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THE SEC PROPOSAL ON MARKET

STRUCTURE: HOW WILL INVESTORS FARE?

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 EIGHTH CONGRESS

SECOND SESSION

MAY 18, 2004

Printed for the use of the Committee on Financial Services

Serial No. 108–88

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

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 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

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 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

DOUG OSE, California, Vice Chairman 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

EDWARD R. ROYCE, California 

DONALD A. MANZULLO, Illinois 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

JOHN B. SHADEGG, Arizona 

JIM RYUN, Kansas 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

GARY G. MILLER, California 

PATRICK J. TOOMEY, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

MELISSA A. HART, Pennsylvania 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

GINNY BROWN-WAITE, Florida 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

(V)

C O N T E N T S 

Page 

Hearing held on: 

May 18, 2004 ..................................................................................................... 1

Appendix: 

May 18, 2004 ..................................................................................................... 27

WITNESSES 

TUESDAY, MAY 18, 2004

Andresen, Matthew, Former President and Chief Executive Officer, Island 

ECN, Inc. .............................................................................................................. 4

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

LLC ........................................................................................................................ 16

Giesea, John, President and Chief Executive Officer, Security Traders Association, Inc. ........................................................................................................... 10

Leibowitz, Larry, Executive Vice President and Co-CEO of Schwab Soundview 

Capital Markets ................................................................................................... 6

McCabe, Daniel, Chief Executive Officer, Bear Hunter Specialty Products ....... 8

Steil, Benn, Andre ́ Meyer Senior Fellow in International Economics, Council 

on Foreign Relations ............................................................................................ 12

Wallison, Peter J., Resident Fellow, American Enterprise Institute .................. 18

Weaver, Daniel G., Visiting Associate Professor of Finance, Department of 

Finance, Rutgers School of Business .................................................................. 14

APPENDIX 

Prepared statements: 

Crowley, Hon. Joseph ....................................................................................... 28

Fossella, Hon. Vito ........................................................................................... 30

Gillmor, Hon. Paul E. ....................................................................................... 32

Hinojosa, Hon. Rube ́n ....................................................................................... 33

Kanjorski, Hon. Paul E. ................................................................................... 35

Andresen, Matthew .......................................................................................... 37

Bang, Kim ......................................................................................................... 46

Giesea, John ...................................................................................................... 70

Leibowitz, Larry ............................................................................................... 75

McCabe, Daniel ................................................................................................. 78

Steil, Benn ......................................................................................................... 83

Wallison, Peter J. ............................................................................................. 88

Weaver, Daniel G. ............................................................................................ 96

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Crowley, Hon. Joseph: 

The Public Advocate for the City of New York letter to the Securities 

and Exchange Commission, May 3, 2004 .................................................... 102

Trading-rule change cheats investor, USA Today, February 26, 2004 ........ 103

Steil, Benn: 

Written response to questions from Hon. Vito Fossella ................................ 104

Wallison, Peter J.: 

Written response to questions from Hon. Vito Fossella ................................ 105

Weaver, Daniel G.: 

Written response to questions from Hon. Vito Fossella ................................ 107

(1)

THE SEC PROPOSAL ON MARKET 

STRUCTURE: HOW WILL INVESTORS FARE? 

Tuesday, May 18, 2004

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 2:03 p.m., in Room 

2128, Rayburn House Office Building, Hon. Richard Baker [chairman of the subcommittee] presiding. 

Present: Representatives Baker, Ryun, Fossella, Hart, BrownWaite, Kanjorski, Ackerman, Inslee, Moore, Hinojosa, Lucas of 

Kentucky, Crowley, Baca, Miller of North Carolina and Velazquez. 

Chairman BAKER. [Presiding.] I would like to call this meeting 

of the Capital Markets Subcommittee to order. This is the subcommittee’s fourth hearing in this Congress on the subject of U.S. 

capital market structure. Our first hearing on corporate governance 

issues was conducted in New York and examined the regulatory 

role of the exchanges and the potential conflicts of interest that are 

created by self-regulation. 

The second examined reforms that potentially would enhance 

competition in the securities markets. The third focused on reform 

efforts at the New York Exchange and the role of the specialist system in a technologically revolutionized marketplace. The 211-yearold NYSE is the leading auction market in the United States. In 

my judgment, it has worked very effectively throughout the years 

in providing for capital expansion needed for our economic growth. 

The NASDAQ market is an inter-dealer quotation system established in 1971. Over-the-counter securities and NYSE-listed stocks 

may also trade through NASDAQ. Dealers quote, bid and ask 

prices and the NASDAQ computer system integrates the 

quotations, calculates the best bidder offer, and displays the prices 

on screens. The development of electronic communications networks, ECNs, that link institutional investors so they can trade directly with each other revolutionized equity markets. They diminished the role of the specialist by allowing users to enter orders at 

specific prices and execute them automatically against other orders. 

The trade-through rule is the subject of discussion and a somewhat controversial provision that has been recently addressed by 

the SEC. The rule states one market cannot trade at prices inferior 

to a price displayed by another market. Critics of the rule analogize 

it to requiring a consumer to purchase ice cream at a store across 

2

town which sells ice cream at a slightly lower price than a store 

located closer to the consumer. Opponents of the trade-through 

argue the NYSE holds a dominant position in the global marketplace not because of superiority of service, but because of the coercive power of this rule. 

Instead of instantaneous computer-to-computer transactions, the 

trade-through rule causes a delay for up to 30 seconds in the execution of investor orders, in some cases a very significant delay to the 

consumer’s best interest. In fast-moving trading, brokers find that 

the NYSE price fluctuates during the time it takes for execution. 

The reality is that the inferior price that calls the order to be routed to the exchange may be a better price once the order is received 

by the NYSE specialist. 

The SEC proposed a reform of the rule that expands the reach 

to include NASDAQ, but would relax the rule in ways that would 

favor, could possibly, electronic markets. The theory behind the 

proposal is that speed and anonymity of execution should take 

precedence in trading and competing markets should be able to ignore potentially superior price if it slows down execution. So far, 

even the New York Exchange appears amenable to the modification 

that would allow for fast markets to trade through slower markets 

within certain limits, because they hope to bring greater automation to its own trading floor so it can fall within the definition of 

a fast market. 

However, the NYSE is opposed to allowing consumers to opt out 

of the trade group. They argue that the opt-out may compromise 

the quality of executions that investors receive. ECNs argue that 

the opt-out is necessary because the so-called ‘‘best available price’’ 

is not always accessible. 

The conclusion I have reached is that executing an order at the 

best price is certainly a laudatory goal and should be the principal 

mission which the exchanges engage in regardless of the site of 

execution. However, it is clear to me that in today’s marketplace, 

trades executed through the NYSE do not always automatically reflect best price. In fact, on as many as thousands of occasions in 

a given week’s trading, best price may be offered on a competing 

exchange and the order not appropriately routed, given current 

technological constraints. 

And in my judgment, the buyer should be the determining factor 

in how the trade is executed. Whether best price is the most important to their trading perspective or whether other considerations 

take precedence should be left to the consumer’s best judgment on 

an informed basis. 

For these reasons, I am anxious to hear the testimony of those 

who have agreed to participate in today’s hearing. I believe this to 

be a most important issue facing the committee and the Congress. 

It is certainly significant in the overall capital formation of our 

American capitalistic system and we hope to come to the most appropriate conclusions based on the best advice we can receive. 

With that, I call on Mr. Kanjorski. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

We meet for the fourth time in the 108th Congress to review the 

organization of our capital markets and evaluate the need for further reforms in light of technological advances and competitive deVerDate 0ct 09 2002 10:39 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\DOCS\95595.TXT FIN1 PsN: MICAH
3

velopments. This hearing seeks to examine how the market structure changes recently proposed by the Securities and Exchange 

Commission will affect investors. 

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

of agents in our equities markets have questioned one or more aspects of the regulatory system during the last several years. We 

have also, in my view, come to a crossroads in the securities industry, confronting a number of decisions that could fundamentally 

alter its organization for many years to come. 

We have elaborately interconnected systems and relationships in 

our equities markets. I therefore believe that we should heed the 

philosophy of Edmund Burke and refrain from pursuing change for 

change’s sake. We should only modify the structure of our securities markets if it will result in improvements for investors. The 

Chairman of the Securities and Exchange Commission has recently 

observed that in pursuing any change to fix those portions of our 

markets experiencing genuine strain, we must ensure that we do 

not disrupt those elements of our markets that are working well. 

In February, the Commission put forward for discussion four 

interrelated proposals that would reshape the structure and operations of our equities markets. Because these proposals have generated considerable debate, the Commission announced last week 

that it would extend the public comment period until the end of 

June. 

In adopting the Securities Acts Amendments of 1975, the Congress wisely decided to provide the Commission with a broad set 

of goals and significant flexibility to respond to market-structure 

issues. From my perspective, this legal framework has worked generally well over the last three decades. It is also appropriate for the 

commission at this time to review its rules governing market structure and for our panel to conduct oversight on these matters. 

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

Although many of the agents in our securities markets have called 

for adopting market-structure reforms and some of them may benefit from these changes, the commission must thoroughly examine 

the effects of its reform proposals on average retail investors before 

approving any change. 

Today, I suspect that many of our witnesses will discuss the 

Commission’s proposal to alter the trade-through rule. Retail investors are guaranteed the best price that our securities markets have 

to offer regardless of the location of a trading transaction under our 

present regulatory system. By ensuring fair treatment, this bestprice guarantee has significantly increased confidence in our securities markets. I also believe that this directive has served most investors generally well. 

The Commission, however, has issued a proposal to permit participants in our capital markets to opt out under certain circumstances of this best-price guarantee. Some have suggested that 

this proposal could potentially produce unintended consequences 

like fragmenting our securities markets, decreasing liquidity, and 

limiting price discovery. Because such results could prove harmful 

for small investors, I will be monitoring this issue very closely in 

the weeks and months ahead. 

4

A recent survey of older American investors also found that 86 

percent of the respondents agreed that they should be alerted before the completion of a transaction in which the best available 

price is not the top priority. I would consequently like to learn from 

our witnesses how unsophisticated investors should be notified if 

their mutual fund manager, stockbroker, or pension fund adviser 

decides to opt out of the present best-price mandate. For example, 

it would be helpful to debate whether such opt-outs should be completed via a blanket disclosure or on a per-trade basis. 

In sum, Mr. Chairman, we should continue to conduct vigorous 

oversight of our equities markets to determine whether or not the 

present regulatory structure is working as intended or to study 

how we could make it stronger. The observations of today’s witnesses about these complex matters will further help me to discern 

how we can maintain the efficiency, effectiveness and competitiveness of our nation’s capital markets into the foreseeable future. 

Thank you, Mr. Chairman. 

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

on page 35 in the appendix.] 

Chairman BAKER. I thank the gentleman. 

Mr. Fossella, did you have an opening statement? 

Mr. FOSSELLA. I will just submit mine for the record and look forward to hearing the testimony of these witnesses. 

[The prepared statement of Hon. Vito Fossella can be found on 

page 30 in the appendix.] 

Chairman BAKER. Without objection. 

Ms. Velazquez, did you have an opening statement? 

Ms. VELAZQUEZ. No, Mr. Chairman, but I will ask unanimous 

consent for my opening statement to be inserted into the record. 

Chairman BAKER. Without objection, all Members’s opening 

statements will be included in the record. 

At this time, I would proceed to our distinguished panel of witnesses. First to give testimony today is Mr. Matthew Andresen, 

former president and chief executive officer of The Island ECN. 

Welcome, sir. 

By way of customary practice, we would request if possible each 

statement be constrained to 5 minutes. Your entire official statement will be made part of the record. And make sure your button 

is on and pull the mike close. With that, take off. 

STATEMENT OF MATTHEW ANDRESEN, FORMER PRESIDENT 

AND CEO, THE ISLAND ECN, INC. 

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

Kanjorski, members of the subcommittee. Thank you for holding 

this hearing and for inviting me to speak before you today. 

We are at a crucial juncture in the evolving equity market structure of the United States. For decades, the electronic and traditional market structures continued their respective evolutions in 

relative isolation from each other. However, the furious pace of 

technological innovation, which I was privileged to be part of in my 

days at Island, has driven the electronic trading realm further and 

further away from the traditional human-driven markets of the 

NYSE-listed world. 

5

The proponents of electronic markets believe that the results of 

this process have been purely positive. The champions of traditional markets believe that these rapid enhancements have sacrificed crucial elements of price discovery. I am certain, given the 

amount of legroom I have here today, that we will be hearing our 

fill today from both sides. 

What is not in dispute, however, is that the rapid evolution of 

technology is forcing these two disparate worlds back together. The 

two competing market structures can no longer live in isolation 

from one another. This has manifested itself in several ways. First, 

the introduction of sophisticated technology tools to the brokerage 

and trading community has made it simple to deliver orders to either an electronic OTC market or to the NYSE through one common interface. This has facilitated the broad trend of sectorization 

whereby Wall Street firms reorganize their trading desks based not 

on where stocks might be listed, but rather based on what industry 

the companies themselves are in. 

Secondly, the rise of automated and so-called ‘‘program’’ trading 

has blurred the distinction between listed and over-the-counter 

trading by often grouping orders together into lists of trades to be 

executed as a group. Third, the electronic markets have evolved 

into significant enterprises who view the big market cap stocks of 

the NYSE with jealous eyes. They know well the opportunity available. Despite their dominance of OTC trading, alternative trading 

systems and electronic exchanges account for only a tiny percentage of trading in NYSE-listed stocks. 

It has long been my contention that this is due not only to the 

NYSE’s significant liquidity advantage, but also the existence of 

the trade-through rule. This rule is an unfortunate relic of an age 

before fully electronic markets were in fact even contemplated. Obviously, they are commonplace today. But while the markets have 

evolved, the trade-through rule lives on in its original form. The essential issue with this rule is that it attempts to distill all of the 

value in a potential transaction down to one factor: advertised 

price. But advertised price is but one factor in determining the best 

execution for a customer. Factors such as time, implicit costs, fees, 

adverse selection and reliability can often make a much greater difference to a customer’s quality of execution. 

In my opinion, the debate over trade-through has been consistently misstated as one of speed versus price. To me, that is not 

wholly correct. The correct date is about true price versus advertised price, because in the stock market as in other transactions 

there are a myriad of factors that can lead to significant variance 

between the true and advertised price. 

The aforementioned factors of time, certainty of execution, fees, 

adverse selection or reliability makes advertised prices only one 

small part of the execution story. We must have a regulatory structure that recognizes this face. I commend the committee for moving 

to address this issue. 

Thank you, Mr. Chairman. 

[The prepared statement of Matthew Andresen can be found on 

page 37 in the appendix.] 

Chairman BAKER. Thank you very much, sir. 

6

Our next witness is Mr. Larry Leibowitz, executive vice president, co-head of Equities Division, Schwab Soundview Capital Markets. Welcome, sir. 

STATEMENT OF LARRY LEIBOWITZ, EXECUTIVE VICE PRESIDENT, CO-HEAD OF EQUITIES DIVISION, SCHWAB 

SOUNDVIEW CAPITAL MARKETS 

Mr. LEIBOWITZ. Chairman Baker, Ranking Member Kanjorski, 

distinguished members of the committee, my name is Larry 

Leibowitz. I am executive vice president and co-CEO of Schwab 

Soundview Capital Markets, the institutional trading, research and 

retail execution arm of The Charles Schwab Corporation. Thank 

you for the opportunity to speak today on the vital market structure reforms proposed by the Securities and Exchange Commission. 

Before I jump into my main statement, I would like to make a 

brief point. One thing that we on the panel here can all agree on 

is that these are relatively arcane topics. Talking about market 

linkages makes even my eyes glaze over so I can imagine yours. 

But in the end, they all impact the transparency and openness of 

the markets, and therefore contribute to investor confidence and 

the integrity and fairness in the largest and most successful system 

for capital formation in the world. Helping that system reflect the 

reality of today’s information age is what this is all about. 

Schwab Soundview Capital Markets, as the largest NASDAQ 

market-maker by volume, and Charles Schwab & Company, with 

its millions of retail customers, believe that the time is ripe for 

modernization of our national market system. We process millions 

of orders a day and those orders are directly impacted by the conflict between modern technology and human interaction when trading securities. These rules primarily serve to insulate outdated and 

inefficient manual markets from competition and actually harm, 

rather than protect, investors. 

For too long, competition has been stifled in the market for 

NYSE-and Amex-listed securities. Given the very limited time 

available, I will focus my comments on the two main impediments: 

the trade-through rule and the market data charging system. 

The trade-through rule purportedly protects investors from inferior prices, but has actually insulated the NYSE and its specialist 

system from competition and protected its privileged position. 

Given the NYSE’s role in the creation of the original trade-through 

rule, the rule has worked as intended to protect its monopoly profits. 

Being forced to route orders to manual markets for execution 

lowers efficiency and in some cases actually undermines a broker’s 

duty of best execution. Moreover, investors attempting to cancel orders often find themselves in limbo waiting for an exchange response and discovering that their orders have been executed 

against their wishes. A better alternative is available. When securities are traded in an automated environment without a tradethrough rule, as they are in NASDAQ today, investors obtain 

greater order protection, faster executions and better prices. Investors are protected by the broker-dealer’s overriding legal obligation 

to provide best execution to customers. 

7

In addition, when a market is efficient, you do not need a rule 

prohibiting trade-throughs. They simply do not happen. And you do 

not have to take my word for it. The Commission’s own order-handling statistics, the so-called 11ACL-5 numbers, prove that automatic markets that are free of trade-through restrictions provide 

investors with better results, better prices, and faster executions. 

The appropriate reform is obvious. Eliminate the ITS tradethrough rule and allow competition to flourish as it does in the 

NASDAQ market. Short of full and outright repeal, Schwab proposes alternatively that the Commission first act to improve the 

interaction among markets trading listed securities. Then, after appropriate analysis of listed trading data, determine whether to 

eliminate the trade-through rule in its entirety. 

Specifically we believe the Commission should take the following 

steps. Investors should be given the choice to ignore slow and inefficient market centers. Therefore, we urge the Commission to support a fast market/slow market exception to the trade-through rule. 

Such an exception will induce markets to implement automatic execution and automatic quote trading, thereby benefiting investors 

through the ensuing efficiency. 

Second, the Commission should require specific disclosure of 

trade-throughs as part of 11AC 1-5 reporting, thereby allowing investors to determine the execution quality of their orders and allowing regulators to determine if the brokers are fulfilling best execution obligations. 

Finally, Schwab believes that customers should be allowed to decide for themselves what constitutes best execution. Therefore, 

Schwab urges the Commission to amend the ITS plan to include an 

opt-out provision so that investors, rather than one-size-fits-all 

rules, can determine how to execute orders. 

With regard to market data, Schwab believes that the current 

SEC proposal simply misses the real problem. Rather than treat 

the symptoms, the Commission should focus on reforming a monopoly-based system that wildly increases the cost to investors for 

trading information. 

Investors have heard lots of stories about why market data is so 

expensive. We heard 2 weeks ago that it costs the NYSE $488 million per year to generate market data. That is hard to believe given 

that as the commission described in its reform proposal, last year 

the Plan Networks made $424 million in revenue and incurred only 

$38 million in expenses. That is a monopoly markup of 1,000 percent. 

Further, NASDAQ, operator of one of the data networks, recently 

stated that it believes it can cut its monopoly data prices by 75 percent and still provide a sufficient return to shareholders. Clearly, 

there is excess market data money sloshing around the exchanges, 

which manifests itself in everything from tape shredding to market 

data rebates, to exorbitant pay packages for executives. This excess 

revenue is extracted from average investors who pay inflated 

charges to the exchanges to see their own limit orders displayed. 

The government-created market data cartels should be asked to 

justify their cost. Until there is transparency in cost and governance, the market data cartels will never change and investors will 

continue to subsidize markets. Schwab believes that markets 

8

should fund their own regulatory and operational functions directly 

and transparently themselves, rather than indirectly through 

opaque market data charges to investors. 

Schwab has three recommendations. First, price information relating to the NBBO be based on its cost, thereby facilitating widespread availability. Second, simplify and standardize network accounting so that the expenses relating to market data consolidation 

are transparent, available to individual investors and independently audited. Finally, require public representation on network operating committees. A toothless advisory committee is a status quo 

proposal. Today, everyone acknowledges the need for independent 

members on the boards of public companies, mutual funds, and 

even SROs. Governance of market data should be no different. 

In closing, Schwab commends this committee for exercising its 

oversight role and examining these important issues. To sum up, 

Schwab hopes the SEC repeals the trade-through rule, or at a minimum institutes meaningful reforms, thereby unleashing a wave of 

modernization in the listed market. Furthermore, we urge the 

Commission to reexamine its market data proposal to end monopoly profits and ensure that all investors have access, at a reasonable price, to the most basic trading information. 

Thank you again for the opportunity to testify today. I look forward to any questions you may have. 

[The prepared statement of Larry Leibowitz can be found on 

page 75 in the appendix.] 

Chairman BAKER. Thank you, sir. 

Our next witness is Mr. Daniel McCabe, chief executive officer, 

Bear Hunter Specialty Products. Welcome. 

STATEMENT OF DANIEL MCCABE, CEO, BEAR HUNTER 

SPECIALTY PRODUCTS 

Mr. MCCABE. Thank you. Good afternoon and thank you, Mr. 

Chairman, for the opportunity to testify in front of the committee. 

A little bit of background first for the committee. I am the CEO 

of Bear Hunter Structured Products LLC. We are liquidity providers in derivative products such as options, futures and exchange-traded funds. Bear Hunter is a wholly owned subsidiary of 

Bear Wagner, which is one of the five major specialist firms on 

Wall Street. We represent more than 350 listed companies, including such household names as Pepsi, Aetna, Alcoa, Xerox and Kimberly-Clark to name a few. Bear Wagner is a member of the NYSE, 

Amex, CME, ISE, CBOT, and CBOE and actively trades in all 

venues. 

Mr. Chairman, I am sincerely worried about the impact of the 

proposed changes, not only on the individual investor, but also on 

our listed companies and on the New York Stock Exchange itself. 

I am deeply concerned because the thrust of these new regulations 

is focused on speed only, and speed will ferment both price and 

temporal volatility in the market, scaring off individual investors, 

destroying confidence and over time driving down the market capitalization of our listed entities. Since the introduction of decimal 

pricing, the markets have already experienced a 126 percent 

growth in program trading, much to the detriment of the individual 

investor. 

9

Allow me to elaborate. Excessive volatility serves no one but professional investors. Over the last 2 years, some 39 NASDAQ-listed 

companies have chosen to move to the New York Stock Exchange 

in order to reduce their volatility. They have, on average, experienced a 50 percent reduction in inter-day volatility. They made this 

choice to facilitate the raising of capital. After five years of market 

softness and financial scandals, is volatility really going to help 

lure investors back into the market, or are we creating a market 

dominated by professional program traders? 

What is driving the focus on speed? Certainly not the majority 

of investors in this country. When AARP recently surveyed nearly 

2,000 of its members, two-thirds of them said price is the top priority when engaging in a market transaction. The second consideration was brokerage fees. Speed barely registered in the survey. 

Chris Hansen of AARP, representing that organization’s 35 million voters, said, ‘‘The SEC needs to proceed carefully in proposing 

changes that could undermine the ability of individual investors to 

get the best price for the lowest transaction cost.’’ I could not agree 

more. 

Some of our competitors say everything should be done in nanoseconds, same-second executions should be the driving force in 

markets. I do not think we want the NYSE looking like an ECN, 

where stocks flicker excessively while attempting to discover price, 

nor do I understand why the markets with excessive volatility will 

be rewarded through the proposed changes in reg NMS. 

In addition, I think the logical outcome of these proposed rules 

will be dramatic fragmentation and internalization of orders, where 

sophisticated investors opt out and the common person is left behind. The solution is not to develop a bifurcated market for insiders 

and small investors, but to instead link the markets together. Define a reasonable time frame, say five or six seconds, where orders 

must be executed or else face a penalty. Mandate that all parties 

compete on price. 

Today, many people have the vision of the NYSE from a bygone 

era, with brokers wandering the floor, hand-writing orders on tiny 

scraps of paper. Over 85 percent of the orders are executed in less 

than 10 seconds. Specialists only provide liquidity roughly 15 percent of the time to smooth out short-term volatility, which helps 

stabilize the market for both investors and our listed companies. I 

think the real motive behind much of this debate has nothing to 

do with the individual consumer, but rather an attempt by failing 

business models to gain an advantage through regulations. 

Here is a recent quote from Steve Pearlstein of The Washington 

Post: ‘‘The fact that these parties are trying to divert more trading 

away from the exchange raises suspicions that their lobbying campaign may have less to do with protecting the interests of the investing public than with gaining competitive advantage or taking 

over the market-making function themselves.’’

Again, let’s look at NASDAQ. Five years ago, the exchange handled more than 90 percent of the market in their own stocks. 

Today, it is less than 20 percent. Currently, the NASDAQ and all 

of its electronic competitors move at the same speed. So why have 

they lost market share? Simply because of practices like payment 

10

for order-flow or the sharing of tape revenue. Those practices must 

be disbanded for the mere health of the market. 

Individual investors buy and sell based on price. When millions 

of investors get home tonight and check on their 401(k) programs, 

they will carefully watch the prices of their stocks and mutual 

funds. I cannot believe a single one of them will wonder whether 

their shares traded in 5 seconds or 8 seconds. Moreover, most will 

have no knowledge of which exchange traded their security or 

under what rules they were traded. 

In conclusion, sir, the NYSE can move faster and yes, it should. 

But price and transparency are equally important principles this 

committee and the SEC must not abandon. 

Thank you for your time and consideration. 

[The prepared statement of Daniel McCabe can be found on page 

78 in the appendix.] 

Chairman BAKER. Thank you very much, sir. 

Our next witness is Mr. John Giesea, president and chief executive officer, Security Traders Association. Welcome, sir. 

STATEMENT OF JOHN GIESA, PRESIDENT AND CEO, SECURITY 

TRADERS ASSOCIATION, INC. 

Mr. GIESEA. Good afternoon, Chairman Baker, Ranking Member 

Kanjorski and members of the committee. Thank you for the opportunity to testify this afternoon. 

The Security Traders Association, or STA, is comprised of some 

6,000 professionals engaged in the purchase, sale and trading of securities, representing individuals and institutions. In the context of 

today’s topic, how will the investor fare, I would comment that I 

believe that investors have benefited greatly over recent years 

given improved market efficiencies and regulation. Proposed Regulation NMS, if properly implemented, will further these gains 

through improved linkages, liquidity and competition. 

The STA is currently in the process of completing its formal comment on proposed Regulation NMS. This has involved input from 

more than 60 professional traders representing both the buy side 

and the sell side. I will highlight the major points of Regulation 

NMS where STA has preliminarily reached consensus with regard 

to the trade-through. The STA believes that a fully linked market 

with automatic execution capability will substantially diminish the 

need for a trade-through rule. 

One way to address the trade-through proposal would be to execute it in a phased approach and implement it only after a comment period for review. Phase one, define automated and a nonautomated markets; phase two, oversee the creation of linkages to 

ensure a high degree of connectivity and access; phase three, reexamine the need for a trade-through rule as such a rule may be impossible to enforce as well as unnecessary given the competitive 

forces driving best execution standards. The result of this phasein approach would be a major step towards the envisioned national 

market system and beneficial for market participants and investors. 

The current proposal would extend the trade-through rule to the 

NASDAQ market. We question why when there have not been 

problems regarding price protection the rule should be imposed 

11

upon the NASDAQ stock market. It would be incorrect to impose 

this rule at the onset. Although there may be some practical and 

other drawbacks to an opt-out, we would support an opt-out exception on an interim basis for the purpose of driving greater automation in or access to markets. This would provide incentive for 

change. However, if automatic execution and economic access to 

quotes were achieved, an opt-out provision would become unnecessary. 

A key determination is the definition of an automated market. 

STA believes that a market must provide for an automatic execution, coupled with an immediate refresh capability. With regard to 

access fees in lock and cross markets, the Commission has correctly 

identified access fees as a critical component of any discussion regarding best execution. The SEC’s proposal to cap fees at $0.001 

per share is a very positive step towards reducing the current problems in the marketplace. However, we believe the preferred action 

is complete elimination of access fees, which would also eliminate 

the economic, or at least one of the economic incentives which 

cause lock and cross markets. The SEC’s proposal appropriately 

calls upon markets to create and enforce rules eliminating lock and 

cross markets which STA strongly supports. 

With regard to sub-penny quotes, sub-penny quotations create a 

number of problems, and we are against the introduction of decimals as originally proposed, and we strongly support the Commission’s recommendation that sub-penny quotations be eliminated. 

We do distinguish between quotation and transaction as there are 

some common needs to have a transaction that creates a subpenny, but quotations should be limited to two decimals. 

With regard to market data, the STA is not in a position to comment on the precise formula to be used for the distribution of market data revenues. We are, however, supportive of the market data 

allocation proposals that lead to rewarding quality quotes at the 

same time eliminating the practices only designed to gain the revenue stream. 

With regard to liquidity providers, I would also note the importance of liquidity providers, namely specialists and market-makers, 

to the capital formation and the efficient functioning of the markets. The trend in rulemaking has been to encourage the matching 

of buyers and sellers without an intermediary. Highly liquid stocks 

do not under normal circumstances require a liquidity provider to 

facilitate the execution of trades. However, the need for liquidity 

providers becomes important in stress situation, be they stock-specific or general market conditions. 

In conclusion, I thank the members of the subcommittee for your 

continued interest in ensuring that U.S. markets are efficient and 

liquid. Such characteristics are important to a robust capital formation process, benefit the U.S. economy, and ultimately benefit all 

investors. 

The STA views the national market system principles established 

in the Securities Acts Amendments of 1975, namely the maintenance of efficient, competitive and fair markets, as both a measure 

and a goal. The SEC proposed Regulation NMS is a step toward 

the goal of a true national market system. 

Thank you. 

12

[The prepared statement of John Giesea can be found on page 70 

in the appendix.] 

Chairman BAKER. Thank you very much, sir. 

Our next witness is Dr. Benn Steil, the Andre Meyer Senior Fellow in International Economics, Council on Foreign Relations. Welcome. 

STATEMENT OF BENN STEIL, ANDRE MAYER SENIOR FELLOW 

IN INTERNATIONAL ECONOMICS, COUNCIL ON FOREIGN RELATIONS 

Mr. STEIL. Thank you, Mr. Chairman, members of the committee. 

Although the SEC’s proposed Regulation NMS covers a wide 

range of important issues related to market linkages, access fees 

and market data, I will confine my brief prepared remarks to the 

specific matter of the trade-through rule, changes in which have 

the greatest potential to improve the ability of our securities markets to service investors. 

Although the idea of having a simple market-wide rule to ensure 

that investors always have access to the best price is an attractive 

one, in practice the trade-through rule has operated to force investor orders down to the floor of the New York Stock Exchange irrespective of investors’s wishes. The rule therefore operates to discourage free and open competition among marketplaces and market 

structures, the type of free and open competition which has in Europe produced a new global standard for best practice both in trading technology and exchange governance. 

The trade-through rule should therefore be eliminated, as it 

serves neither to protect investors nor to encourage vital innovation 

in our marketplace. Those who support the maintenance of some 

form of trade-through rule, most notably the New York Stock Exchange, have raised five main arguments in its defense. The most 

effective way to illustrate why the rule is undesirable is to address 

each of these directly. 

First argument: Why should speed be more important than 

price? According to this view, eloquently presented by Mr. McCabe, 

the whole debate is about whether traders should be allowed to 

sacrifice best price in pursuit of speed. But the notion that investors would ever sacrifice price for speed is nonsensical. In the marketplace, it is always about price. It is about the price for the number of shares the trader wants to trade, not just the 100 shares advertised on the floor of the New York Stock Exchange, and it is 

about the price that is really there when the trader wants to trade. 

Statistics from competing marketplaces about fill rates, response 

times and the like make very nice input into a trader’s decision, 

but they are not substitutes for a decision. 

Argument two: But the rule is necessary to protect market orders. The normal fiduciary principle says that the agent must act 

in the customer’s interest, but the trade-through rule says that the 

agent must ignore the customer’s interest. In other words, to eliminate any possibility that a broker may abuse his discretion, regulators should forbid not only his discretion, but his customer’s discretion. This cannot be sensible, Mr. Chairman. 

To illustrate, an investor may wish to buy 10,000 shares at $20 

a share done at a keystroke on market X. The trade-through rule, 

13

however, would oblige that investor instead to buy only 100 shares 

at $19.99 at the New York Stock Exchange and then submit to a 

floor auction there, so that exchange members on the floor may 

profit from knowledge of his desire to buy many more shares. 

Tellingly, the same people who insist that brokers will abuse discretion or that their customers should not be entitled to it, will defend to the death the right of specialists to use discretion. This 

view, curiously, is entirely unburdened by knowledge of the $241.8 

million in fines paid by five of the seven NYSE specialist firms for 

improper discretionary trading. 

Argument three: But the rule is necessary to protect limit orders. 

According to this argument, it is not the market orders that have 

to be protected, but rather 100-share limit orders. But this is a 

strange principle for the NYSE to defend, given that the floor could 

not even exist were it not for the ability of specialists and floor brokers to trade in front of limit orders. Indeed, the most frequent 

complaint of institutional investors about trading on the floor is 

precisely the fact that limit orders are revealed to the crowd, who 

are then allowed to use that information to trade in front of them. 

In a marketplace, Mr. Chairman, it takes two to trade. The fellow 

who puts down a limit order in market X has no moral standing 

over the gal who sees a better package deal in market Y. Appeals 

to fairness favor neither one over the other. 

Fourth argument: But if limit orders are traded through, no one 

will place them. If limit orders are traded through on market X, 

they just will not be placed on market X. They will move to market 

Y, where they will not get traded through. 

Fifth and final argument: But a fair compromise is to have a 

trade-through rule among fast markets. The NYSE has stated repeatedly that in the fast exchange of the future, there must be a 

role for the floor action. To be clear, this means that the NYSE will 

only be fast for as few shares as the SEC will let them get away 

with. So to go back to the example of an investor wanting to buy 

10,000 shares available on market X at $20 a share, if the NYSE 

is designated a fast market it means only that the NYSE might sell 

him a fast few hundred shares at $19.99, but then just like old 

times, Mr. Chairman, the exchange will force him into a floor auction. 

More fundamentally, do we really want the government to be in 

the business of determining which markets are fast enough for all 

investors, now and in the future, and doling out protection from 

competition on that basis? My judgment is that we do not. 

To conclude, I do not believe that any of these arguments for a 

trade-through rule are compelling. Moreover, the rule is not even 

enforced at present against its leading supporter and only systematic violator, the New York Stock Exchange, which trades through 

other markets hundreds, even thousands of times every day. Since 

the SEC is silent on the question of how the rule will actually be 

enforced in the future, it must be assumed that if perpetuated it 

will continue to operate solely to force investors to trade on the 

New York Stock Exchange, even if they desire to do otherwise. 

The SEC should, of course, be concerned to see that intermediaries do not abuse their discretion in handling investor orders, 

but given that the focus of recent SEC disciplinary action has been 

14

improper discretionary trading by specialists, it cannot be in the interest of investors to oblige them to trade with specialists if they 

do not wish to do so. After all, the SEC emphasizes in its proposal 

that a trade-through rule, and I am quoting, ‘‘in no way alters or 

lessens a broker-dealer’s duty to achieve best execution for its 

customers’s orders.’’ If this is truly the case, Mr. Chairman, then 

a trade-through rule is neither necessary nor desirable. 

I thank you for the opportunity to testify this afternoon and I 

look forward to assisting your deliberations in any way possible. 

[The prepared statement of Benn Steil can be found on page 83 

in the appendix.] 

Chairman BAKER. Thank you, sir. 

Our next witness is Dr. Daniel G. Weaver, visiting associate professor of finance, Department of Finance, Rutgers School of Business. Welcome, sir. 

STATEMENT OF DANIEL G. WEAVER, VISITING ASSOCIATE 

PROFESSOR OF FINANCE, DEPARTMENT OF FINANCE, RUTGERS SCHOOL OF BUSINESS 

Mr. WEAVER. Thank you. 

Mr. Chairman, let me state unequivocally that I am against repeal of the trade-through rule. If the rule is repealed, it will further 

fragment our markets and hurt investors. It will be a large step 

backward in the modernization of U.S. markets, effectively taking 

us back to pre-Manning rule days. The history of the Manning rule 

has reverse parallels to the proposed repeal of the trade-through 

rule. Prior to Manning I, which was enacted in 1994, if an individual investor sued their broker, NASDAQ dealers could simply 

ignore customer limit orders. Customers learned that limit orders 

were not executed and did not submit them. 

Manning I prevented NASDAQ dealers from trading through customer limit orders at better prices, much like current trade-through 

rules do today. However, after the passage of Manning I, NASDAQ 

dealers could still trade ahead of their customer’s limit orders at 

the same price. There was no public order priority rule. 

Manning II enacted about a year later gave public limit orders 

priority, but only within a dealer firm. In other words, a customer 

submitting a limit order to dealer X could still see trades occurring 

at other dealers at the same price or worse than the customers’s 

limit order. Thus, Manning II still discouraged public limit order 

submission. It took the order handling rules enacted by the SEC 

in early 1997 to unleash the potential of public limit orders in the 

NASDAQ market. After the OHR, spreads dropped dramatically. 

ECNs, which despite customer limit orders, grew in market share 

from about 10 percent to 80 percent today. ECNs allow public limit 

orders to compete with NASDAQ market-maker quotes. 

The lesson is clear. If limit orders stand a chance of execution, 

they will be submitted and can then become an important source 

of liquidity for markets. We need liquidity in our markets. Limit 

orders are shock absorbers for liquidity events. Without limit orders to absorb trades from liquidity demanders, large orders will 

increasingly push prices away from current prices. While it may be 

argued that price impact is a fact of life for large institutional traders, I am more concerned about the small trader that submits an 

15

order at the same direction, but just behind the large order. The 

small order will execute at an inferior price before sufficient liquidity can be sent back to the market by traders. 

Repeal of the trade-through rule, then, would take us back to 

pre-Manning rule days. It will discourage limit order submission 

and in turn increase volatility in affected stocks. This will result 

in a higher effective execution cost for the average investors. A few 

large players will benefit, but it will be at the expense of the majority of long-term investors. It has been shown time and time again 

that investors factor execution costs into the required cost of supplying funds to firms. Therefore, higher execution costs will translate into higher costs of capital for firms and stock prices will fall. 

This will make it more difficult to raise capital and hence provide 

a drag on the economy. 

As an example, on April 11 of 1990, the Toronto Stock Exchange, 

TSX, enacted rules that resulted in the effective execution costs increasing by about .025 percentage points. Within a week, prices declined by over 6 percent and stayed there. This impact on prices 

will happen if the trade-through rule is repealed. It will set us back 

10 years and put us dead last in the modernization of markets 

among industrial nations. 

Other nations have seen the value of routing orders according to 

price. The TSX affected rules that require brokers receiving market 

orders of 5,000 shares or less to either improve on price or send the 

order to the TSX for execution against public limit orders. Following that action, affected stocks experienced an immediate increase in depth and reduction in spread. Evidence from U.S. markets finds the same result. When Merrill Lynch decided to stop 

routing their orders to regional stock exchanges and instead routed 

them directly to the New York Stock Exchange, spreads narrowed 

and customers obtained better executions. Recently, the EU has 

passed the investment services directive II, which is similar to TSX 

concentrates on rules and requires orders that occur off exchanges 

to be improved-on price; not worse price, not same price, better 

price. 

The above are examples of the adage that liquidity begets liquidity. In other words, limit order traders will submit limit orders 

where market orders are. It is similar to the fact that the more 

traffic exists on a highway, the more gas stations will exist. If the 

traffic goes away, so will the gas stations. Similarly, if market orders get routed away from the venue with the best price, limit orders will leave that venue as well. Going back to the gas station 

example, it does not matter how cheap your gas is. You will not sell 

much at the back of a dead-end street. 

If markets want to truly compete, they should do so on price, 

which is the current structure. However, the entire notion of markets competing is problematic. True competition is between natural 

buyers and sellers. I doubt if any member of the public ever received a call from the Chicago Stock Exchange asking them to send 

their orders in NYSE-listed stocks to them, but their brokers did. 

Allowing orders to be routed for reasons other than best price 

will increase the incidence of preferencing, again taking us a big 

step backward in efforts to modernize our market. I am generally 

against allowing traders to give blanket opt-outs of the best price 

16

rule. Most investors do not know their bid from their ask, and I 

am afraid will quickly agree to allow their brokers to opt out of 

their accounts. This opens the floodgates for abuse by brokers, 

undoing years of regulatory mandated improvements in our markets. There may be something to be said for allowing some large 

traders to make an informed decision to opt out on a trade-by-trade 

basis. However, I would suggest that this can be accomplished 

through the changes to the rule for block trades. 

Therefore, I really do not see a need for an opt-out ability. If 

enough investors opt out, then market orders can be routed away 

from current venues and executed at inferior prices. This will discourage traders from providing liquidity, leaving more volatility in 

the markets, higher execution costs, and higher costs of capital for 

U.S. firms. Repealing the trade-through rule in listed markets will 

result in fragmentation for listed stocks similar to that on 

NASDAQ. The fragmentation of NASDAQ has led to an increased 

usage of order routers to find liquidity. The creation and sale of 

order routers is perhaps the biggest growth segment of the securities industry today. 

Companies like ITG do a big business selling trading firms their 

order routing services. Now, these order routing firms are not charitable organizations, but for-profit. Therefore, it costs money to find 

liquidity in the OTC market today. This further adds to execution 

costs, therefore increasing the fragmentation of markets by allowing opt-outs to the trade-through rule and will result in higher execution costs because of the increased cost of finding liquidity. 

Thank you for inviting me today, Mr. Chairman. 

[The prepared statement of Daniel G. Weaver can be found on 

page 96 in the appendix.] 

Chairman BAKER. Thank you, sir. 

Our next witness is Mr. Kim Bang, president and chief executive 

officer, Bloomberg Tradebook. Welcome. 

STATEMENT OF KIM BANG, PRESIDENT AND CEO, 

BLOOMBERG TRADEBOOK LLC 

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

behalf of Bloomberg Tradebook. 

In early market structure hearings, Chairman Oxley asked, why 

does the New York Stock Exchange control 80 percent of the trading volume of its listed companies, when NASDAQ controls only 

about 20 percent of the volume of its listed companies? The answer 

is simple. There has been and continues to be numerous impediments to electronic competitors. The NASDAQ price-fixing scandal 

of the mid-1990s resulted in sanctions by the SEC and the Department of Justice and decisions on market structure intended to enhance transparency and competition in the NASDAQ market. 

Specifically, the SEC’s 1996 issuance of the order-handling rules 

permitted electronic communication networks, ECNs, to flourish, 

benefiting investors and enhancing the quality of the market. 

NASDAQ spreads narrowed by nearly 30 percent in the first year 

following the adoption of the order-handling rules. These and subsequent reductions in transactional costs constitute significant savVerDate 0ct 09 2002 10:39 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\DOCS\95595.TXT FIN1 PsN: MICAH
17

ings that are now available for investments that fuel business expansion and job creation. 

The question confronting the SEC and Congress is whether equity markets can be reformed to bring the same benefits to the 

New York Stock Exchange investor as they have to the NASDAQ 

investor. The trade-through rule is the foremost impediment to 

that opportunity. 

Currently, the inter-market trading system trade-through rule 

protects inefficient markets, while depriving investors of the choice 

of anonymity, speed or liquidity by mandating instead that investors pursue the advertised theoretical best price, instead of the best 

available firm price. Ending the trade-through rule would allow investors to choose the markets in which they wish to trade, which 

would in turn promote competition and benefit investors. The results would be greater transparency, greater efficiency, greater liquidity and less intermediation in the national market system, 

which are precisely the goals of the Securities Acts Amendment of 

1975. 

Rather than introducing a complex new trade-through rule that 

would be expensive to implement and unlikely to be enforced, we 

suggest launching a pilot program similar to the ETF de minimus 

exemption for a cross-section of listed stocks. With no tradethrough rule restriction, the Commission could then monitor and 

measure the results of these three competitive forces. 

I cite in my testimony a study appraising a real-world experience 

in which market quality did not diminish, but actually improved in 

the ETFs with the relaxation of the trade-through rule. This is no 

surprise, as the second largest market in the world, namely 

NASDAQ, functions very effectively without a trade-through rule. 

As to market data, the Financial Services Committee has long 

held that market data is the oxygen of the markets. Ensuring that 

market data is available in a fashion where it is both affordable to 

retail investors and where market participants have the widest 

possible latitude to add value to that data are high priorities. In 

its 1999 concept release on market data, the Commission noted 

that market data should be for the benefit of the investing public. 

Indeed, market data originates with specialist market-makers, 

broker-dealers and investors. The exchanges and the NASDAQ 

marketplace are not the sources of market data, but rather the facilities through which market data are collected and disseminated. 

In that 1999 release, the SEC proposed a cost-based limit to market data revenues. We believe the SEC was closer to the mark in 

1999 when it proposed making market data revenues cost-based, 

rather than in its Regulation NMS proposal which proposes a new 

formula for dispensing market data revenue without addressing the 

underlying question of how effectively to regulate this public utility 

function. 

In addition to questions regarding who owns market data and 

who shares in the revenue and the size of the data fees, we believe 

the Commission ought also to revisit how much market data should 

be made available to investors. Here, decimalization has been the 

watershed event. Going to decimal trading has been a boon for sure 

to retail investors. It has been accompanied, however, by a drastically diminished depth of displayed and accessible liquidity. With 

18

100 price points to the dollar, instead of eight or sixteen, the informational value and available liquidity at the best bid and offer 

have declined substantially. In response to decimalization, the 

Commission should restore lost transparency and liquidity by mandating greater real-time disclosure by market centers of liquidity, 

at least five cents above and below the best prices. 

I would like to touch briefly on one other aspect of Regulation 

NMS, namely access fees. Bloomberg has long believed that access 

fees should be abolished for all securities in all markets. While we 

applaud the SEC’s efforts to reduce access fees, we are concerned 

that the complexities inherent in curtailing these fees without 

eliminating them are likely to create an uneven playing field. 

In conclusion, this committee has been at the forefront of the 

market structure debate and I appreciate the opportunity to discuss how these seemingly abstract issues have a real concrete affect on investors. Regulation NMS is a bold step to bring our markets into the 21st century. However, we believe there is a risk that 

Regulation NMS may reshuffle, rather than eliminate current impediments to market efficiency. Elimination of the trade-through 

rule, elimination of access fees, to restore lost transparency lost to 

decimalization, and to control the cost of market data would help 

promote a 21st century equity market that best serves investors. 

Thank you very much. 

[The prepared statement of Kim Bang can be found on page 46 

in the appendix.] 

Chairman BAKER. Thank you, sir. 

Our next witness is Mr. Peter J. Wallison, resident fellow, American Enterprise Institute. Welcome. 

STATEMENT OF PETER J. WALLISON, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. WALLISON. Thank you very much, Mr. Chairman. I am 

pleased to have this opportunity to offer my views on the SEC’s 

proposed Regulation NMS. 

Regulation NMS is a complex proposal with elements that address different aspects of the national market system. I will only 

discuss the basic question of market structure, which is implicated 

by the regulation’s proposed changes in the applicability of the 

trade-through rule. 

The U.S. securities market today consists of two entirely different structures, a centralized market for the trading of New York 

Stock Exchange-listed securities; and a set of competing market 

centers for the trading of NASDAQ securities. One of these models 

and only one is likely to be best for investors, and hence the best 

market structure. But Regulation NMS does not help us decide 

which it is. In fact, by allowing some investors and markets to 

trade-through prices on the New York Stock Exchange and by attempting to impose the trade-through rule on the trading of 

NASDAQ securities, Regulation NMS further confuses the issues. 

The fundamental question of market structure is whether investors are better off when securities trading is centralized in a single 

dominant market, or when it is spread among a number of competing market centers. If the SEC is interested in reforming securiVerDate 0ct 09 2002 10:39 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\DOCS\95595.TXT FIN1 PsN: MICAH
19

ties market structure, it must address this question. Regulation 

NMS does not do so. 

Accordingly, I believe the regulation should be withdrawn until 

the SEC has done sufficient study and analysis of market structure 

to make an appropriate recommendation. 

There are two basic models for organizing a securities trading 

system. In the first, trading in specific securities is centralized so 

that, to the maximum extent possible, all orders to buy and sell 

meet each other in a central market. In economic theory, this produces the greatest degree of liquidity and thus the best prices and 

narrowest spreads. 

This model has two potential large-scale deficiencies, however. It 

forces all trading into a single mode—one size fits all—and thus 

will not meet the trading needs of some investors; and it does not 

create incentives for innovation or encourage accommodation to the 

changing needs of investors. The second model is a decentralized 

structure that contemplates competing market centers. Any security can be traded in any market. The advantages of this structure 

are that it can potentially meet the trading requirements of the 

greatest number of investors, and because the markets are in competition with one another, it provides adequate incentives for innovation and change. 

The disadvantage of this structure is that is breaks up liquidity 

and thus could potentially interfere with price discovery. It also 

could result in investors getting different prices for the same security, executed at the same time, which some regard as unfair. The 

reason for the difference between competitive conditions in the two 

markets is probably the trade-through rule, which is applicable to 

New York Stock Exchange-listed securities, but not, for historical 

reasons, to those listed on NASDAQ. 

The trade-through rule requires that customer orders to buy or 

sell NYSE securities be forwarded to the market center where the 

best price for those securities has been posted, usually the NYSE. 

The purpose of the rule in conformity with the SEC’s longstanding 

policy, is to increase the chances that buyers and sellers of a security will get the best price available in the market at the time they 

want to trade, even if the security is traded in different markets. 

It appears that if the trade-through rule were eliminated entirely, much of the trading in New York Stock Exchange securities 

would move to the automated markets such as the ECNs. This 

seems likely because in the NASDAQ market, where the tradethrough rule was not applicable, ECNs have been able to capture 

much of the trading from NASDAQ market-makers themselves. 

There are good reasons for this, especially for institutional investors, detailed in my prepared testimony. From the perspective of 

institutional investors, electronic markets may offer the best available prices because they allow trading in large amounts with relatively low market impact. 

Thus, one way to state the question before the SEC is whether 

the trade-through rule should remain applicable to trading in New 

York Stock Exchange securities. If the SEC believes that overall, 

taking into account its advantages and disadvantages, the centralized trading on the New York Stock Exchange is superior to the decentralized structure of the NASDAQ market, then it should retain 

20

the trade-through rule. On the other hand if it believes that the decentralized structure of the NASDAQ market overall is superior, 

then it should eliminate the trade-through rule entirely so that all 

market centers could trade all securities. 

In Regulation NMS, the SEC has done neither and both. It is 

proposing to eliminate the trade-through rule in some circumstances, and to impose it in others where it does not currently 

apply. This indicates to me that the SEC is unwilling or unable to 

grapple with the central question of market structure—whether to 

favor a centralized trading model like the New York Stock Exchange, or a market that consists of competing trading venues. 

Without deciding this question, there is no point in adopting another regulation. Instead, I would suggest that the SEC withdraw 

the regulation and do the necessary work to decide how the securities market should be structured in the future. 

That is my testimony, Mr. Chairman. 

[The prepared statement of Peter J. Wallison can be found on 

page 88 in the appendix.] 

Chairman BAKER. Thank you, Mr. Wallison. 

Mr. McCabe, much of your testimony is based on the principle 

that execution at the best price should be the stalwart principle 

from which we should not retreat. To that extent, I think most 

would agree that coming down on the side of the consumer is always a good choice. But can you represent to me that today all 

trades are executed at the best price available on the New York 

Exchange at the time of execution? 

Mr. MCCABE. Sir, first off I have to say that I do not represent 

the New York Stock Exchange. I work for a subsidiary broker-dealer. On the New York Stock Exchange, we have rules that say that 

we must attempt always to get the best price for a customer. If for 

any reason we fail at that, there are methods for people to redress 

that. But I would say that the vast majority of the time, yes, they 

do get the best price. 

Chairman BAKER. I do not know if there is someone who chooses 

to offer the counter view. I have received information from other 

exchange representatives who allege as to the frequency of thousands of times a week that there are executions that occur on the 

New York exchange, not by necessarily adverse intent, but due to 

technological limitation that the executions do not occur at the best 

price. That is, in fact, what is driving my review of the matter is 

that I believe the current system is faulty in that regard, and that 

you do not necessarily attain best price. 

But let’s move past that. Assume for the moment you are correct 

and some investor has reason to want to have some other principle 

guiding his investment decision. Dr. Weaver, you indicated that 

most investors do not know bid from ask, but let’s assume for a moment we have one who has gotten pointed out in the right direction. If he has some other strategic reason to want to execute, why 

should not that consumer be given his choice as opposed to the 

mandatory rule? 

Mr. WEAVER. Are we only going to worry about that consumer? 

Or are we going to worry about the market as a whole? If orders 

get routed away from a market center, then people realize that 

their limit orders are not going to get executed and they are not 

21

going to submit them. Too long in this country, the SEC has focused on coming up with the smallest spread, but we need to worry 

about providing liquidity to the marketplace. Liquidity is a shock 

absorber. You need to have them there. You do not want to have 

your shock absorbers at home in the garage right before you get 

into a pothole. 

Chairman BAKER. That assumes that once the order would not 

be placed, that the demise of the western civilization follows because the liquidity disappears, as opposed to going to perhaps another exchange. You are saying it parks on the sideline and forever 

disappears from the economic system? How do we get to that conclusion? 

Mr. WEAVER. No, sir, I am not saying that at all. First of all, you 

are assuming there is another exchange for them to go to. What if 

it is a market-maker who is operating proprietarily and does not 

accept customer limit orders to compete for the other customer’s 

order? There is no way for that limit order to get there. 

Chairman BAKER. I am not arguing that the role of the specialist 

is not needed. 

Mr. WEAVER. No, I am not talking about the role of the specialist 

either, sir. 

Chairman BAKER. I am saying that where there is a liquid market for a publicly traded stock, where someone has an alternative 

reason for exercising other than best price, which by the way we 

do not get in the New York Exchange anyway, why don’t we let the 

customer choose? We can put a big bumper sticker, the surgeon 

general says this could be hazardous to your health, whatever we 

want, but let people make choices. I think that is more the inherent in the free market system than something that says you must 

do this in order to participate. 

Mr. MCCABE. Mr. Chairman, if I may address that just quickly. 

Chairman BAKER. Sure. 

Mr. MCCABE. The point you have just made is that you do not 

get the best price on the New York Stock Exchange. I have not 

seen anyone publish data that says that, other than some of these 

competitors sitting around here, and quite frankly I question some 

of that data. The most recent 11(a)(c)1-5 report shows that actually 

the fill rate on the New York Stock Exchange for marketable limit 

orders is 72.3 percent. The highest competitor below that for market orders is the NASDAQ. They are at 60 percent, sir. All the 

other RCNs go down from there. 

Chairman BAKER. So it would be, not easy, it takes some work 

for folks to determine it, but based on that we will get the SEC 

working to find out. 

Let me ask another question though. The Philadelphia model has 

competitive specialists, as opposed to the New York Exchange 

which has the dedicated specialist. Is there something wrong with 

the Philadelphia model that would not make sense? If we are going 

to have limited competition, can’t we at least have it among the 

specialists on the trading floor? 

Mr. MCCABE. I think it is always good to know if you have a 

problem you have to address, so I do think it is important that you 

have one person in control. I do agree that there are different market structures and some of them work rather well. I think that the 

22

market structure on the Chicago Mercantile Exchange with comparative market-makers and also the new futures that they are 

rolling out have what they call DPMs, that market structure even 

in the futures is a very interesting market structure. It may actually sometime in the future be what the New York Stock Exchange 

evolves into. 

Chairman BAKER. But you do not necessarily see the Philadelphia model as a flawed model? 

Mr. MCCABE. I do not quite frankly know the percentages of 

trades that are going on there, nor do I know enough about that 

model to speak appropriately on it. 

Chairman BAKER. We will just say possibly could be, but we need 

to have further examination. 

My time has expired, and I know we are going to have to break 

for votes here shortly. I want to make sure other members get their 

chance to make their statements. 

Mr. Hinojosa is next, then you, Mr. Crowley. 

Mr. HINOJOSA. Thank you, Chairman Baker. I want to thank you 

for holding an additional hearing to review the structure of our 

capital markets, in particular the SEC’s proposed national market 

system regulation and how investors would fare under that proposal. 

My first question is for Dan Weaver. Dr. Weaver, what impact 

would the SEC’s proposed national market system rule have on 

limit orders? 

Mr. WEAVER. Which part of the NMS are you referring to? I am 

sorry. The trade-through rule? 

Mr. HINOJOSA. Yes, the trade-through. 

Mr. WEAVER. It encourages limit order submission. Right now, 

there is a trade-through rule on NASDAQ. It is on a firm-by-firm 

basis. It does not apply across the market. The SEC is suggesting 

that we should apply it across the market. I strongly support that. 

It will encourage limit order submission. The reason ECNs were 

started on NASDAQ was because limit orders were being ignored 

by the market-makers, and anything that we can have that will 

give limit orders some priority in the marketplace will help our 

markets. 

Mr. HINOJOSA. Dr. Weaver, how will all investors, not just the 

sophisticated ones, be notified that their mutual fund manager, 

their broker or pension fund manager, is opting out of the tradethrough rule? 

Mr. WEAVER. I do not know how they would be notified because 

I am against them opting out, really. 

Mr. HINOJOSA. Who can tell me how that notification would 

occur? Anybody on the panel? Yes, sir. 

Mr. LEIBOWITZ. It is my understanding that the intention would 

not be for mutual fund managers to notify specific investors. Remember that mutual fund managers first of all have a great degree 

of discretion in execution anyway. They also have a fiduciary responsibility to the client, and it is their job as a sophisticated investor themselves to get the best prices for their client. That is part 

of what they do as a money manager. 

Mr. MCCABE. If I may also, today currently I believe Charles 

Schwab, working the best execution for their customers, internalVerDate 0ct 09 2002 10:39 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\DOCS\95595.TXT FIN1 PsN: MICAH
23

izes 95 percent of the order flow in NASDAQ securities. I would 

question whether or not all those customers are guaranteed best 

price. 

Mr. HINOJOSA. Okay. 

Mr. LEIBOWITZ. I would like to respond to that, if you do not 

mind. 

Mr. HINOJOSA. Certainly, go ahead. 

Mr. LEIBOWITZ. I can tell you that it is our best execution obligation and that we would be examined and fined if we did not provide 

it. If you look at our best execution stats, they are actually superior 

to the New York Stock Exchange in almost every instance, and you 

not only get better prices, but it is at a faster speed. 

Mr. MCCABE. I agree with Larry you can do things quickly, but 

he did not say that they guarantee best price. 

Mr. LEIBOWITZ. No. In fact, I am saying we do guarantee them 

the best price. 

Mr. HINOJOSA. The next question would be for Dan McCabe. Mr. 

McCabe, what is the fundamental difference between the electronic 

commercial networks and the exchanges? 

Mr. MCCABE. Quite frankly, sir, the ECNs are just what they 

state. They are electronic communication networks. They match orders that happen to be in the system. If there are no buyers or no 

sellers on one side, a trade cannot occur. There is nobody in any 

of these platforms that is mandated or required to provide liquidity. On the exchanges, whether it be on Philadelphia or the New 

York or out in Chicago, there are people who are given the responsibility of making fair and orderly markets. That is the difference 

between the exchanges. 

Mr. HINOJOSA. This last question is for Dan Weaver and Daniel 

McCabe. What would happen if in the end, the SEC were to withdraw the proposed NMS rule? 

Mr. MCCABE. If I may, I think the New York Stock Exchange 

quite frankly has changed. I think the proposed rules have caused 

people to address things that needed to be addressed for some time. 

I am very happy to see that. I think those changes will continue 

because of people like Mr. Thain coming into the exchange and 

bringing the appropriate people with him. 

If it is withdrawn, I think that there are certain portions that 

we are still going to have problems with, most notably not the 

trade-through rule, but the payment-for-order flow and the sharing 

of tape revenue that really needs to be addressed in these markets. 

Mr. WEAVER. Let me follow up on that, if I may. I think if they 

withdrew the proposal, it would keep us near the back of the pack 

in the modernization of markets. In particular, the portion of the 

NMS that refers to decimalization and attempting to ban subpenny quoting would continue to further fragment our markets and 

discourage limit order submission. I am afraid that a down market 

of the ilk of 1987 could be more disastrous because there is a lot 

less liquidity in the marketplace than their used to be. 

Mr. HINOJOSA. Chairman Baker, I look forward to hearing 

investors’s opinions of the SEC’s proposal in the near future. I 

found you always to be inclusive, so we have no doubt that you will 

allow us to hear from investors before this is over, before the end 

of this session. Finally, I ask unanimous consent that my opening 

24

remarks be made a part of the record because I was on the floor 

and I could not be here for the beginning. 

[The prepared statement of Hon. Rube ́n Hinojosa can be found 

on page 33 in the appendix.] 

Chairman BAKER. Mr. Hinojosa, your statement will be incorporated as part of the record, and I assure you will hear a great 

deal more about this subject. 

Mr. Crowley? 

Mr. CROWLEY. Thank you, Mr. Chairman. I, too, want to thank 

you for holding these series of hearings on market restructuring reform. 

I, too, have an opening statement that I would also submit for 

the record. 

[The prepared statement of Hon. Joseph Crowley can be found on 

page 28 in the appendix.] 

Chairman BAKER. All members’s statements will be made part of 

the official record. 

Mr. CROWLEY. Thank you, Mr. Chairman. 

I would first of all want to, in the sense of truth in advertising, 

follow up on what Mr. Hinojosa just spoke about, the hearing is entitled ‘‘The SEC Proposal on Market Structure.’’ How will investors 

fare? I am struggling as best I can, and I can certainly make arguments, and this is not disparaging of the panelists before us, but 

I am trying to determine who here really represents the interests 

of the investor. The investor today has taken on many, many new 

forms, and especially mom-and-pops who in the past were not necessarily in the market, but who are in there today. 

So I would also like to include for the record someone who does 

represent, at least in some capacity, the investors. That is the public advocate for the city of New York, Betsy Gotbaum, who in a letter representing more than eight million New Yorkers, many of 

whom are mom-and-pops, as well as others who are invested in the 

markets today, who is offering her opinion in opposition to any 

change in the trade-through rule. I would offer that for the record. 

Chairman BAKER. Without objection. 

[The following information can be found on page 102 in the appendix.] 

Mr. CROWLEY. Just one more point, again truth in advertising, 

and again, Mr. Steil, this is toward you, I note that on the witness 

list it says that you are a Andre Meyer Senior Fellow in International Economics at the Council for Foreign Relations. Are you 

representing the Foreign Relations Council here today? 

Mr. STEIL. No one can represent the Council on Foreign Relations in terms of representing its views. The Council on Foreign 

Relations has no institutional position on any subject matter whatsoever. Even the president of the Council on Foreign Relations cannot state a view on policy of the Council on Foreign Relations. 

Mr. CROWLEY. I appreciate that. You are probably right. But are 

you not also the director of the London-based stock exchange Virtx, an ECN that would clearly benefit if the trade-through were 

eliminated or at least provided with an opt-out provision? 

Mr. STEIL. In fact, I was discussing this matter with Dan Weaver 

before we started the testimony here today. Virt-x is a stock exchange, not an ECN. It trades primarily Swiss SMI stocks. The bigVerDate 0ct 09 2002 10:39 Sep 09, 2004 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\DOCS\95595.TXT FIN1 PsN: MICAH
25

gest beneficiary in the world that I know of, of a trade-through rule 

would be Virt-x, the reason being that Virt-x, being a new competitor in the pan-European trading market was trying to generate liquidity in non-Swiss stocks when it did not have it in the first 

place. 

In its first year of operation, it was quite successful in achieving 

very narrow spreads on a limited number of high-volume European 

stocks. For example on Deutsche TeleKom, on many months Virtx had a narrower inside spread on most days than the home market Deutsche Borse, yet Virt-x got very little order flow in Deutsche 

Telekom. So Virt-x would be an enormous beneficiary of a European trade-through rule. 

Mr. CROWLEY. I am not so sure where your conflict comes in. It 

is either with Virt-x, or for the panel today in terms of your discussion. 

Mr. STEIL. You are making my argument for me. I am not here 

to represent Virt-x in any capacity whatsoever. I am a non-executive director of Virt-x. I do not come here speaking for Virt-x in any 

capacity whatsoever. I am speaking here today solely for myself. 

Mr. CROWLEY. Fair enough. Let me just move on. 

A number of years ago, a number of firms represented here today 

were making the argument that the New York Stock Exchange was 

a dinosaur, that it was outmoded, that it was not performing in essence in a fair way towards its investors in providing fast enough 

or expedited movement. They were making the argument that the 

lack of speed was the downfall of the stock exchange. I, for one, and 

many in the committee have made the point that we believe that 

price needs to be the issue over speed. 

Now that it appears as though the exchange is moving ever so 

quickly towards a more competitive, if not almost identical rate of 

speed, what does that do to the argument? 

Chairman BAKER. That will need to be the gentleman’s last question, so I can get to Mr. Inslee before we leave for votes. Someone 

please pick up wherever you might. 

Mr. GIESEA. I will quickly respond to that to suggest that should 

that occur, that is what the objective of the national market system 

is, in my opinion. It envisions a market that can be seen and 

accessed on an immediate basis. That is I think the overall 

envisionment of the national market system. 

Mr. CROWLEY. So if you have speed and you have price, there is 

really no need to change the trade-through rule. Is that correct? 

Mr. GIESEA. And accessibility. 

Mr. CROWLEY. Thank you. 

I yield back. 

Chairman BAKER. Mr. Inslee? The gentleman passes. 

I will just do some quick follow-ups, and by way of explanation, 

I would really like to stay for considerably longer and have an exchange. We have either four or five votes, I am not sure which, in 

a series, so we are going to be over there for a bit. I think it unreasonable to expect you to remain here while we go do that stuff. 

I will follow up in written form to a number of you with regard 

to specific questions. I do believe it the case that the trade-through 

rule does no in effect result in execution at best price. I do believe 

that consumers ultimately are the ones we should be concerned 

26

about and should be able to act at their instruction since the markets are actually facilitators of a transaction which is initiated by 

the initial investor. 

To that end, I do not believe that the opt-out rule properly constructed is a bad thing. I will follow these observations up with 

questions about the triple-Q trade and the ETF transactions in 

which the SEC eased the rules for a bit, de minimus opportunity 

to conduct business, and ask for your perspectives on that versus 

the transitions that occurred in Europe. I am not at all interested 

in contributing to the demise of our economic system, which has 

been portrayed as a consequence of looking at facilitated trading. 

We really do need to have careful consideration, time to do the 

analysis, and even with Mr. Hinojosa’s requests for additional hearings, we certainly will. In the interim, I hope to ask the SEC specifically to help us navigate through this maze with specific data 

that would be helpful in our insights. 

I regret that I do not have time to engage you in more thoughtful 

discussion today, but given the flow of votes, I think it more appropriate to release you at this point and ask for your response in 

writing to questions we will formulate over the coming days. 

I express my deep appreciation to each of you for your participation here. It has been helpful to the committee’s deliberations. 

We stand adjourned. 

[Whereupon, at 3:21 p.m., the subcommittee was adjourned.] 

(27)

A P P E N D I X

May 18, 2004

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