rule to 

NASDAQ is supported by the facts and may indeed be harmful to 

investors. 

Reg NMS will allow investors to make distinctions between fast 

and slow markets. This will help modernize our overall market 

structure. While repealing the trade-through rule would be a simpler way to achieve a competitive proinvestor National Market System, the advances proposed by the Commission with regard to 

floor-based markets are a step forward. This proposal is already 

driving floor-based markets to develop plans to automate. It will 

enable electronic markets to compete and will offer investors a better opportunity for best execution. 

With regard to NASDAQ, the extension of the trade-through rule 

to our market would be harmful to investors. We are not convinced 

that the rule would even achieve the SEC’s desired goal of increasing the use of limit orders. In contrast, we know that the rule will, 

in fact, impose financial and technical costs and deprive millions of 

investors of the ability to determine what is best for them. 

The Commission relied on two economic studies to support the 

application of the trade-through rule to NASDAQ securities. We respectfully disagree with the Commission’s staff studies. Our full 

analysis is attached to my written testimony, and in these studies 

it shows that the trade-through rate on NASDAQ is not, in fact, 

2 percent, but today is 1 percent. 

In general, I will tell you the SEC’s study significantly overstates 

the extent, and it also concludes that differential fill rates for large 

market orders in NASDAQ and New York Stock Exchange stocks 

are evidence of a defect in NASDAQ’s market structure. This study, 

in fact, demonstrates a lack of understanding of how the market 

works, and yet it is used to justify a major change in our market. 

Many in Congress have asked NASDAQ what we think of the 

two alternatives in the latest NMS proposal. Just to be clear, neither a top of book proposal nor a depth-of-book version of the tradeVerDate 0ct 09 2002 14:06 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\DOCS\22158.TXT FIN1 PsN: MICAH
26

through rule is better than the NASDAQ open competitive market. 

The real question should be, has the trade-through rule outlived its 

usefulness, and should it be repealed? 

For those who support a trade-through rule, we found it interesting that the arguments they relied upon conveniently evaporated from their advocacy when the depth of book alternative was 

proposed by the Commission. In fact, some seem to be taking intellectually inconsistent positions. When the New York Stock Exchange testified before you last February at the New York field 

hearing, the NYSE stated ‘‘Why should investors ever receive anything other than best price?′′

There is talk of the importance of speed, anonymity, and other 

factors, but in a commoditized market like that which exists for equities, if displayed prices across all markets are available immediately, there is absolutely no reason to allow agents to buy and 

sell on behalf of their clients for anything other than the best price. 

However, the New York Stock Exchange seems to have had a 

change of heart. Last month, in a letter to the SEC, the New York 

Stock Exchange praised the virtue of promoting investors’ ability to 

choose among alternative trading venues and decried the mandatory depth-of-book routing. And it said it will eliminate intermarket 

competition by giving any limit order regardless of where it was 

placed the same protection; that is, any limit order would be protected based on price. 

If you really worship at the altar of best price, the depth of book 

alternative fulfills that objective perfectly. If someone supports 

trade-through protection for one price, how can one logically argue 

against protection of an order as little as one penny away from that 

price? That is saying that the first investor in line deserves to have 

his or her spot protected, but the second person in line and any 

subsequent investors in line do not. 

We have been given a choice between two competing visions. The 

first vision is the government continues to function as an involved 

regulator, presiding over the positive forces of competition as is 

now the case on the NASDAQ market where there is no tradethrough rule. Or the second choice is we rely on the government 

to define quality stock market services and provide attendant rate 

protection and price setting. This is the world where a national 

trade-through rule is administered by the SEC. 

Some would say there is a level of safety in removing the rigorous jostling forces of competition and applying a government-defined pathway for each and every trade. Others would say competitive vigor is our best hope of providing the most efficient, effective 

market for investors. I come down squarely on the side of competition, and this is not a theoretical conclusion. The NASDAQ Stock 

Market operates this way every day and has performed exceptionally well for investors. 

In the end, NASDAQ is hopeful that Reg NMS is completed in 

a timely manner. It is important to move competition forward in 

the trading of New York Stock Exchange issues. 

Again, we hope the Commission will reject the imposition of any 

trade-through rule on NASDAQ. The Commission’s market structure rules are critical to maintaining our lead in the global equity 

27

markets and will impact the way Americans and all investors view 

the quality and the fairness of our markets. 

I thank you for holding this hearing and for considering 

NASDAQ’s views. 

Chairman BAKER. Thank you, Mr. Greifeld. 

[The prepared statement of Robert Greifeld can be found on page 

135 in the appendix.] 

Chairman BAKER. And I want to start my questions with you. 

Based on your obvious concerns about trade-through being extended, setting aside for the moment the consumer interest to respond to this question—and let me quickly add, this should not be 

considered for litigation purposes a forward-looking statement. I 

am asking a policy question. If we were to extend the tradethrough, or the SEC were to extend the trade-through, with the top 

of book feature, tell me where the NASDAQ would be 3 years from 

now. What is it going to look like? What is the bad consequence 

of that? And take into consideration Mr. Joyce’s and others’ comments about cost of compliance. 

Mr. GREIFELD. Right. I think the consequence is that the trading 

in NASDAQ stocks remain essentially unchanged, but we have a 

drag to participants and investors on their return in that the imposition of trade-through on NASDAQ forces all participants to essentially go through a very rigorous and time-consuming and expensive system reengineering to allow each and every participant to 

follow the government-mandated rules. At the end of that day, you 

will have some trade-through on NASDAQ even if there is a tradethrough rule. So that is a key point. With the imposition of a tradethrough rule, there still will be some level of trade-through, and 

that is specified in Reg NMS. 

Chairman BAKER. Well, let me jump in. There is one other issue 

that the SEC, as I understand it, was hoping to achieve with the 

imposition, and that was to facilitate enhanced utilization of limit 

orders. Given where you are vis-a-vis the New York Exchange, 

what is the prognosis if the trade-through is applied with regard 

to the current utilization? 

Mr. GREIFELD. Well, we see today that there is a greater use of 

limit orders on the NASDAQ market as compared to the New York 

Stock Exchange, and we see from a broad range of commenters 

that they feel their limit orders today are better protected on the 

NASDAQ Stock Market when compared to the New York Stock Exchange. So we do not have an issue today with investors being 

wary or unwilling to put limit orders into the market. So, at the 

end of the day, you are putting a cost structure on to the market, 

and you are solving a problem that does not exist. 

Chairman BAKER. Let me flip over to Mr. Britz and give you the 

worst situation. Let us say, for example, that the trade-through is 

eliminated. Now, other than the consequence to the individual investor, who I am sure you will say may not be best served by that 

change, what is the consequence to the market structure? Assume 

for the moment the committee’s interest in looking forward is to 

come up with a philosophical approach to the issue to have the 

most vibrant and competitive market possible in 3 to 5 years. What 

is wrong with that as far as the New York Exchange, and why 

won’t your predominant position in the market prevail? 

28

Mr. BRITZ. Well, Mr. Chairman, if I may, I would almost like to 

answer the question for just briefly that you asked Mr. Greifeld. I 

think NASDAQ will be, under your scenario, a much better competitor of the New York Stock Exchange in 3 years with the benefit 

of the trade-through rule than they are today. And as you can 

imagine, I have some mixed views on that, but they would be in 

a position where they would strive to deliver the best prices to investors rather than striving—having a business model that strives 

to deliver cash inducements to brokers and substandard prices to 

investors. 

Relative to the New York Stock Exchange, we will continue 

under all circumstances to have a business model that delivers the 

best prices to investors with or without a trade-through rule, Mr. 

Chairman. 

Chairman BAKER. So your response really is if we extend the 

trade-through to NASDAQ, you are actually facilitating their competitive position; and you are going to argue here that in competition for your financial interest is the way we ought to go? 

Mr. BRITZ. Yes, sir. 

Chairman BAKER. That is an interesting approach. 

Let me ask this: Since the numbers are similar as percentages, 

I go to the question asked by——

Mr. BRITZ. Mr. Chairman, if I may. 

Chairman BAKER. Sure. 

Mr. BRITZ. The numbers are not similar. There is a fair amount 

of smoke and mirrors taking place here. 

Chairman BAKER. Please explain. 

Mr. BRITZ. There is a difference between the gross number and 

the net number. There isn’t anything in the listed market and in 

the trade-through rule today that precludes a trade-through from 

taking place; it simply requires a resolution for the aggrieved 

party. The trade-through rule at the end of the day was not about 

the taker of liquidity, it is about the person that gets traded 

through. Ultimately they raise their hand and complain against the 

trade-through, and that matter gets resolved. So the net number 

in NYSE-listed trading within the National Marketing System is 

dramatically different than the gross number that you are hearing 

about. 

Chairman BAKER. And what would that number be? If it is dramatically different, what would be the number? 

Mr. BRITZ. Virtually zero. 

Chairman BAKER. So are you telling me that there aren’t occasions on each trading day where thousands of executions occur 

which are not at the best price in the market. 

Mr. BRITZ. There are always order facts, Mr. Chairman. What I 

am telling you is that the trade-through rule addresses a procedure 

whereby those bona fide trade-throughs and aggrieved parties get 

resolved after the fact. 

Chairman BAKER. I understand your point as to process and the 

right of the aggrieved party to seek redress. My point merely was 

in today’s market function there are on thousands of occasions on 

a daily basis within the conduct of the New York Exchange transactions, individuals who do not get execution at the best price. 

29

Mr. BRITZ. That is correct. And what I am suggesting to you, Mr. 

Chairman——

Chairman BAKER. Is there is a way for them to fix it. 

Mr. BRITZ. That is exactly right. 

Chairman BAKER. I understand. 

Mr. BRITZ. That is what the trade-through rule prescribes today. 

Chairman BAKER. And all I am suggesting is that the defense of 

the current structure is that we are protecting individual interest. 

And I think Mr. McCooey made the point in his written testimony 

that when we went to decimalization, and there were minor fractions that were gleaned for the investor, we should not lose those 

fractions of a penny or a penny on the aggregate of trades because 

of the enormity of value that represents in the market. 

I am simply saying—making the same observation with regard 

to current trade-through practice: There are thousands of occasions 

when the trade does not occur at the best price, maybe a penny, 

maybe a little over a penny, and that also represents significant 

value. And what I am trying to get out of this—and, you know, a 

Congressman trying to unravel Wall Street conversation is perhaps 

a more lengthy task than somebody who has only been here 20 

years really has to really understand you guys. 

But I am kind of getting the picture that, whatever the current 

system, there are advantages that could further accrue to the average investor—it might be very small amounts—if we let technology 

work. I think the principal reason—and, again, correct me if I am 

wrong, one of the principal reasons why the execution might not 

occur at the best price is the technological barriers between the exchanges that don’t allow that transfer of information in a timely 

manner to meet your own self-imposed trading timelines. Is that a 

factor in this? 

Mr. BRITZ. Proposed Reg NMS, Mr. Chairman, neutralizes the 

landscape relative to speed. So whatever inefficiencies exist as between so-called manual markets and automated markets today will 

be a thing of the past under Reg NMS. 

Chairman BAKER. But what I am saying, as to current market 

practice, that is the principal reason I believe that execution may 

not occur at the best prices, because of technological lack of translators. 

Mr. BRITZ. I am not so sure I would call it technological so much 

as I would call it different market models, different market structures. Technology, the piece of that, to be sure, but a much more 

fundamental——

Chairman BAKER. We are not getting to the specialist question, 

are we, with that answer? 

Mr. BRITZ. Say it again. 

Chairman BAKER. We are not getting into the specialist question 

with that answer. 

Mr. BRITZ. No, we are not. 

Chairman BAKER. Okay. 

Mr. BRITZ. No, we are not. 

Chairman BAKER. I have exhausted my time and probably you 

as well. I am sorry. 

Mr. Kanjorski. 

30

Mr. KANJORSKI. Ms. Dwyer, you helped draft the original tradethrough rule, and I assume, because of technological change in advancement, your position now is contrary to what you drafted when 

you were originally with the SEC? 

Ms. DWYER. Well, actually the rule was drafted by the American 

and New York Stock Exchanges. At that time I represented the 

American Stock Exchange, and with my companions at the New 

York Stock Exchange we were being pressured by an SEC that was 

looking to establish a CLOB because it wasn’t happy with the inefficiencies of ITS, which in those days linked regional stock exchanges and some third market makers. And under pressure to 

avoid the imposition of a CLOB, we did, as Bob has correctly pointed out, create a rule that had nothing to do with best execution, 

and that rule hasn’t had—for at least 28 of its 30 years, it was 

merely a means of redressing monetary grievances between specialists that traded through each other. It was a means of avoiding arbitration over every single one of those things. 

Mr. KANJORSKI. I find that interesting, but I suspect, like Abraham Lincoln, it depends on who you represent as to who you stand 

for. But your company participates, I believe—and I want to ask 

this as a question—getting payment for order flow; is that correct? 

Ms. DWYER. Well, in some respect I think you could characterize 

the sale of our market-making business lock, stock, and barrel to 

UBS with an ongoing order routing arrangement as payment for 

order flow, but it would then be in the realm of many other things 

throughout the industry that arguably could be called that, but 

represent not cash payment for order. 

Mr. KANJORSKI. Do you see any conflict of interest involved 

there? 

Ms. DWYER. I actually don’t see a conflict of interest there. I see 

it as the elimination of a potential conflict of interest which we 

have been managing for many years operating our own marketmaking business within the Schwab family, and now we have an 

arm’s-length arrangement with the New York Stock Exchange’s 

largest order routing firm and service levels agreements that are, 

if anything, better than the ones we provided to our customers on 

our own. 

Mr. KANJORSKI. Let me understand, because I really haven’t 

been able to inquire into the question. My understanding is the 

broker, or the Exchange, but it is really the broker that is handling 

the transaction, pays the company for its order flow, and then that 

money reverts back to the company. But it isn’t distributed to the 

investors in that company if their mutual fund buyers or if their 

investors through that company, those revenues, stay with the corporation; is that correct? 

Ms. DWYER. Well, there are many different kinds of payment for 

order flow, and in some cases monies are remitted back to customers; in other cases, traditionally the SEC has allowed payment 

for order flow to stay legal because it reduces the cost that customers pay. 

In our situation we have a very traditional—today we have a 

very traditional arrangement on Wall Street, which is paying someone else to execute our orders and being paid for the value of 

that——

31

Mr. KANJORSKI. Do you see a big distinction between that practice and insurance companies paying brokers for certain 

insurables? 

Ms. DWYER. Well, I hope you are not going to get me indicted 

here, but I——

Mr. KANJORSKI. No, I——

Ms. DWYER. I do think there is a big difference. 

Mr. KANJORSKI. I can tell you, I have been to a number of exchanges now where the question has been raised to me—and I am 

flabbergasted—that you all in the securities business don’t see the 

inherent conflict of interest in being paid by the person you are giving the business to, and he is buying perhaps at a higher price 

which affects your investor. And let me ask anyone else. Do you all 

see any conflict, potential conflict of interest, or a problem in paying for order flow? 

Mr. JOYCE. Mr. Kanjorski, I would like to take a run at that. We 

at Knight, in fact, do pay some brokers to provide us with order 

flow. By definition order flows have value, by definition. That is obvious. But any and all. 

Mr. KANJORSKI. Well, what is that? It is a payment to somebody—somebody gets the business that you give them because they 

pay you, right? 

Mr. JOYCE. We get order flow brought to us because of, in point 

of fact, we compensate them under certain circumstances for routing the order flow to us. Now, the point is that——

Mr. KANJORSKI. They used to call that rebates or something in 

the railroad? 

Mr. JOYCE. Rebates. Rebate, payment for order flow. 

Mr. KANJORSKI. I mean, this has been a practice going on in 

American capitalism for a couple hundred years in different forms. 

Mr. JOYCE. Yeah. And I think it started in the securities industry 

in the late 1960s when there were eight-point spreads. 

Mr. KANJORSKI. I understand payment for order flow specifically, 

but rebates and paying for business and the conflict of interest that 

is inherent in that concept, that has been going on in American 

business for years. 

Mr. JOYCE. Well, I can’t comment on the rest of American business. I do know the conflict of interest in this case, I think, is negligible at best because none of these payments take place before the 

execution is considered. This is all after the fact of securing the absolute best execution for the investor. 

Mr. KANJORSKI. But it may cause a worse price. 

Mr. JOYCE. With all due respect, Mr. Kanjorski, I challenge that. 

The best price procedures that are taking place in the NASDAQ—

in point of fact, 2 years ago——

Mr. KANJORSKI. You mean you pay somebody money for order 

flow even though you could have had the same order flow from 

anyone else and have paid them nothing? 

Mr. JOYCE. Or, theoretically, we——

Mr. KANJORSKI. Or they wouldn’t pay you for the order? 

Mr. JOYCE. Well, we wouldn’t have that order flow if we didn’t 

pay for it. We wouldn’t just get it. 

Mr. KANJORSKI. Why? 

32

Mr. JOYCE. Because we have to—one of the reasons, we get it in 

competition with other members of the industry. By the way, this 

is not just an isolated case in one firm or another; this is an industry practice. In order to compete in the industry——

Mr. KANJORSKI. I understand, it is rather broad. Does anyone at 

that table, eight of you, see anything potentially as a conflict of interest or improper about that activity on the exchanges? And I am 

just curious. 

Ms. DWYER. Let me see if I could answer that in another way. 

Any business is full of conflicts, and it is how you manage them 

that matters; do they affect the quality, as you have pointed out, 

of what the customer receives. So the SEC in this matter has required, I think very properly, that we all do fulsome disclosure to 

our customers, and that we still be subject to the highest standards 

of best execution, which we demonstrate regularly to all and sundry. And I would like you to look at the disclosures that are made 

so customers know absolutely. 

Mr. KANJORSKI. Unlike the insurance industry——

Ms. DWYER. I think very unlike the insurance industry. 

Mr. JOYCE. I agree it is unlike the insurance industry. You can 

look up right now on the Internet, and you can see what our execution statistics and the quality of those statistics are. 

Mr. KANJORSKI. Why would so many brokers——

Mr. JOYCE. The insurance industry does that. 

Mr. KANJORSKI. Why would so many brokers——

Mr. JOYCE. We are very——

Mr. KANJORSKI. When I went on to the floor of one of the exchanges, I must have had 25 brokers come up to me and say, Congressman, you have got to do something about this. This is the 

most immoral, illegal practice, and most conflict-of-interest practice 

we have ever seen. And we have no alternative but to pay for order 

flow. 

Are they—their idea of this is grossly wrong, or is there something missing in this? 

Mr. JOYCE. I don’t know where they are coming from, Mr. Kanjorski. I can’t speak for them. 

Chairman BAKER. And let me say, that might be the gentleman’s 

last question, but please feel free to respond, anybody who wants 

to answer his question. 

Mr. BANG. A piece of the problem may tie back to access fees 

that are currently permitted by the SEC to charge access fees, 

ECNs to charge access fees, exchanges charge access fees. And as 

a result of those charges, competitive pressures essentially make it 

such that rebates are funneled back to market participants for 

posting bids and offers. Our position, Bloomberg Tradebook’s position, is that it is a market-distorting element and that we should 

do away with access fees. 

Mr. KANJORSKI. Your position, you should do away with the payment of order? 

Mr. BANG. Access fees, which access fees is an element that provide the ability to pay for limit orders. If you eliminated access 

fees, the ability to pay rebates for limit orders would diminish significantly. 

Chairman BAKER. Mr. Greifeld, did you want to add? 

33

Mr. GREIFELD. Yeah. I think the broader issue is a conflict between acting as principal and agent. And our industry really has 

had to grapple with that through the years, where you have traders who can act both as principal and agent. And most notably in 

the recent history is the specialists on the New York Stock Exchange, where they did a very good job for a number of years, decades, and postdecimalization you saw that they were putting their 

principal interest ahead of the customer interest, and that resulted 

in the $250 million fine. 

Now, NASDAQ market makers have also run into problems with 

managing that principal and agency conflict. I think Carrie says it 

properly: Conflict is there, it is a question of how the SEC, the 

SROs discharge their responsibilities to make sure that conflict is 

managed. 

Mr. JOYCE. And if I just may clarify. Knight Trading Group neither endorses nor opposes payment for order flow. It is simply a 

function of the competitive environment. What we do feel exceptionally strong about is that the retail investor has never had it so 

good. So any and all payment for order flow issues are above and 

past the execution issue, because the execution issue is one that is 

public, and we are exceptionally proud that the retail investor gets 

top-flight executions, and then the payment for order flow issue 

comes in. But we neither endorse it nor oppose; it is just sort of 

a competitive part of life, and it does not, repeat not, affect the 

quality of the execution. 

Mr. MCCOOEY. As a pure agency broker, the Griswold Company 

sees the conflict and does not pay for any order flow. 

Chairman BAKER. Mr. Fossella, did you have a question at this 

time or comment? 

Mr. FOSSELLA. Thank you, Mr. Chairman. Thank you, panel. 

Just to follow up on Mr. Britz’s comments. I guess I don’t—I 

guess I will paraphrase it. But I think he said that the Reg NMS, 

I guess, will neutralize the differences relative to the speed of execution among the exchanges. Given that, if that is true, is there 

anybody on the panel who thinks on balance that a Reg NMS as 

currently proposed is bad for the markets and thus bad for investors, or does everybody believe that on balance Reg NMS is good 

for the markets and thus good for investors? 

Mr. JOYCE. I would be happy to comment. I think parts of Reg 

NMS are good for investors, like getting rid of subpenny trading 

and limiting access fees. It is a fundamental difference that I guess 

some of us have. There is a view that regulation, i.e., extending the 

trade-through rule, is going to enhance markets. I fundamentally 

believe that regulation stops innovation. Long-term innovation will 

improve the investor experience. So as long as Reg NMS includes 

an extension of the trade-through rule, it will be, in point of fact, 

a detriment to the investor experience. 

Mr. FOSSELLA. Is there anybody who believes that it will be a 

detriment? If not, is it safe to assume that everybody thinks that, 

on balance, as currently proposed, it is a plus for the markets and 

thus investors? 

Ms. DWYER. I think, speaking for me, I think I testified to the 

opposite, that, on balance, it would not be a benefit. I would say—

before I came here, I looked at some order execution statistics from 

34

our own order flow in the last week, and, contrary to Bob’s assertion that we would normalize speed in this market, last week, for 

example, New York Stock Exchange executions, which were of an 

equal quality of execution that we received elsewhere, were on average four times slower. And I think what I said in my testimony—

across all bands of orders. And I think what I said in my testimony 

was that that kind of a break on the current trading process, something that clogs the pipeline and slows it down. 

If you think about the fact that a firm like ours sends probably 

40,000 orders an hour out into the markets to be executed, you 

start to put a drag on that pipeline, and it is not just one investor 

who may get an execution for seconds, you know, slower or faster, 

it is the cumulative effect on that entire stream. 

Mr. FOSSELLA. And that is currently—you don’t feel that, as proposed, Reg NMS will satisfy that? 

Ms. DWYER. No. It will make it worse. 

Mr. FOSSELLA. Because Mr. Britz followed up, again, different 

markets, different models, different structures, and different models, that it would be an incentive for these regional markets including the Stock Exchange to become more hybrid, and thus speed of 

execution will, his point—is to neutralize it. You don’t buy it? 

Ms. DWYER. Speaking for us, we think the opposite. 

Mr. FOSSELLA. Okay. 

Ms. DWYER. That the ability—that the necessity to compete fully 

with more automated markets will cause the Stock Exchange, 

which is one of the greatest markets in the world, to move forward 

and innovate. 

Mr. BRITZ. If I may, it is inarguable that Reg NMS will normalize the speed across markets in order to have quotes eligible for 

competition in the marketplace. I don’t know at what level right 

now the language is automatic execution, essentially untouched by 

human hands. Our own speed for automatic execution is now down 

to seven-tenths of 1 second. But the point is inarguable that under 

a Reg NMS regime, speed, or at least some minimum standard of 

speed, will be normalized across all markets. 

I would make one other point relative to Carrie’s comment. She 

was, I am sure, accurately portraying her own firm’s data. If you 

look at the data required to be filed with the Securities and Exchange Commission, you will see that the New York Stock Exchange in a number of trade size categories, for example, the largest trades, is actually faster than any other marketplace. 

Ms. DWYER. Bob is correct, I was speaking for us alone. 

Mr. ANDRESEN. I think that one thing that is important to note 

here is that I think the trade-through debate has been 

mischaracterized as a choice between speed and price. I think that, 

speaking for Citadel or speaking for any market participant, this 

is always a choice about price. But there are different factors in 

price. There is the advertised price of a trade, and there is the true 

price of a trade. When you buy an automobile, you have delivery 

charges, you have taxes that might impact the true cost of execution that may very well differ from the advertisement you saw in 

the newspaper. 

And when we talk about normalizing execution costs between exchanges with Reg NMS, the possibility here is to face each—before 

35

each exchange a binary choice to either be a manual market or an 

electronic market. Once you are in an electronic market, one of the 

most major implicit costs of execution on the floor of the New York 

or the American Stock Exchanges disappear. That is the optionality 

for someone trading their own account to selectively trade with 

that incoming order. Once that choice is removed, and they must 

immediately execute that trade or immediately not execute that 

trade, then the incoming order cannot be gamed. And that—if that 

is the case, in someone’s manual, whether they are seven-tenths of 

a second or seven-tenths of a millisecond, as long as the gaming is 

gone, then an investor can take those costs into effect when choosing their routing table. 

Mr. JOYCE. If I may just say, normalizing to me sounds like appealing to the lowest common denominator, which sounds like to 

me a complete lack of competition, which sounds like to me a detriment to the investor community long term. 

Mr. GREIFELD. When we think about Reg NMS, when we started 

this process, we truly had hopes and dreams that it would represent a true step forward for the U.S. equity marketplace. So I 

guess I take some issue with saying is it detrimental. I believe that 

is not the right question. It is a question of are we doing this once 

in a generational change to the markets, and are we taking best 

advantage of this opportunity. 

There are things in Reg NMS, as I stated in my testimony, that 

clearly improve the markets. But when we look at the imposition 

of a trade-through on NASDAQ where there is no discernable benefit and there is substantial cost, we are wondering if we really are 

spinning our wheels and wasting our time for this really unique set 

of opportunities. 

Chairman BAKER. The gentleman’s time has expired, unless 

there is somebody else who wants to respond. If not, Mr. Ackerman. 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

I am still trying to get my arms around this whole issue. I would 

like to ask the panel, which of you would like to go away with the 

award for having lousy testimony, having little effect on the committee, but having been the fastest in delivering it? No takers. 

I remember a couple years ago I got a hip replacement, and I 

was talking to a whole bunch of different surgeons about it. One 

had told me that he was renowned because he could do six hip replacements before noon. He wasn’t that good at it. I went with the 

guy who could do three but was an excellent surgeon. I think for 

me anyway it was the right choice. It might not have been the 

right choice for everybody. I mean, some people just don’t want to 

be on the operating table that long. But that should be their choice. 

I remember when I was a teacher, we used to have questions 

like, two planes leave New York for Washington at 3:00; one travels at 400 miles an hour and crashes and burns upon landing. The 

other travels 250 miles an hour, gets there 15 minutes later, safely. 

If I would ask my students which plane would they rather be on, 

I think they all get it right. 

Is there an application of these things to what we are talking 

about now? 

36

Mr. BANG. I would like to comment briefly on that. We believe 

that investor choice is really the cornerstone of the creating a competitive, dynamic marketplace. The problem what we have right 

now is that there is no true choice, because customers, clients, investors do not have the ability to see available liquidity and access 

it without being intermediated by a manual process. And that 

means they don’t really have the choice between opting in for an 

option process, let us say manual execution, and a purely electronic 

direct market access choice. 

We don’t favor a trade-through rule, but what we favor is providing that transparency and that ability for the investor to make 

the choice, go for the direct electronic execution, immediate execution, or choose to go to the auction process in the manual market. 

But that choice does not exist in today’s market structure for the 

New York Stock Exchange. 

Mr. MCCOOEY. I am sorry, but, yes, it does. We have an automatic execution at the New York Stock Exchange. We have had it 

for years. Right now the average trade size is 399 shares at—and—

across all listed securities at the New York Stock Exchange. That 

is the average print size, the trade size. Our execution facility direct plus is 1,100 shares and under. So it encompasses the 399 

shares that is the average share size, and that is an automatic execution. There is no human intervention. That is, the order is there. 

There is an offer that wants to be taken, a bid that wants to be 

hit, the investor hits that bid and immediately is removed from the 

screen, and there is no human intervention. So that is a 

mischaracterization on how the market works today. 

Mr. BANG. The markets are capped. There is a trade size cap to 

up to just a little over—under 1,100 shares. And you can only repeat that process every, I think, 15 or 20 seconds. So there is a 

speed bump, if you would like, along the way. 

With the proposal, hybrid market proposal, from the New York 

Stock Exchange, they are proposing to do away with that, and we 

commend that. But as it is today, it is capped in both time and 

size, and there is no realtime visibility beyond the top of file. So 

one penny below, you have no visibility and no access to that liquidity. 

Mr. ACKERMAN. What is the object of an investor? 

Mr. BANG. To get done, typically. 

Mr. ACKERMAN. To get done? I had this house I bought, and as 

I was looking around for painters, I hired this painter, I said, I 

have got to get this done in 3 days. I got there at the end of the 

second day to see how he was doing, and he was wrapping up. 

There was paint pouring down the exterior brick walls of the 

house, the inside had paint all over the floors and everything. And 

I said, you messed up my whole house. And he says, yeah, but I 

finished in 2 days. 

Mr. JOYCE. Ah, but the wonderful thing is you had choice. The 

wonderful thing is, in that example, you had a choice, and you 

made it. And the way this is—the way NMS is laid out, there will 

be a limitation of choice. 

Mr. ACKERMAN. But if my choice was to get the painter out of 

there faster, I could have shook hands with him the day I met him 

and sent him home. 

37

Mr. JOYCE. But at least you had a choice. 

Mr. ACKERMAN. The object that I was gunning for was to get my 

house painted. I would think that the object of an investor—and 

correct me if I am wrong, but if I am an investor, I am investing 

money with the object of making money. And if somebody says to 

me, you are going to lose money, but you are going to lose it faster, 

you know, is that what the investors are looking for? 

Mr. BRITZ. Congressman, if I may. If your question is one more 

of whether or not, from a public policy point of view and the health 

of our U.S. capital markets, unleashing this raw speed to the traders, who have great a appetite for it, will ultimately serve U.S. capital markets, the jury is going to be out on that for sure as to 

whether or not that injects increased volatility into the marketplace. 

When I broke into this business 30 years ago, it used to be that 

behind every order that came to the New York Stock Exchange was 

someone looking at a balance sheet and an income statement and 

doing some fundamental work, and then coming to a conclusion 

and sending an order to our market or anyone else’s market. Regrettably, Congressman, that is a very quaint notion today. People 

simply trade on a momentum basis. They cancel. The cancel rate 

for orders that are sent to the New York Stock Exchange, the socalled manual slow market, is about 80 percent of all orders that 

are sent to us are cancelled. And an extraordinary percentage of 

those are cancelled within the same second that the original order 

is sent to us. So what becomes of all of this endless speed vis-avis the health of the U.S. Capital markets is a question that I don’t 

think anybody can answer right now. 

Chairman BAKER. And that is the gentleman’s last question, but 

if anybody else wants to respond? 

Mr. GREIFELD. I just wanted to say that this Reg NMS debate 

clearly has gone on for too long, because I do remember the house 

painting analogy I guess it was a year ago, and I chuckled at it 

then, I chuckle at it now. 

Just a comment I will make. With NASDAQ, it is not a question 

of speed versus price. You truly get both speed and price. And by 

any objective measure, today the NASDAQ Stock Market yields a 

better outcome for investors than the New York Stock Exchange. 

Chairman BAKER. The gentleman’s time has expired. If no one 

else wishes to comment on that question——

Chairman BAKER. Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Assuming for the moment that best price is what the consumer 

is looking for and assuming for the moment that, be it through regulation or legislation, we should impose this, I was reading in Ms. 

Dwyer’s testimony that in the New York Stock Exchange you can 

have a delay between 30 seconds and 2 minutes on order execution 

and that the price volatility obviously can cause an investor, under 

the trade-through rule, not to actually get the best price. My guess 

is, Mr. Britz, here in part of your testimony that you disagree with 

that factual assertion. If so, where has she gotten her facts wrong? 

Mr. BRITZ. Congressman, I think the author of that disagrees 

with that. 

Ms. DWYER. If you are referring to my testimony—maybe not. 

38

Mr. HENSARLING. I think I was—I guess Mr. Andresen. Maybe 

it was in Mr. Andresen’s testimony. It was in somebody’s testimony. I don’t think I made it up. 

Mr. BRITZ. Congressman, I will take a shot at responding to it. 

The average turnaround time for every order that is sent to the 

New York Stock Exchange across the board, as we speak, is about 

12 seconds. I wouldn’t deny that there are occasions when it is 

something north of that by definition. That is an average, so there 

has to be something north of that. 

The facility that we have in place that now handles 11 percent 

of our volume, the direct-plus facility that Bob McCooey referenced 

a moment ago, is a sub-second execution which accommodates a 

multiple of average trade sites, even with the current restriction as 

to the limitation on size. So any notion that there is a 30-second 

or a 2-minute execution experience at the NYSE is an artifact, Congressman. 

Mr. ANDRESEN. I think that you know one important thing to 

consider here is the certainty of an execution. Citadel executes over 

a hundred million shares a day through various venues. If I knew 

when I was sending an order that I was definitely going to get an 

execution, I just wasn’t going to find out about it for 12 seconds, 

I really wouldn’t care that much. The issue is, if in 12 seconds I 

might find out that I got, I might find out that I didn’t get it. 

If I was trying—you know, if I offered you tickets to the Duke 

Carolina game later this year for $10, you would probably think it 

is a pretty deal. But if I didn’t deliver the tickets until after the 

game was played, you would not think it was such a good deal. 

There is a time value to having the certainty of an execution realized. And we talk about like how quickly we get execution. The 

real issue here is not just, you know, if the execution is fast. It is, 

you know, if it happens at all. And especially is there an option for 

the person on the other end of that line to take advantage of price 

fluctuations in the meantime. If I send an order and it takes 12 

seconds to respond but the stock moved during that intervening 

time and I only get filled if the stock moved against my order and 

never filled when it went with my order, then that 12 seconds 

starts to look like a pretty raw deal. 

Mr. BRITZ. Congressman, if I may respond that. 

Matt, I don’t disagree with the principle you articulated, but I 

find it interesting that when you trade NYSE stocks, if you trade 

them away from the NYSE, you have certainty of execution. You 

get a fill rate on NASDAQ at 59 percent; INET at 18 percent; 

ARCA, 40 percent; and Brut, 29 percent; versus 79 percent for the 

NYSE. So who wins the certainty race there, Matt? 

Mr. ANDRESEN. Actually, our percentage executions are actually 

far lower than that. But that speaks to our strategies. When you 

are standing ready to buy or sell something and you put in an 

order, that price is good as long as the value doesn’t change. When 

the value changed, you must cancel that and replace it to update 

what the new price is. 

Mr. HENSARLING. Mr. Andresen, let me ask you different question here. And that is, it appears that the ECNs have a much 

greater market share in NASDAQ traded stocks than they do New 

39

York Stock Exchange. Does the trade-through rule play any factor 

in this, or what are the factors that account for that? 

Mr. ANDRESEN. Well, the most important thing is inertia. The 

New York Stock Exchange has been around a long time. They have 

done a very good job with their business. They have over 80 percent market share. If you are going, you know, shopping and 80 

percent of the time you find everything you want in one place, you 

will tend to stay in that place. So, first, you know credit is due to 

the New York Stock Exchange for their business. 

When you look at NASDAQ marketplace, maybe 6, 7 years ago 

electronic markets had also a very small percentage of volume, but 

they have been able to be successful there and have not been successful on the New York Stock Exchange. I think part of the reason 

is the competitive nature of the New York Stock Exchange, but also 

part of that is the trade-through rule. 

Electronic markets attempt to compete using—across various 

value propositions. There is the cost of the execution—not the price 

of the trade but the actual explicit cost and fees associated with 

making a transaction. They offer varying degrees of certainty of 

execution. They offer different speeds. And the trade-through rule 

right now, because where there is a better price away your choice 

as a market is either to match that price internally or route it to 

that better price. Well, if you are an electronic marketplace that 

acts as an agent, you are not allowed to trade for your own account. Therefore, your only choice is to send that order away. 

Now if you are an electronic market, you are trying to sell services based off speed of execution. But every time there is a superior 

price you have to mail that off to a different marketplace. You have 

then lost control of the user experience on that order. And once 

that happens the customer—and I used to run an electronic network. Now I am part of the problem. I am a customer of these. I 

don’t like that result. 

Chairman BAKER. The gentleman’s time has expired, unless 

somebody else wants to jump on in on that. Yes, sir. 

Mr. NICOLL. I would just like to remind everybody here that 

the—a couple of fundamental—I think we need to step back, okay? 

We have two markets. One has a trade-through rule; one doesn’t 

have a trade-through rule. Whenever you are considering the parade of horribles that the New York Stock Exchange marches before you about what will happen to their market without a tradethrough rule, you have to say to yourself, why hasn’t that happened in the NASDAQ marketplace? That’s number one. 

Number two, you are going to be thrown a lot of statistics which 

are always in the favor of the person who is delivering them to you. 

Let’s take this issue that Bob just brought up of fill rates. Fill 

rates are a consequence of how many executions you get versus 

how many orders you send. So if you send down 10 orders and you 

only get one execution, you have got a 10 percent fill rate. If for 

every order you send you get an execution, you get 100 percent fill 

rate. Now you would think 100 percent is better than 10 percent. 

But the fact of the matter is that the better the marketplace, the 

more certain the marketplace is, the more apt you are to send more 

orders to them, and the more comfortable you feel sending those orVerDate 0ct 09 2002 14:06 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 G:\DOCS\22158.TXT FIN1 PsN: MICAH
40

ders. Therefore, the better marketplaces don’t have higher percentages of fill rates. They actually have lower percentages of fill rates. 

Now I am saying that to you because I have a low fill rate percentage. Bob is going to say to you, no, no, my 79 percent is better 

than his. Okay? I assure you that whoever makes the argument is 

going to be using the statistics for their own benefit. 

I hope you buy my logic. But what I want you to buy, first and 

foremost, is that these are very sophisticated people up here, what 

we call on the street, arguing their own book, making the best case 

for themselves and using very sophisticated arguments to do that. 

And to me, in a situation like that, the best public policy is to allow 

competition to play out. 

Don’t buy into these arguments that you need to overregulate 

these markets. What we need are minimal regulations. Let these 

markets compete with each other and let investors choose. Let investors choose which are the best markets. 

I assure you the New York Stock Exchange, with its 80 percent 

market share, all it has to do is meet the needs of investors and 

it will retain that 80 percent market share. It doesn’t need the benefits of the trade-through rule and the barriers to competition that 

the trade-through rule creates. 

Chairman BAKER. I thank the gentleman. 

Ms. McCarthy. 

Mrs. MCCARTHY. Thank you, Mr. Chairman. 

I probably agree with you, Mr. Nicoll. It sounds like Republicans 

and Democrats when we are trying to sell each one of our points. 

I remember when this conversation started, I guess about 18 

months ago or 2 years ago, and we first started hearing about 

trade-through and best price; and now we seem to be, 18 months 

later, dealing with a situation that in my opinion seems worse than 

what we started off with. Mainly because I happened to ask the 

question going back then—I have NASDAQ and I have the New 

York Stock Exchange, certainly wonderful members of New York, 

and they add to the economy to, certainly, our great State. But the 

question kept going back, competition. 

If we overregulate, don’t think it is going to be good for anybody. 

But, with that, the one question I still don’t get a real answer for, 

the companies, the investors, the clients are going to go to whoever 

they feel comfortable with or who they feel they are getting the 

best service for. So here we are, in my opinion, starting to even 

more overregulation than what we started off in the beginning, and 

nobody is happy. 

I don’t even know how this all started, to be honest with you. I 

don’t have the answers. But I am certainly more confused today 

than I was before I read all my notes and all the testimony before 

we started. 

So I know it is a separate language down on Wall Street, and it 

is, and it is a different world. But, you know, we are here, I think 

all of us, to really try and figure out what is the best thing for the 

consumer. I mean, that is what we are concerned about in the end. 

And, hopefully, I think, in my opinion, that we should proceed very 

cautiously before we make any radical changes. 

I think that the rules that are coming through, again, looking at 

them, and I guess I will ask Mr. Andresen and Mr. Bang, I—from 

41

hearing your testimony, it seems to me that you are suggesting a 

cautious approach to what Congress and the SEC can judge the impact of any new proposals on the national market. And I guess if 

your answer is yes—or if it is no, tell me differently. To me, the 

market and the BBO alternative seems to offer the more cautious 

approach. That is my—from hearing everything, between those—

between NASDAQ and the New York Stock Exchange and all of 

you in between. And correct me if I am wrong or give me suggestions on where we should be going. 

Mr. ANDRESEN. You are absolutely correct. The BBO alternative 

is the more incremental approach. But if you look at the NASDAQ 

example, right now there is no trade-through rule. The BBO, alternatively, merely says, well, you have to look at the best price from 

a competing marketplace. Depth of book says that if someone displays all of their orders, whether it be the best price, the next-best 

price, the next, next-best price, you must consider all of those. So, 

naturally, if we are concerned about the costs and unintended consequences of additional regulation, then making someone look at 

one order versus a potentially infinite number of orders, it is clear 

which one is less invasive and less apt to have unintended consequences. 

Mr. BANG. You are basically correct that we do favor a phased 

or cautious approach, particularly because the New York has two 

proposals out there that we think will have significant impact on 

the way market structure evolves. New York’s open book proposal, 

which is essentially to extend in real time transparency beyond just 

top of file, which we think is very significant; and, secondly in the 

hybrid proposal which has this element of extending the direct 

plus, direct immediate access capability without any share limits 

and without any time limits. That goes also beyond just the top 

penny quotation. 

Once that happens—although, you know, there are some technicalities with both of those proposals that we have some issues 

with, but that can be debated and sort of sorted out. But once that 

happens, investors will have much greater choice. They will have 

choice to route and go for this electronic, unintermediated approach 

for an execution, or they will have the choice to go through the auction process. 

And we believe that market participants today have very sophisticated execution management systems. They have linkages to 

these various points of liquidity, and bandwidth is very cheap, and 

there are smart routers that are designed to get best execution, 

which in most cases are always best price. It is, you know, not the 

speed issue. It is a best-price issue. 

So, yes, we do favor a phased approach. Once you go through 

those steps, however, we don’t think there is any need for any sort 

of trade-through rule, whether top of file or depth of book. 

Chairman BAKER. Will the gentlelady yield on that point? I just 

want to echo one perspective of her comment in going slow. 

I would think going slow would be to take most of the recommendations made, if that would be the committee’s wisdom, and 

not extending the trade through the NASDAQ. To me, that is just 

as Draconian as repealing the trade-through rule for the New York. 

There ought to be some mid-ground here. 

42

I think taking the old western style of ranching and applying it 

to the modern dairy doesn’t make a lot of sense until we get all the 

pieces sorted out. And I just want to commend the gentlelady’s observations and say to her, unless she has further comment——

Mrs. MCCARTHY. Well, taking on that point and just explain that 

to me, because it seems to me that NASDAQ does not want to go 

through the trade-through rule and the New York Stock Exchange 

wants to go through the trade-through rule but doesn’t—probably 

doesn’t like the—I lost it here. So neither one of them like——

Chairman BAKER. There is enough wrong here to go around for 

everybody, yeah. 

Mr. GREIFELD. We are certainly not in favor of the trade-through 

rule. 

And going back to your original comment, how did this come 

about? It came about that investors recognized that something was 

broken on the floor of the stock exchange in this decimalization 

world. And there was a hue and a cry to bring about some reform. 

They are the only floor-based market essentially left in the 

world. So, as the rules were put in place to encourage them to automate it, automate their markets, the rules then were extended to 

NASDAQ. NASDAQ is already an automated market, already has 

a fast and efficient price discovery mechanism, and we are left 

wondering why do we bear the burden of the cost for a market that 

already works so well. 

Mrs. MCCARTHY. Well, then going back to the New York Stock 

Exchange, is actually, because competition is actually moving everything to faster time, correct? 

Mr. BRITZ. Correct, Congresswoman. 

Congresswoman, if I may, I don’t know whether this will bring 

you the clarity that you seek, and it probably won’t, but of the 130 

respondents to the SEC across all market participants on reg NMS, 

100 were in favor of keeping the trade-through rule in New York, 

extending it to New York. It breaks out 92 top of book market 

BBO, if you will, and 8 depth of book. And another five were in 

favor of the trade-through rule tied to the NBBO, which is more 

closely aligned to some trade-through rule than it is none at all. 

Only 27 out of those 130, again across a broad constituency, were 

in favor of eliminating the trade-through rule. 

Chairman BAKER. The gentlelady’s time has expired. 

Mrs. MCCARTHY. Thank you, Mr. Chairman. 

Mr. BANG. Can I get one quick comment? 

Chairman BAKER. Sure. 

Mr. BANG. A middle-of-the-road opportunity may be to take the 

proposed reg NMS which is looking at firm quotations and extending transparency to five levels deep, which is nothing more than restoring transparency that was lost to decimalization. And then investors will then chose and route accordingly. 

Chairman BAKER. Gentlelady’s time has expired. 

Chairman Oxley. 

Mr. OXLEY. Thank you, Mr. Chairman; and congratulations on 

putting together an excellent panel. I see a lot of familiar faces out 

there who have compiled this panel before on a number of occasions. We have always enjoyed your expertise and good cheer. This 

43

is, what, your fifth or sixth hearing, Mr. Chairman, on the new 

market system? 

Chairman BAKER. I have lost count. 

Mr. OXLEY. Somewhere around there. Who is counting when you 

are having fun? 

Chairman BAKER. I will say, though, I note this one wasn’t nearly as entertaining as the field hearing in New York. 

Mr. OXLEY. Well, I am so sorry that I missed the field hearing 

in New York. 

Chairman BAKER. It was real entertainment, I have got to tell 

you. I think we need to go back. 

Mr. OXLEY. Yes, we do. 

And our good friend, Mr. Andresen, I noticed talked about Duke 

and North Carolina versus Duke versus Maryland, which I thought 

was——

Mr. ANDRESEN. We don’t talk about that. 

Mr. OXLEY. I didn’t think you would want to pursue that subject. 

This—I guess we are here today, and the whole issue revolves 

around, and I would be interested in the comments from the panel, 

two relatively recent phenomena that have affected the market. 

One, obviously, is technology, IT technology, and what technology 

can do in terms of accuracy and speed and productivity and all of 

that. And, secondly, of course, was going to decimals. Have I 

missed anything? Is that—are those the two issues that are driving 

this whole debate? Is there any other—does anybody want to pile 

on or add anything else? Okay. 

And I think this Committee can take some credit for certainly 

the second—the decimals, which we finally joined the rest of the 

world in trading in decimals, and Mr. Andresen still has his famous penny somewhere I think that provided visual aids for the 

hearing a few years ago. That really did, I think, change the whole 

equation for all of us as policymakers, for you, market makers and 

participants in the most robust markets in the world. To that end, 

there is no question we wouldn’t be here today discussing the proposed rule by the SEC had it not been for those two phenomena. 

Given that and where we are today, it just seems to me that both 

the advent of technology and the change to decimals have made 

this a much more vigorous competitive marketplace. And the entry 

of ECNs, the NASDAQ’s coming of age, all of these changes have 

meant one thing and that has been an incredibly competitive marketplace that has benefited all of our constituents, those folks who 

are participating in the market, either directly or indirectly, and it 

has had an enormous impact on our country and our society. 

Over half of the households today are invested in stocks. Ninetyfive million plus own mutual funds. People are trading on the 

Internet. Some of the debate we are going to have about Social Security individual accounts in many ways will involve the arguments that we have got today in terms of people’s ability to make 

decisions in the marketplace for their own future. The ability of 

those people to amass a fairly good nest egg over 40 or 45 years 

of saving and investing, the safety of the market, the cost of setting 

up these accounts, all of these issues and more really bring us to 

where we are today. 

44

What if—and I will just ask each one of the panel. I have got a 

pretty good idea where you are coming from. But let’s say that, instead of the trade-through rule, that we say to the SEC, let’s go 

back to the old fiduciary duty that brokers and investment managers owe to their clients, including the duty to obtain the best execution of their clients orders, and that we allow this unfettered 

competition to take place, we allow people in the marketplace to 

determine whether speed is their thing or whether best price is 

their thing or a combination—however. What would be wrong with 

that approach going forward, given these incredible changes that 

have taken place in a relatively short period of time? 

Also, understanding that we as policymakers, whether we are in 

the Congress or the SEC, many times find ourselves following, not 

leading the changes that take place in the markets; that, in fact, 

in the case of Gramm-Leach-Bliley, we were essentially making a 

law that in many cases out in the real marketplace had already 

taken place because of technology, because of things that had happened in the marketplace—and so I don’t think we are smart 

enough as policymakers to see into the future, and the only thing 

that happens is some—most of the time you get it wrong. 

So what is wrong with going back to this whole idea that, instead 

of this intrusive government regulation, we simply go back to the 

tried and true concept of best execution of the clients’ orders which 

ultimately is their fiduciary responsibility. 

Let’s begin with Mr. Nicoll. 

Mr. NICOLL. Well, I couldn’t agree, first of all, that fiduciary responsibility exists today and has existed and will continue to exist. 

So the trade-through rule, these rules are on top of those existing 

fiduciary obligations which are established both in common law 

and enshrined in the SEC regulations. We already have that fiduciary responsibility imposed upon all of the agents in the marketplace. What—and when we started out this debate, we started with 

that issue. 

People said, well, if we have a trade-through rule, then people 

are going to take advantage of it and trade through for their customers and it will be unfair. So the SEC initially came up with this 

idea of an opt out and said, okay, in case there are unscrupulous 

people out there, if you want to trade through, you have to absolutely opt out. You have to say to your broker, I want to opt out. 

Okay. So now there can be no question with an opt out that people 

who are trading through are doing it in the interest of their customer. 

Well, when that happened, people said—people still wanted a 

trade-through rule. And so they shifted the argument. They no 

longer said that it is about protecting the person placing the order. 

They made this very complicated argument about limit order which 

said it is not about the person placing the order, it is about the 

order that is already there. That order that is already there might 

get traded through, and people will lose confidence. That order that 

is placed is important because limit orders are important to what 

is called price discovery, and what that really means is it is important to narrow the spreads between the bids and the offers. 

The problem with that argument is it is just not supported in 

evidence, and there is a lot to suggest that all that you need are 

45

a couple of simple rules of transparency and access. And, by the 

way, and surprise, surprise, people will not trade through better 

prices if they can get a better price. It is not a surprise that people 

seek the best price in the marketplace, and people do not trade 

through. The evidence that the SEC has already adduced with respect to the NASDAQ has shown that there are very little tradethroughs, and the NASDAQ says that the SEC evidence even overstates how many trade-throughs there are. 

So this is all about this sort of bizarre notion that there is this 

public good in these existing limit orders and if we don’t protect 

them they are going to get traded through and that will impair the 

quality of the market. It is an interesting story. But, as I said, in 

my testimony, the facts just don’t bear it out. 

And nobody talks about the—when they make this argument 

about this, they will always talk about the future. It is always in 

the future, okay? But they never talk about the facts. The fact is, 

we have a market without a trade-through rule and we have one 

with a trade-through rule; and there is not a whole lot of difference 

in the number of trade-throughs between those two market places. 

Whether it is 2 percent or 1 percent or even 0 percent, there is 

very, very little difference. I would suggest to you that all that we 

need is that fiduciary responsibility to get the best price and let 

markets compete and we will have sufficient protection in the marketplace. 

Chairman BAKER. Thank you. 

Mr. Britz? 

Mr. BRITZ. I would say to Ed, if you wear your seatbelt, why 

would you be worried about some sort of a prescription that requires you to wear a seatbelt? 

Congressman, more directly in response to yours, I think you 

cannot consider this in a vacuum. We don’t have a blank sheet of 

paper here. 

Congressman Kanjorski has left us, but earlier he was voicing 

concerns relative to other things that are in the marketplace like 

payment for order flow. Payment for order flow and the lack of 

trade-through rule is a prescription for a bad price. Best execution 

is—I have yet to hear anyone clearly delineate what best execution 

means. It is a very broad, to use your word, fiduciary principle. 

And it is, at best, after the fact proved that you have gotten your 

customer best execution, whereas trade-through rule insures that 

you will get them the best price in real time. 

You know, I think, Congressman, through SEC hearings and congressional hearings and SEC concept releases and rule proposals 

we make this much more complicated than it needs to be. If you 

are a market destination that runs your business to deliver to investors the best prices, your best friend is the trade-through rule. 

On the other hand, if you are a market destination that runs your 

business off a business model that is based upon inducements to 

brokers and inferior prices for investors, I do understand why you 

would have a problem with the trade-through rule. What I don’t 

understand is why you would think that that kind of a business 

model is worthy of relief from this body vis-a-vis the trade-through 

rule. 

46

We talk about—there is a lot of ‘‘don’t overlegislate and competition.’’ the folks who are here talking about the trade-through rule 

are asking you for relief from a rule that requires them to provide 

investors with the best price. Competing on the basis of other than 

the best price in a world where speed is neutralized, I don’t understand that kind of deregulatory competition.

Mr. OXLEY. Thank you. 

Miss Dwyer. 

Ms. DWYER. Chairman Oxley, I think a lot of folks at the SEC 

where I used to work had an unofficial motto when they taught 

about rulemaking which was, first, do no harm. I think, as Ed has 

said, we have two models in front of us, one with a trade-through 

rule and one without. The one without is wildly competitive, produces, you know, equal order execution statistics to anything that 

the vaunted specialist system can produce, sometimes a lot better. 

I think we ought to be guided by what we see in front of us in 

terms of what works and what doesn’t and be very careful about 

layering, you know, protectionist rulemaking on top of a market 

where two and a half billion shares a day pass through it. It is fairly fundamental to the health of our economy. 

There are conflicts everywhere. We have to continually strive to 

manage them better, even on the floor of the New York Stock Exchange, as we have seen in the last few years. 

Do we have suboptimal performance? I think that allowing the 

markets to work freely, possibly even being incremental—the SIA, 

which represents the majority of the securities industry, has commented against the trade-through rule and has proposed something 

that I think was very ingenious which, as a compromise, would be 

an exemption from the trade-through rule across all markets for 

highly liquid securities that obviously don’t need one. Something to 

think about. 

Also, the opt out is very a fruitful suggestion. So that you have 

a trade-through rule if you feel you need one only where you need 

to have it. 

I think we ought to look at those things before we impose what 

is a government design on how every single firm operates. I don’t 

think I can explain the trade-through rule to our customers. I don’t 

think it matters to them. They want to look at the price they got. 

As we said earlier, I think that the best possibility of getting best 

price consistently for customers is in a freely competitive market. 

Mr. OXLEY. Thank you. 

Mr. Andresen. 

Mr. ANDRESEN. Thank you. Thanks for bringing up Maryland 

again. I can’t get enough of that. 

Well, Citadel, as we noted in our testimony, is in favor of the top 

of book reg NMS proposal for the listing department. And we do 

that because we think it puts in front of each of the manual markets a choice, that you either have to be—go ahead and stay a 

manual market or you have to have your quote be immediately and 

automatically executed without human intervention. That is Citadel’s primary concern. 

You know, we talk about, well, you know, best price or you know 

maybe it is not best price. The thing to keep in mind is that just 

47

because a price is on a screen does not mean that that is the price 

you are going to get. You might get no price. 

You know, the Palm Pilot IPO years ago moved 27 points in the 

first 30 seconds. That is an extreme example. You can see with, 

you know, stocks like Taser or stocks like Fannie Mae, when they 

had bad news, that there are violent moves in securities. In those 

instances, it is most dramatic when you have big swings in stocks 

how much money is really at cost here, when there is optionality 

and time value, to someone deciding whether or not to execute your 

trade. 

What I am excited about with the top of book is, if markets are 

forced to choose to say, well, competitively, I have to be a so-called 

fast market, I have to be an automated market, once the price is 

automated I am less concerned as an investor about getting that 

price back in a second versus a millisecond. Than I am about making sure I either get it or don’t and no one is taking advantage of 

my order. 

Mr. OXLEY. Thank you. 

Mr. McCooey. 

Mr. MCCOOEY. Chairman Oxley, thank you for bringing up this 

point. 

I think, as the agent here who has this fiduciary responsibility 

for his clients here every day, I would agree with you. I think it 

is important for the SEC to take up that mantle with, obviously, 

the oversight of this committee and to move forward with trying to 

define best execution obligations. 

I think it is very—for us, it is very difficult each and every day 

to have to deal with brokers and see trade-throughs and see our 

customers traded through in a way where we are not getting an 

execution because other markets have traded through us. We want 

to make sure that we get the best execution we can for our customers, and it would certainly be much easier for us in this regulatory environment, where people have been put into regulatory 

jeopardy over the past number of years, to have a better understanding of what the SEC does define as best execution. So we 

would support that, and we think that that is something that this 

committee should encourage the SEC to take up. 

Mr. OXLEY. Thank you. 

Mr. Joyce. 

Mr. JOYCE. Chairman Oxley, just as an observation, Mr. Britz 

keeps referring to inferior prices to investors as some business 

model that I think he has referred to two or three times today. I 

get a sense it is a veiled shot at NASDAQ. Perhaps it is. Perhaps 

it isn’t. 

In any event, I can assure you that we trade a lot of NASDAQ 

stocks, and never in the history of retail investors have retail investors gotten such a good deal trading the NASDAQ stocks or 

New York Stock Exchange stocks, for that matter, too. And it is because of what you said earlier. There is vibrant competition taking 

place in the markets, and I think what this committee and what 

the SEC needs to focus on is maintaining, encouraging that vibrant 

competition to continue. 

As you see the results over the last 2 years, where turnaround 

times have come down from 20 seconds, in some cases, to sub-secVerDate 0ct 09 2002 14:06 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 G:\DOCS\22158.TXT FIN1 PsN: MICAH
48

onds now, to people getting the best price they see on the screen, 

if not an enhanced price, those best-execution responsibilities in a 

competitive, transparent environment have driven those results. 

So I believe, sir, that your blueprint is entirely accurate. A light 

regulatory touch enhancing and encouraging transparent competition is the only blueprint that this market should pursue. 

Mr. OXLEY. Thank you. 

Mr. Bang. 

Mr. BANG. We believe that change is needed. We believe that leveling the playing field between professional market participants 

and the investor is really important. That is what is going to promote greater competition and choice for the investor. 

For the investor to really have choice, we believe that there 

needs to be firm quotations in the marketplace, greater level of 

transparency, at least restoring what was lost to decimalization 

and perhaps a dose of additional oversight in terms of what the fiduciary obligation of the particular market participants are with 

regard to best execution. 

Now, best execution is not clearly defined, if you like, but there 

are certainly a number of guidelines, one through the 11Ac1-5 statistics, or through third-party independent performance cost analysis firms such as Abel Moser, Plexus and Elkins/McSherry. All of 

these attempt to measure the quality of execution, and it is certainly something that is available to investors, particularly, you 

know, the professional institutional investors. They watch those 

sort of statistics very carefully, and, based on that information, 

they decide where to send their orders for execution. But, right 

now, there is not a level playing field and in that choice certainly, 

not with respect to the manual markets of the New York Stock Exchange. 

Mr. OXLEY. Thank you. 

Mr. Greifeld. 

Mr. GREIFELD. My comment is very easy. 

Mr. Chairman, I agree with your thought, and it is the way the 

NASDAQ stock market operates today. There is not a tradethrough rule. There is not a heavy burden of unnecessary regulation. Our market does not trade through, and it trades incredibly 

well, and, by objective measures set up by the Commission, namely 

the -5 stats, it trades better than the New York Stock Exchange. 

I think it is interesting, if we flip the scenario, where NASDAQ 

was the institution that had been around for 211 years and 

NASDAQ was the electronic market, and the entrant who had been 

in business for 30 years had the manual slow market, we wouldn’t 

conceive of imposing upon the larger markets the solutions that are 

intended to fix the smaller market. So we have a situation here 

where, by all objective measures, the New York Stock Exchange 

has to move forward based upon technology and based upon 

decimalization, and there is no clear or compelling case or really 

any case for imposing their remedies upon the NASDAQ stock market. 

Mr. OXLEY. Thank you. Thank you, Mr. Chairman. 

Chairman BAKER. The gentleman’s time has expired. 

Mr. Sherman. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

49

I believe I am—well, I guess—I thought I was going to be last, 

next to last. That doesn’t mean I will be brief. 

The gentleman from Ohio, I think, reflects wisdom in his question, which is, basically, why not rely on the fiduciary rule and 

allow investors, perhaps, to specify what they are looking for? 

Some, as Mr. Ackerman points out, just want the hip replaced as 

quickly as possible. Others may care about the quality. Some will 

want a top of the book, others want a depth of book. Some will 

want to opt out. And I don’t always agree with the chairman. It 

is a joy to do so. I think most wisdom comes from California. And 

CALPERS——

Chairman BAKER. You just lost the chairman again. I am sorry. 

Mr. SHERMAN. I had him for a second—writes us and says we 

still believe that investors should have an opportunity to make 

choices and, therefore, an opt-out provision appropriate within regulation NMS. And they go on to say that CALPERS, it looks for 

best execution, but best depends upon best price discovery, and also 

they have a number of different objectives—speed of execution, 

price, probability of trade completion, convenience and, for them, 

anonymity. So I am a little surprised that an SEC appointed chiefly by the other party, a party that is always telling us to avoid excessive regulation and to allow investor choice is about to, I guess, 

clash with the right wing libertarians at CALPERS and, I might 

add, with perhaps its most prominent board member, our treasurer, Phil Angelides, who writes us pretty much along the same 

lines. 

So, again, I am surprised that it would take government to impose one model or the other, in part—I don’t see whether investors 

are crying out for this, and I am going to ask Ms. Dwyer, because 

I know your company is in a marketing competition. Some brokers 

are offering, you know, free trades; some will give you a free toaster. Some will give you this; some will give you that. You have got 

a huge marketing department trying to figure out what investors 

might want, and you can offer them what they might want, and I 

recommend the toaster oven. But the—is there anybody in your 

business that has a plan, a marketing plan, a way you can sign up 

for an account where they guarantee you top of the book? Has anybody got that as a marketing strategy? 

Ms. DWYER. Well, I would answer that by saying I think we already guarantee them much more than that. 

Mr. SHERMAN. I know. The SEC is about to put a rigid rule, or 

one of two rigid rules in place, and I wanted to know if there is—

any of your marketing geniuses have discovered a group of investors who want either of these two rigid rules. 

Ms. DWYER. No, our customers want——

Mr. SHERMAN. Okay. Is there anybody out there who has come 

up with a marketing strategy of depth of book? And I realize that 

might be a little harder to offer, but is anybody offering as close 

to an equivalent of that as possible? 

Ms. DWYER. Not that I am aware of. 

Mr. SHERMAN. So they are all offering the fiduciary duty that the 

chair put forward, that is to say, best execution, and we—none of 

the marketing geniuses have been able to find a group of investors 

who want a rigid rule imposed, at least for their own trades. 

50

I wonder if anyone else has a comment on that? 

Mr. BRITZ. Congressman, you talk about investor choice. Let’s 

maybe get a little granular here. Supposing you are the investor 

and supposing you choose to be the best bid and offer in the marketplace. You want to—you have topped the best bid because you 

aggressively want to buy the securities. And suppose it trades in 

another marketplace, and you are willing to pay $20, and it trades 

at $19.90 in another marketplace. Did you choose to get traded 

through? 

There is an old expression, Congressman, it takes two to tango; 

and there are both sides of that. You would not have opted out in 

that. 

Mr. SHERMAN. It does. The buyer’s broker is retained by the 

buyer. The buyer’s broker—hey, if I am buying a house and my—

and I retain a broker and I say I don’t want one that is purple, 

great. Well, lo and behold, you know, if the best deal on the block 

is purple, he won’t show it to me. And I would say that if you have 

got the highest offer on one side and for some reason the broker 

on the other side doesn’t pick you, that is a choice, just as if you 

have a purple house, my real estate broker has the right to pass 

you by. 

I wonder if we could get some comment on the idea of why this 

SEC rule doesn’t give investors the choice. Because there are at 

least three choices: opt out, top of book or depth of book. What if 

I am just fanatically in favor of top of the book and the SEC comes 

up with depth of book? Will I be given a chance to have my fanaticism reflected in my trading behavior? 

Mr. NICOLL. A couple of things. First of all, I ran two large retail 

brokerage firms before. I now run Instinet. In each one of those instances over the past 20 years I have represented customers in the 

NASDAQ marketplace without a trade-through rule. It is my responsibility to make sure that I got my customers their price. And 

if they were traded through, they give me a limit order, I was the 

one responsible for that. I have the fiduciary responsibility. 

So in Mr. Britz—the proper response to Mr. Britz is, if that happened, you would be calling up your broker and say, why the hell 

are you on the wrong market, you idiot. And you owe me an execution. And, by the way, you would get it. Okay? So we are confusing 

here the broker’s responsibility with the customer’s responsibility. 

Second, as to why the SEC is proposing what it is proposing, all 

I can say is that it has been—the market reg apparently has been 

in love with the CLOB for a long, long time. It has tried to impose 

it before. It—and each time it does, I think cooler heads prevail. 

I think this was another opportunity for rethinking the marketplace; and, once again, the SEC, you know, tended to go towards 

its roots. I mean, it is a regulator. It believes in regulations. It 

tends to propose what it believes in, and I just think that it missed 

the mark. And I don’t——

Mr. SHERMAN. Thank you. 

I see my time is expiring, but, Mr. Chairman, I would hope that 

we would bring the SEC before our subcommittee and ask them 

why they want to deprive those investors who would want to opt 

out with the opportunity to do so and, also, if for some reason they 

oppose a depth of book rule, why they would prohibit investors 

51

from choosing a broker who goes with a top of the book rule. I 

would like to explore why the SEC seems opposed to investor 

choice. 

Chairman BAKER. I thank the gentleman for his perspective and 

would just say for the record the Commission is bipartisan and it 

is unclear, quite yet, which members are voting which way. I have 

my suspicions, but I would not wish to prejudice those positions 

until they are finally determined. 

But let me quickly add——

Mr. SHERMAN. Mr. Chairman, you know the SEC is about to 

make a mistake when I am trying to give you responsibility for 

them and you are trying to say that we should take responsibility 

for them. 

Chairman BAKER. I appreciate the gentleman’s effort to make it 

my fault, and I am conscious of his continuing efforts to do that. 

But I also want to join with him in his observations that we 

would—perhaps are losing sight here of something. It is an investor giving his money to somebody. And if the investor chooses to 

dictate how his resources are deployed, it just seems to me—and 

I am agreeing with the gentleman, even if he is from California—

that there is something basically fair about that. And if we are not 

getting to a standard of fairness, then we need understand why we 

are not and how we can without bringing unnecessary adverse consequences to a marketplace where has performed admirably by 

making reckless change in the conduct of the market. 

But it is certainly worth, I think, continued effort on the part of 

the economy to understand more comprehensively the consequences 

of this debate today and certainly—and I can assure the gentleman 

of our renewed interest, and we will return to this subject perhaps 

more times than most members would like. I thank him for his 

courtesy. 

I wish to express my appreciation to all of you for your long-suffering patience. 

Our meeting stands adjourned. 

[Whereupon, at 5:46 p.m., the subcommittee was adjourned.] 

(53)

A P P E N D I X

February 15, 2005

54


22158.001
55


22158.002
56


22158.003
57


22158.004
58


22158.005
59


22158.006
60


22158.007
61


22158.008
62


22158.009
63


22158.010
64


22158.011
65


22158.012
66


22158.013
67


22158.014
68


22158.015
69


22158.016
70


22158.017
71


22158.018
72


22158.019
73


22158.020
74


22158.021
75


22158.022
76


22158.023
77


22158.024
78


22158.025
79


22158.026
80


22158.027
81


22158.028
82


22158.029
83


22158.030
84


22158.031
85


22158.032
86


22158.033
87


22158.034
88


22158.035
89


22158.036
90


22158.037
91


22158.038
92


22158.039
93


22158.040
94


22158.041
95


22158.042
96


22158.043
97


22158.044
98


22158.045
99


22158.046
100


22158.047
101


22158.048
102


22158.049
103


22158.050
104


22158.051
105


22158.052
106


22158.053
107


22158.054
108


22158.055
109


22158.056
110


22158.057
111


22158.058
112


22158.059
113


22158.060
114


22158.061
115


22158.062
116


22158.063
117


22158.064
118


22158.065
119


22158.066
120


22158.067
121


22158.068
122


22158.069
123


22158.070
124


22158.071
125


22158.072
126


22158.073
127


22158.074
128


22158.075
129


22158.076
130


22158.077
131


22158.078
132


22158.079
133


22158.080
134


22158.081
135


22158.082
136


22158.083
137


22158.084
138


22158.085
139


22158.086
140


22158.087
141


22158.088
142


22158.089
143


22158.090
144


22158.091
145


22158.092
146


22158.093
147


22158.094
148


22158.095
149


22158.096
150


22158.097
151


22158.098
152


22158.099
153


22158.100
154


22158.101
155


22158.102
156


22158.103
157


22158.104
158


22158.105
159


22158.106
160


22158.107
161


22158.108
162


22158.109
163


22158.110
164


22158.111
165


22158.112
166


22158.113
167


22158.114
168


22158.115
169


22158.116
170


22158.117
171


22158.118
172


22158.119
173


22158.120
174


22158.121
175


22158.122
176


22158.123
177


22158.124
178


22158.125
179


22158.126
180


22158.127
181


22158.128
182


22158.129
183


22158.130
184


22158.131
185


22158.132
186


22158.133
187


22158.134
188


22158.135
189


22158.136
190


22158.137
191


22158.138
192


22158.139
193


22158.140
194


22158.141
195


22158.142
196


22158.143
197


22158.144
198


22158.145
199


22158.146
200


22158.147
201


22158.148
202


22158.149
203


22158.150
204


22158.151
205


22158.152
206


22158.153
207


22158.154
208


22158.155
209


22158.156
210


22158.157
211


22158.158
212


22158.159
213


22158.160
214


22158.161
215


22158.162
216


22158.163
217


22158.164
218


22158.165
219


22158.166
220


22158.167
221


22158.168