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In the Midst of Revolution: The SEC, 1973-1981 (Beginnings of a Central Market System) | Galleries | Virtual Museum and Archive of the History of Financial Regulation
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In the Midst of Revolution: The SEC, 1973-1981
First Linking Buyers and Sellers
Beginnings of a Central Market System
Will Wall Street Come Tumbling Down?
Conservative Approach to Radical Change
Momentum for Change Slows
Rule 394 Compromise
What the SEC Expects
"In recent years, the old familiar patterns in the securities industry have been disrupted by the appearance of two new forces: institutional investors and computers. By mobilizing capital, the institutional investors have acquired the power to influence the way markets are made. Computers, because of the communication systems they make possible, offer the means to radically improve the way markets operate. Both of these forces have developed apart from the New York Stock Exchange. Together, they have had a pronounced impact on the New York Stock Exchange's performance as the principal market."
- August 6, 1971 The Securities Market – A Report, with Recommendations, by William McChesney Martin, Jr.
With the successful fight over fixed rates concluded, the SEC turned to a lengthy and more complicated reform effort, one which created both an opportunity for market innovation and the potential to do great damage to the securities industry.
During the 1960s, the massive stock volume generated in the "go-go years" often broke down the system, making it impossible to adequately offset larger block orders. For example, in the late 1960s, the New York Stock Exchange closed on Wednesdays and/or at 2:00 p.m. in order to facilitate the delayed back office work. This "back office" crisis created substantial obstacles to an orderly and efficient market system.
The incapacity of the NYSE system to execute those orders led to the creation of a separate market, which involved those non-NYSE executions of listed securities in secondary and over-the-counter markets outside the main market system and unregulated by the SEC. The 1971 Institutional Investor Study had called attention to those problems.
Even before the advent of computer technology, securities authorities proposed the idea of creating a central securities market system, which would gather and distribute all buy and sell orders in any given security so that investors could then receive the best execution of individual orders. Investors operating in that system, it was argued, could then get the best price as buyers or sellers because the system would provide a continuous matching of the highest-priced buy orders with the lowest-priced sell orders. In addition, reformers argued that the system would be more orderly, without wide and abrupt price swings, and liquid, able to process orders quickly with the capacity to handle temporary imbalances in supply and demand.(19)
In response to the Institutional Investor Study, the New York Stock Exchange issued the Martin Report, proposing a central market system that would preserve the monopoly of the exchange and integrate the national and regional exchanges to create a single, national auction for all listed securities.(20) From that point on, with the battle lines drawn, the SEC and New York Stock Exchange began the long debate over the manner and means of implementing market structure reform with a central market system.
The process of reform took center stage after the resolution of the fixed rate structure issue. It was during the attenuated term of SEC Chairman G. Bradford Cook when the SEC laid important foundations for eventual reform.
The SEC's 1973 "Policy Statement on the Structure of a Central Market System" outlined broad reforms, including the creation of a system-wide communication system; the elimination of unjustifiable impediments to market-maker competition, such as Rule 394, which was intended to ensure depth in the market; the creation of a system-wide Central Limit Order Book (CLOB); and an electronic execution system.
While the details of the proposal remained vague, the SEC called for quick action, with Cook estimating that "major elements of the system should be implemented within two years."(21) Although Chairman Cook departed just months later, the reform momentum created by the policy statement would continue to influence the debate.
(19) Seligman, 486
(20) August 6, 1971 The Securities Market – A Report, with Recommendations, by William McChesney Martin, Jr.
(21) April 25, 1973 "Democracy in the Markets" – Address by SEC Chairman G. Bradford Cook to the Economic Club of Chicago
Institutional Investor Study Response, Securities Regulation and Tax Report
document pdf (Courtesy of Milton Cohen)
"The Central Market System," Address by SEC Commissioner Philip A. Loomis, Jr. to the Securities Industry Association California District Conference
September 19, 1973
Memo from Samuel A. Gray to New York Stock Exchange Executive Committee on Title IV H.R. 5050 - bill for integrated national system of processing of securities
transcript pdf (All rights are owned exclusively by NYSE Euronext copyright 2008 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
New York Stock Exchange Board Summary Memorandum on ticker tape delay procedures
New York Stock Exchange Board Summary Memorandum on news tickers on the floor
"Options: The New Game in Town?," Address by SEC Commissioner A. A. Sommer, Jr. to the Securities Regulation and Enforcement Cooperative Conference
"The Challenge of New Investment Services," Speech by Ray Garrett, Jr. to FBA - BNA Briefing Conference
document pdf (Courtesy of Harvey L. Pitt)
New York Stock Exchange Board Summary Memorandum on consolidated tape
"The Consolidated Tape: A Perspective," Speech by SEC Chairman Ray Garrett, Jr. to the National Association of Securities Dealers
transcript pdf (Courtesy of Harvey L. Pitt)
"Efficiency in Transferring Securities," Speech by SEC Chairman Ray Garrett, Jr. to the New York Regional Group, American Society of Corporate Secretaries
March 27 and 28, 1974
SEC Authority Over Third Market Trading - Hearings before the Subcommittee on Securities of the U.S. Senate Committee on Banking, Housing and Urban Affairs
"Disclosure by Foreign Companies in U.S. Markets," Speech by SEC Chairman Ray Garrett, Jr. to the Conference on the Re-opening of U.S. Capital Markets
April 23, 1974
Letter from U.S. Senators Harrison A. Williams and William Proxmire to SEC Chairman Ray Garrett, Jr. on options trading
"The Analysts and the SEC," Speech by SEC Chairman Ray Garrett, Jr. to the New York Society of Security Analysts
"Mutual Funds: Fifty Years and Beyond," Address by SEC Chairman Ray Garrett, Jr. to the Investment Company Institute
"The Future is Now," Address by SEC Commissioner John R. Evans to Joint Conference co-sponsored by Boston Stock Exchange and Independent Broker Dealers Trade Association
"Is the SEC a Barrier to New York's Role in International Finance?," Address by SEC Chairman Ray Garrett, Jr. to The Financial Times
Letter from George W. Mitchell, Federal Reserve to SEC Chairman Ray Garrett, Jr. on Citicorp
image pdf (Arthur F. Burns Papers, Courtesy of the Gerald R. Ford Library)
"Savings and Loan Associations and the SEC," Address by SEC Chairman Ray Garrett, Jr. to the United States League of Savings Associations
Letter from SEC Chairman Ray Garrett, Jr. to Senator Howard Metzenbaum on foreign ownership legislation
image pdf (Courtesy of the Gerald R. Ford Library)
The Capital Needs and Savings Potential of the U.S. Economy, Projections through 1985 - New York Stock Exchange, Inc.
image pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2009 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives)
"The Securities and Exchange Commission and Foreign Issues in the United States," Address by SEC Chairman Ray Garrett, Jr. to the Keidanren Kaikan, Otemachi
"A Fool and His Gold Are Soon Parted: Do They Have to Be?" - Address by SEC Commissioner A.A. Sommer, Jr. to the North American Securities Administrators
"Bank Securities Activities - Economic Evolution or Governmental Resolution," Address by SEC Commissioner John R. Evans to Practising Law Institute
"Securities Markets Should Not Be 'Trick or Treat'", Address by SEC Commissioner John R. Evans to Municipal Finance Officers Association
"American Capital Markets: Roses or Thorns in Their Future?" - Address by SEC Commissioner A.A. Sommer, Jr. to Cleveland Committee of the Ohio Foundation of Independent Colleges
Opening Remarks of SEC Chairman Ray Garrett, Jr. at the Public, Fact-Finding Investigation in the matter of Beneficial Ownership, Takeovers and Acquisitions by Foreign and Domestic Persons
Oral Statement of SEC Chairman Ray Garrett, Jr. to Labor and IRS Hearing
Written Statement of SEC Chairman Ray Garrett, Jr. in support of proposed exemptions from prohibitions on transactions between employee benefit plans and certain broker-dealers
"To Create a Fair Field of Competition," Address by SEC Commissioner John R. Evans to Midwest Stock Exchange
"Future Securities Markets - Reform, Not Revolution" - Address by SEC Chairman Ray Garrett, Jr. to the North American Securities Administrators Association
"Tell It Like It Is," Address by SEC Commissioner John R. Evans to the Association of Registered Bank Holding Companies
Letter from I.W. Burnham II, Securities Industry Association, to SEC Chairman Roderick Hills on multiple cycle trading of options
document pdf (Courtesy of the estate of John Evans)
Letter from Joseph W. Sullivan, Chicago Board Options Exchange to the SEC Commission on put trading
Letter from Michael E. Tobin, Midwest Stock Exchange to Andrew Klein, Director, SEC Division of Market Regulation on options trading
Memorandum from the SEC Directorate of Economic and Research Policy to the SEC Division of Market Regulation on the economic analysis of Net Capital and Market Credit Requirements governing Options Market Makers
Letter from Thomas D. Gleason, Wolverine World Wide, Inc. to William Batten, New York Stock Exchange in opposition to future expansion of options trading
Letter from Michael E. Tobin, Midwest Stock Exchange to SEC Chairman Harold M. Williams requesting proposed rule change on options trading
Letter from Michael E. Tobin, Midwest Stock Exchange to George A. Fitzsimmons, SEC Secretary in response to SEC release to investigate options trading
Letter from Kenneth I. Rosenblum, Midwest Stock Exchange, to Harvey Pitt, SEC General Counsel on complaint filed by options market makers against the exchange and Michael Tobin
Letter from Philip J. Lo Bue, Pacific Stock Exchange, to Andrew M. Klein, Director, SEC Division of Market Regulation with comments on guidelines for replacement of involuntarily delisted options classes
Joint Submission of Chicago Board Options Exchange and Midwest Stock Exchange to SEC Chairman Harold M. Williams on the proposed combination of Midwest's stock options program with that of CBOE
Letter from Milton H. Cohen, Schiff Hardin & Waite, to the SEC in support of the Chicago Board Options Exchange's position on the New York Stock Exchange's creation of an options market
Report of the SEC's Special Study of the Options Market
(Courtesy of Stuart Kaswell)
Letter of Transmittal, Acknowledgements and Staff Listing image pdf
Glossary of Terms image pdf
Table of Contents image pdf
Chapter I - Introduction - Part 1 image pdf
Chapter I - Introduction - Part 2 image pdf
Chapter I - Introduction - Part 3 image pdf
Chapter II - Fundamentals of Exchange Traded Options - Part 1 image pdf
Chapter II - Fundamentals of Exchange Traded Options - Part 2 image pdf
Chapter II - Fundamentals of Exchange Traded Options - Part 3 image pdf
Chapter III - The Use of Options by Professional Traders - Part 1 image pdf
Chapter III - The Use of Options by Professional Traders - Part 2 image pdf
Chapter III - The Use of Options by Professional Traders - Part 3 image pdf
Chapter IV - Self-Regulatory Organization Surveillance of the Standardized Options Markets - Part 1 image pdf
Chapter IV - Self-Regulatory Organization Surveillance of the Standardized Options Markets - Part 2 image pdf
Chapter IV - Self-Regulatory Organization Surveillance of the Standardized Options Markets - Part 3 image pdf
Chapter IV - Self-Regulatory Organization Surveillance of the Standardized Options Markets - Part 4 image pdf
Chapter V - Options Selling Practices - Part 1 image pdf
Chapter V - Options Selling Practices - Part 2 image pdf
Chapter V - Options Selling Practices - Part 3 image pdf
Chapter V - Options Selling Practices - Part 4 image pdf
Chapter V - Options Selling Practices - Part 5 image pdf
Chapter V - Options Selling Practices - Part 6 image pdf
Chapter V - Options Selling Practices - Part 7 image pdf
Chapter V - Options Selling Practices - Part 8 image pdf
Chapter VI - Self-Regulatory Organization Oversight of Retail Firms and Their Associated Persons - Part 1 image pdf
Chapter VI - Self-Regulatory Organization Oversight of Retail Firms and Their Associated Persons - Part 2 image pdf
Chapter VI - Self-Regulatory Organization Oversight of Retail Firms and Their Associated Persons - Part 3 image pdf
Chapter VI - Self-Regulatory Organization Oversight of Retail Firms and Their Associated Persons - Part 4 image pdf
Chapter VI - Self-Regulatory Organization Oversight of Retail Firms and Their Associated Persons - Part 5 image pdf
Chapter VI - Self-Regulatory Organization Oversight of Retail Firms and Their Associated Persons - Part 6 image pdf
Chapter VII - Financial Regulation in the Options Markets - Part 1 image pdf
Chapter VII - Financial Regulation in the Options Markets - Part 2 image pdf
Chapter VII - Financial Regulation in the Options Markets - Part 3 image pdf
Chapter VII - Financial Regulation in the Options Markets - Part 4 image pdf
Chapter VII - Financial Regulation in the Options Markets - Part 5 image pdf
Chapter VII - Financial Regulation in the Options Markets - Part 6 image pdf
Chapter VII - Financial Regulation in the Options Markets - Part 7 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 1 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 2 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 3 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 4 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 5 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 6 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 7 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 8 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 9 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 10 image pdf
Chapter VIII - Issue of Structure in the Standardized Option Markets - Part 11 image pdf
Chapter VIII - Tables and Graphs image pdf
Letter from James Buck, New York Stock Exchange, to George Fitzimmons, SEC Secretary on the NYSE proposal to enter the options trading market
Letter from Scott Lager, Chicago Board Options Exchange, to Michael Maloney, Assistant Director, SEC Division of Market Regulation on options trading closing
Letter from Elkins Wetherill, Philadelphia Stock Exchange, to George Fitzsimmons, SEC Secretary on standardized options trading
Memorandum prepared by Janet R. Zimmer, Special Counsel, SEC Division of Market Regulation on options closing hours and closing rotations
Letter from Robert J. Birnbaum, American Stock Exchange, to SEC Chairman Harold M. Williams, protesting SEC approval of the expansion of the Chicago Board Options Exchange
"Regulation and Expansion of Options Markets," Address by SEC Commissioner John R. Evans to The "New" Stock Options Market Conference
Acquisition of Technology-Based Firms by Tender Offer: An Economic and Financial Analysis - SEC Capital Market Working Papers
Letter from U.S. Representative John Dingell to SEC Chairman Harold M. Williams urging the SEC to require ITS and NASDAQ to implement automated interface
Letter from Frank Wiglusz to SEC Commissioner John R. Evans on money market funds
Letter from John K. Moore, The Beach Bank of Vero Beach, to U.S. Representative Bill McCollum on checking privileges through money market funds
The Bright Image: The SEC, 1961-1973
An Economic Theory of Regulation Emerges - Facing a Challenge