[House Hearing, 109 Congress] [From the U.S. Government Publishing Office] THE SEC'S MARKET STRUCTURE PROPOSAL: WILL IT ENHANCE COMPETITION? ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND GOVERNMENT SPONSORED ENTEREPRISES OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED NINTH CONGRESS FIRST SESSION __________ FEBRUARY 15, 2005 __________ Printed for the use of the Committee on Financial Services Serial No. 109-2 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2005 22-158 PDF For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 HOUSE COMMITTEE ON FINANCIAL SERVICES MICHAEL G. OXLEY, Ohio, Chairman JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania DEBORAH PRYCE, Ohio MAXINE WATERS, California SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois PETER T. KING, New York NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana RON PAUL, Texas BRAD SHERMAN, California PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York JIM RYUN, Kansas BARBARA LEE, California STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North HAROLD E. FORD, Jr., Tennessee Carolina RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois JOSEPH CROWLEY, New York CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri VITO FOSSELLA, New York STEVE ISRAEL, New York GARY G. MILLER, California CAROLYN McCARTHY, New York PATRICK J. TIBERI, Ohio JOE BACA, California MARK R. KENNEDY, Minnesota JIM MATHESON, Utah TOM FEENEY, Florida STEPHEN F. LYNCH, Massachusetts JEB HENSARLING, Texas BRAD MILLER, North Carolina SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia GINNY BROWN-WAITE, Florida ARTUR DAVIS, Alabama J. GRESHAM BARRETT, South Carolina AL GREEN, Texas KATHERINE HARRIS, Florida EMANUEL CLEAVER, Missouri RICK RENZI, Arizona MELISSA L. BEAN, Illinois JIM GERLACH, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin, RANDY NEUGEBAUER, Texas TOM PRICE, Georgia BERNARD SANDERS, Vermont MICHAEL G. FITZPATRICK, Pennsylvania GEOFF DAVIS, Kentucky PATRICK T. McHENRY, North Carolina Robert U. Foster, III, Staff Director Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises RICHARD H. BAKER, Louisiana, Chairman JIM RYUN, Kansas, Vice Chair PAUL E. KANJORSKI, Pennsylvania CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon SPENCER BACHUS, Alabama BRAD SHERMAN, California MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York PETER T. KING, New York DENNIS MOORE, Kansas FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts DONALD A. MANZULLO, Illinois HAROLD E. FORD, Jr., Tennessee EDWARD R. ROYCE, California RUBEN HINOJOSA, Texas SUE W. KELLY, New York JOSEPH CROWLEY, New York ROBERT W. NEY, Ohio STEVE ISRAEL, New York VITO FOSSELLA, New York, WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois CAROLYN McCARTHY, New York GARY G. MILLER, California JOE BACA, California MARK R. KENNEDY, Minnesota JIM MATHESON, Utah PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina BRAD MILLER, North Carolina GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia TOM FEENEY, Florida NYDIA M. VELAZQUEZ, New York JIM GERLACH, Pennsylvania MELVIN L. WATT, North Carolina KATHERINE HARRIS, Florida ARTUR DAVIS, Alabama JEB HENSARLING, Texas MELISSA L. BEAN, Illinois RICK RENZI, Arizona DEBBIE WASSERMAN SCHULTZ, Florida GEOFF DAVIS, Kentucky BARNEY FRANK, Massachusetts MICHAEL G. FITZPATRICK, Pennsylvania MICHAEL G. OXLEY, Ohio C O N T E N T S ---------- Page Hearing held on: February 15, 2005............................................ 1 Appendix: February 15, 2005............................................ 53 WITNESSES Tuesday, February 15, 2005 Andresen, Matt, President, Citadel Execution Services............ 16 Bang, Kim, President and Chief Executive Officer, Bloomberg Tradebook LLC.................................................. 22 Britz, Robert G., President and Co-Chief Operating Officer, New York Stock Exchange, Inc....................................... 12 Dwyer, Carrie E., General Counsel, The Charles Schwab Corporation 14 Greifeld, Robert, President and Chief Executive Officer, The Nasdaq Stock Market, Inc....................................... 25 Joyce, Thomas M., President and Chief Executive Officer, Knight Trading Group, Inc............................................. 20 McCooey, Robert H. Jr., President and Chief Executive Officer, The Griswold Company, Inc...................................... 18 Nicoll, Edward J., Chief Executive Officer, Instinet Group Incorporated................................................... 9 APPENDIX Prepared statements: Oxley, Hon. Michael G........................................ 54 Kanjorski, Hon. Paul E....................................... 56 King, Hon. Peter T........................................... 58 Gillmor, Hon. Paul E......................................... 60 Andresen, Matt............................................... 62 Bang, Kim.................................................... 89 Britz, Robert G.............................................. 114 Dwyer, Carrie E.............................................. 129 Greifeld, Robert............................................. 135 Joyce, Thomas M.............................................. 166 McCooey, Robert H. Jr........................................ 176 Nicoll, Edward J. (with attachments)......................... 184 Additional Material Submitted for the Record Fidelity Investments, prepared statement......................... 214 THE SEC'S MARKET STRUCTURE PROPOSAL: WILL IT ENHANCE COMPETITION? ---------- Tuesday, February 15, 2005 U.S. House of Representatives, Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to call, at 3:00 p.m., in Room 2128, Rayburn House Office Building, Hon. Richard H. Baker [chairman of the subcommittee] Presiding. Present: Representatives Baker, Shays, Bachus, Fossella, Biggert, Kennedy, Barrett, Brown-Waite, Feeney, Harris, Hensarling, Davis, Fitzpatrick, Oxley (ex officio), Kanjorski, Ackerman, Sherman, Hinojosa, Israel, Clay, McCarthy, Baca, Miller of North Carolina, Scott, Watt, Bean, and Wasserman Schultz. Chairman Baker. I would like to call the meeting of Capital Markets Subcommittee to order and welcome all of our witnesses at our rather cramped quarters today. The subcommittee meets today for the purpose of reviewing the market structure proposal under consideration currently by the SEC. The proposed regulation NMS is aimed at the subject of modernization of United States securities markets. Supplemented in May of this year or, excuse me, of 2004 with the filing extending the comment period till June, the regulation has provoked a great deal of discussion and controversy. Comments on the proposed rule were due January 26 of this year. It centers around three principal aspects of the current securities market. The 212-year-old New York Stock Exchange, which is clearly the leading stock option market not only in the United States but in the world, lists over 2,800 countries. New York Stock Exchange members representing individual and institutional investors bring their orders to buy and sell New York list stocks to specialists on the floor, electronically, or through a floor broker. On a similar but slightly different path, the NASDAQ is the largest U.S. electronic market, listing over 3,300 companies and unlike the New York exchange, NASDAQ is a dealer market where buyers and seller purchase a share from the dealer or market maker through telecommunications capabilities. The most recent development in market centers is the growth of the electronic communications network. Until the 1990s, NASDAQ was the dominant trading in NASDAQ listed securities. ECNs have initiated a different methodology of operation from the New York exchange or from the NASDAQ. There are no third party middlemen, specialist market makers. Buyers and sellers actually meet directly and electronically. And today, two of the leading ECNs, Instinet and Bloomberg, account for about 25 percent of the trading volume in NASDAQ listed securities. These developments have obviously caused market observers and participants to question the current regulatory structure and whether any efficiencies might accrue by a change of rule. The rule does focus on the question of the trade-through rule, its appropriateness, market access, market data and sub-penny quotations. Via the trade-through rule, market participants are prohibited from ignoring or trading through to the best price available and executing a trade at an inferior price, even if the investor so chooses. Some broker dealers and investment advisors contend this rule has a resulting anti-competitive effect. There is also a discussion as to whether disclosure of top of book, Market Best Bid and Offer should be the required disclosure or whether depth of book which would allow participants to voluntarily display several levels of bids and offers away from the Best Bid and Offer. I can go on with what really is ultimately a complex subject and the decisions of which will have broad and long standing effect on market function in this country. I do wish to make a comment at the outset, however, that without regard to one's view of the trade-through's applicability in the New York exchange, I am hoping today to get a good understanding of the proposal's intent to apply the trade-through to the NASDAQ and the logic of making that the order of the day. I do believe that our hearing will be productive. We have diverse opinions represented, and more importantly, we have very educated and insightful individuals as market participants who have been willing to come here today. And let me extend a brief word of apology to all. I was ready this morning. Delta said they were ready; you know, they are ready when you are. I got there at 5:50 this morning, and they were not ready. So for that reason, I had to make the untimely announcement of the delay. And I know that caused each of you some personal inconvenience, for which I regret. But to put a fine point on it, I really wanted to be here for this hearing and felt it appropriate to make that request. So thank you for your courtesies extended. With that, I would recognize Mr. Kanjorski for his opening statement. Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, as the old joke goes, that is one. So you have two more shots, and then we shoot you. Mr. Chairman---- Chairman Baker. I will save you the trouble. Just do it now. Mr. Kanjorski. Mr. Chairman, today, we meet for the fifth time in the last 16 months to evaluate the need for further reforms in the organization of our capital markets. The ongoing deliberations over the National Market System have engendered strong emotions and considerable debate. As I have regularly observed in our previous hearings, a variety of agents in our equities markets have questioned one or more aspect of the regulatory system during the last several years. Technological advances and competitive developments have also led us to a crossroads in the securities industry, forcing us to confront a number of decisions that could fundamentally alter its organization for many years to come. One year ago, the Securities and Exchange Commission put forth four interrelated proposals to reshape the structure and operations of our equities markets. After reviewing the comments that it received regarding these matters, the commission made a number of striking changes in its original plan and republished them for comment this past December. Mr. Chairman, as you already know, I have made investor protection one of my highest priorities for work on this committee. It is therefore my very strong expectation that the commission first and foremost will ensure that it protects the interests of average American investors in any decision it finally reaches regarding the future of the National Market System. Given my interest in protecting retail investors, I was very pleased that the commission decided to retain the trade- through rule when issuing its latest regulatory proposal. As one of the foundations of our National Market System this regulation has insured that all investors get the best price that our securities markets have to offer regardless of the location of the transaction. The approval of an opt-out provision for the trade-through rule will have likely splintered our securities markets, decreased liquidity, limited price discovery and damaged our economy. Today, I also suspect that many of our witnesses will focus on the commission's newest proposal to alter the trade- through rule. In addition to applying the trade-through rule to all securities marketplaces, the commission's latest plan for updating the National Market System includes two alternatives for implementation, the Market Best Bid or Offer Alternative and the Volunteer Depth Alternative. Although some of our witnesses may disagree, the former approach, in my view, is the one that the commission should choose as it better protects investors, fosters competition between and within markets, and incentivizes markets to attract the most aggressive orders. Also, the Voluntary Depth Alternative seems inconsistent with the goals of the National Market System in that it would undercut efforts to promote robust competition between markets. Moreover, the Voluntary Depth Alternative will almost certainly result in only one way for the markets to differentiate themselves, namely, how much they are willing to pay other market participants for their order flow. In my view, promoting competition based on payment for order flow will improve--will prove detrimental in the long- term to average retail investors because the conflicts of interest it creates. This issue is one that the commission should carefully study and one that I hope our panelists will address in their comments and answers today. Ultimately, the commission can best ensure that investors obtain the best price by balancing competition between markets with protection of the best prices in each marketplace. From my perspective, the incremental approach contained in the Market Best Bid or Offer Alternative is preferable. The adoption of this alternative will also help to ensure that the United States maintains its global leadership in our financial markets. In closing, Mr. Chairman, it is appropriate for our panel to conduct continued oversight on these complex issues. The observation of today's witnesses about these matters will further help me to discern how we can maintain the efficiency, effectiveness and competitiveness of our Nation's capital markets for many years to come. [The prepared statement of Hon. Paul E. Kanjorski can be found on page 56 in the appendix.] Chairman Baker. I thank the gentleman. Mr. Shays, do you have a statement? Mr. Shays. Just for the purposes of introduction, I want to extend a warm welcome to Bob Greifeld of the NASDAQ market whose nerve center is located in the Fourth Congressional District. As I do this, I am thinking probably some of you also live in the Fourth Congressional District. Bob has done a tremendous job improving NASDAQ strategy direction since he joined the company in 2003, and I am told his graduate thesis at Stern School, where I also went, was on operation of the NASDAQ marketplace. So it seems to me he was the perfect match for the company and probably why he actually did his thesis. Bob is an active speaker on market structure and regulatory issues, and I am pleased he could join our other distinguished guests here today to provide his thoughts on the SEC proposal. Could I ask, is there anyone else in the Fourth Congressional District? Bob lives in New Jersey. Welcome. Thank you. I tell people, being on the Finance Committee from the Fourth Congressional District of Connecticut is like being-- living in Iowa and being on the Agriculture Committee. Chairman Baker. Thank you Mr. Shays. Mr. Ackerman. Mr. Ackerman. I just want to thank the Chairman and the Ranking Member for calling this hearing, and I am anxious to hear from the witnesses. Chairman Baker. I thank the gentleman. Mr. Bachus. Mr. Bachus. I thank the chairman. I am not going to ask how many of you are from Alabama. First of all, I thank Chairman Baker for his leadership on the issue. As you know, a significant part of the proposed reg NMS purports to reform the so-called trade-through rule and extend its application marketwide or intermarket. While the repeal of the trade-through rule makes more sense, the SEC appears to be past that point. According to the SEC's own studies, the trade-through problems in the New York Stock Exchange and NASDAQ markets are roughly the same and not very large. About 2.5 percent of the trades are traded through in both markets. So why extend the rule into the market that does not have one, the NASDAQ? A trade-through rule is unnecessary for the NASDAQ market and, if anything, would reduce execution quality by slowing down the execution times. A more appropriate approach, I would suggest would be to reform the trade-through rule and the listed market, the NYSE, where there is already such a rule but where clearly the rule is flawed. Once the SEC is confident that they have reformed, that they have a reform rule or they have the reform rule right, then consideration could be given to extending the rule's application to the NASDAQ market. Just a short suggestion, short statement. Thank you Chairman Baker. Look forward to hearing from our witnesses. Chairman Baker. I thank the gentleman. Mr. Israel. Mr. Israel. Thank you Mr. Chairman. Thank you for convening this hearing. In the interest of the committee's time, I will insert my statement for the record. I want to give them more time to speak than me. Chairman Baker. I thank the gentleman for his leadership. Mr. Fossella. Mr. Hensarling, did you have a statement? Mr. Hensarling. Thank you Mr. Chairman. First, hailing from the Dallas Fort Worth metroplex, home of American Airlines, I might point out, Mr. Chairman, they got me here on time this morning. And as we explore increased competition within the securities market, we may want to explore it in the airline arena as well. I appreciate the chairman for holding this hearing. As a believer in the free market system, I believe that Congress must constantly search for ways to foster more competition within our financial markets and allow them to become more efficient. Along these lines, I have paid particularly close attention to the SEC's reg NMS proposal. It is my opinion that the nearly 30-year-old trade-through rule is too limited in scope to take into account the many factors that investors consider when executing trades in today's modern high-speed markets. And I have great concerns about any expansion of this arguably antiquated rule. And I certainly do not need to be convinced that more government mandates typically lead to less private sector innovation. I hope that this debate will continue to focus on what enhances competition and thus what is best for the American consumer, because only each individual investor knows what his short-term and long-term goals are. And certainly, institutional investors have different priorities. I question whether this rule truly protects investors in today's, much less tomorrow's, high-speed markets. I am additionally unconvinced that reg NMS should favor one particular market or market structure. Instead, shouldn't we be trying to foster and encourage competition between markets? So as the SEC continues to determine how best to revise the regulation, it is my hope that they will keep in mind the importance of free and open competition in the American economy and the role that we have as a world leader in financial services. Thank you Mr. Chairman. I yield back. Chairman Baker. I thank the gentleman. Mrs. McCarthy. Mrs. McCarthy. Thank you, Mr. Chairman, I also will submit my questions, and I am actually looking forward to hearing from the committee. Chairman Baker. I thank the gentlelady. Mr. Fitzpatrick. Mr. Fitzpatrick. Thank you Mr. Chairman. And to the distinguished panel of experts who are prepared to give testimony today, I appreciate your taking the time to be here. Even though I am new to this committee and to these rather complicated market structure issues, it seems that market forces and technological advances have made trading stocks today much more efficient and transparent than ever before. With decimalization and the rise of electronic trading, investors today are receiving better prices and faster trades than they were say just 5 years ago. Despite the wide-ranging viewpoints of our exceptional panel of witnesses, we can all agree that the work must still be done to fully modernize the structure of our equity markets. I commend the Securities and Exchange Commission for its timely proposal, regulation NMS, which aims to complete this modernization. However, one part of the proposal, extending the trade- through rule, does not appear to much offer efforts to modernize our equity markets. I am apprehensive about government regulations that can strain competition. Competition in the marketplace generates innovation, which leads to greater productivity. Automatic market structures and mechanisms have lower trading costs, bypassing obsolete market mechanisms that cost public investors unnecessary trading costs. It seems this rule may be an unnecessary second layer of regulation. Aren't investors protected by their brokers best execution obligations? Nonetheless, we must be certain that we are protecting the investor, in particular small investors. These investors happen to be my constituents, the residents of Pennsylvania's Eighth Congressional District who have pensions, 401(k) plans, mutual funds and investments in stocks and bonds. I need to know in what way the SEC's proposal affects the everyday lives of my constituents. But before I make that final judgment, I would like to hear from our distinguished panelists. I yield back my time. Chairman Baker. I thank the gentleman. Mr. Scott. Mr. Scott. Thank you very much, Mr. Chairman. I certainly want to thank you, Mr. Baker and Ranking Member Kanjorski, for holding this hearing today regarding the Securities and Exchange Commission's proposal to modernize the National Market System. I understand that the proliferation of electronic computer networks have changed the way that investors trade in the markets, which is the reason the Securities Exchange Commission needs to update the current National Market System. It is clear from the written testimony of the witnesses that there are a wide range of opinions on the best approach for assuring intermarket price protection. Indeed, some of our witnesses today believe that, in light of current best execution obligations and other existing practices, no such assured protection is necessary. However, one question that I would like to focus on today is, if the ultimate policy decision is to try to strengthen and expand existing trade-through protection, would it make sense to do so in an incremental fashion? And also I would like to weigh the potential costs to participants in relation to the benefits that new rules would provide to markets. And then, of course, there is the fundamental question, is there a need for a trade-through rule, or does a broker's responsibility to obtain best execution of customer orders provide the sufficient protection for customers? As this subcommittee reviews these proposed regulations, we must keep in mind the need to have an efficient national system that provides the best prices for a wide variety of investors. With that in mind, Mr. Chairman, I look forward to hearing from the distinguished panel of witnesses, and I yield back the balance of my time. Chairman Baker. Thank the gentleman. Mr. Davis. Mr. Davis. Thank you, Mr. Chairman and Ranking Member Kanjorski. I do want to mention, Delta was ready when I was this morning at 5:55, so we are here. It is a great opportunity to have this dialogue today. The dramatic improvement of communication technology, just literally a generational leap in the last 5 years, demands that we evaluate the applicability of all regulations, policies and procedures from the Federal Government that could assist or impair the function of our markets and ultimately the functioning of our economy. I am looking forward to this dialogue to address regulations, the process and procedures to ultimately assure that we can protect investors, especially working Americans who are building a nest egg for the future and whose future economic growth rests largely on our work in this room on both sides of the table. I am excited about this discussion. And I hope the outcome will be ensuring free and fair markets that encourage investments and create jobs. Thank you, Mr. Chairman. I yield back the balance of my time. Chairman Baker. I thank the gentleman. Ms. Wasserman Schultz. Ms. Wasserman Schultz. Thank you, Mr. Chairman. It is a pleasure to be here with you today and with Ranking Member Kanjorski and members of the panel. Appreciate you taking this time to articulate your concerns with regard to the SEC's revised National Market System proposal. I am looking forward to hearing from the panelists, and I am sure that the differences among them with regard to the efficacy of trade- through reform will only reinforce the contentious nature of this issue and the absence of a clear regulatory solution. As this process moves forward, I encourage the commission to be as fair as possible and to proceed with restraint when considering reforms that will affect our nation's financial markets. I personally have reservations about imposing regulations that may damage our internationally competitive investor-driven markets. I believe we must always be wary of the unintended consequences that reforms may impose upon the very markets that sustain our national economy. Thank you, and I yield back the balance of my time. Chairman Baker. Thank the gentlelady. Mr. Fossella, did you have a statement, sir? Mr. Barrett? Mrs. Biggert? Mr. Feeney? Mr. Watt? Mr. Watt. I pass. Chairman Baker. Mr. Miller. Mr. Miller of North Carolina. I will pass. Chairman Baker. We are on a role. Mr. Clay. Mr. Clay. None. Chairman Baker. Mr. Hinojosa. Mr. Hinojosa. Thank you, Mr. Chairman. Chairman Baker and Ranking Member Kanjorski, I want to express my sincere appreciation for you holding this very important and very timely hearing. Unfortunately, I will not be able to stay for the entire hearing due to a scheduling conflict with another committee, but I look forward to reading the testimony of today's witnesses and the transcript of today's hearing. This subcommittee has held a number of hearings on the Securities and Exchange Commission's proposed National Market System regulation, and we have heard from a number of witnesses on the proposal. Today, we will hear from some witnesses, including exchanges, ECNs and others, on yet another aspect of the Securities and Exchange Commission's National Market System proposal originally designed to update and strengthen our national securities markets. As most everyone in this room and those listening or watching knows, the Securities and Exchange Commission proposed regulation NMS last year in the attempt to modernize U.S. market structure. In May 2004, the SEC decided to extend the comment period to June 30, 2004, in part likely due to the amazing amount of interest in the importance of and the controversy surrounding this proposed regulation. Once all the comments were in, the SEC decided to propose two alternatives to the original NMS proposal. The commission republished the two alternatives to the proposed regulation for comment. And now that all those comments are in, the SEC is reviewing all of them and will issue its final regulation reportedly at the end of this quarter. While working on proposed changes to the Real Estate Settlement Procedures Act last year, I was amazed and surprised by the number of steps that can be taken by certain groups to interfere with the regulatory process in an attempt to either slow down the process or to use certain ways and means to arrive at the end they desire. The fundamentally flawed proposed changes to the Real Estate Settlement Procedures Act were ultimately and thankfully withdrawn as the result of efforts by myself, Mrs. Biggert, Senator Wayne Allard and our letter in opposition cosigned by well over 250 Members of Congress. All this to say that it is amazing what a few of us here in Congress can defeat when we put our hearts into it. I realize that the SEC is now considering two alternatives to the NMS regulation. And Mr. Chairman, I have serious reservations about the Voluntary Depth Alternative. It could radically change the structure of the U.S. capital markets and damage our internationally competitive investor-driven markets. I urge the SEC to reject the Voluntary Depth Alternative. In this instance, I hope that the SEC will complete the task that we set out to do last year and will issue a final regulation soon. Mr. Chairman, Ranking Member Kanjorski, again, I wish to express my sincere appreciation for you holding this important hearing today. I yield back the remainder of my time. Chairman Baker. I thank the gentleman. Ms. Bean, did you have a statement? Is there any member wishing to make a further statement? If not, at this time, I would like to proceed to call on our panel, and I am, again, appreciative for so many of our distinguished participants willing to give us their time this afternoon. Our first is Mr. Edward J. Nicoll, chief executive officer, Instinet group incorporated. As is the usual custom, we ask that you try to limit your statement to 5 minutes. Your full statement will be made part of the official record. And otherwise, proceed as you like. STATEMENT OF EDWARD J. NICOLL, CHIEF EXECUTIVE OFFICER, INSTINET GROUP INCORPORATED Mr. Nicoll. Mr. Chairman, I am wondering whether I should draw any inferences from the fact that I am seated at this-- apparently at the children's table here today. But thank you Chairman Baker, Ranking Member Kanjorski and members of the subcommittee. Thank you for inviting me to appear today to discuss the SEC's latest version of reg NMS. This subcommittee has held hearings throughout the formation of the rule, and I greatly appreciate the time and effort you have taken to understand the complexity of this issue. Chairman Baker. Mr. Nicoll, if you could pull that mike a little closer. They are not real sensitive. You almost have to---- Mr. Nicoll. How about that? Chairman Baker. That is much better. Thank you. Mr. Nicoll. As I said, I greatly appreciate the time and the effort that the committee has taken to understand the complexity of this issue. In particular, I want to thank Chairman Baker for your leadership. This afternoon, I would like to spend a few minutes on the trade-through rule. When the SEC re-proposed regulation NMS last December, Commissioner Cynthia Glassman encouraged those submitting comments not just to consider what type of trade- through they preferred, but if any trade-through rule was even necessary. We have taken Commissioner Glassman's words to heart and continue to advocate for the elimination of the trade-through rule. Its repeal would foster competition without favoring one market model over another. I must say that I was surprised by the re-proposed rule, since, even at this late date, the case for the trade-through rule has not been made. Sound economic principle, solid data and real-world experience must be our guides when implementing rules that will impact our nation's capital markets. Let's look at the facts surrounding the trade-through rule. First, it is said that the rule is necessary to protect investors from unscrupulous brokers that may execute customer orders at inferior prices. But once it became apparent that the inclusion of an opt-out provision could have addressed such concerns, advocates of regulation had to shift their rationale for preserving the rule. The new defense of the trade-through rule is that it encourages limit orders. The example given by supporters is of the retail investor who posts a limit order only to watch in dismay as other markets ignore his order. All of this causes the investor to lose confidence in the market and stop posting limit orders. With fewer limit orders, spreads widen and market quality is compromised. It is a good story, but with a significant flaw. There is no evidence to support it. Moreover, the absence of a trade- through rule in other markets shows no evidence of such a loss in confidence. In fact, retail investors have shown a preference for placing limit orders in NASDAQ where there is no trade-through rule. I am concerned that the SEC has adopted the position that the trade-through rule promotes limit orders based on research that seems to prove just the opposite. In its own study, the SEC examined 4 days of trading in 2003. And what did it find? The trade-through rate for NASDAQ listed securities was just 2.5 percent of the trades. This finding can only mean that supporters of the trade-through rule believe that even though more than 97.5 percent of the time a limit order is not traded through, the mere 2.5 percent risk of being traded through is enough to discourage limit orders. This just does not seem to be the case. In fact, some of the largest brokerage firms that represent individual investors, including Schwab, Ameritrade, Morgan Stanley, Scottrade, and even Goldman Sachs, report that they receive more limit orders for NASDAQ stocks where there is no trade- through rule than for New York Stock Exchange stocks where there is. Further, the SEC's own study also noted that there were more limit orders placed in NASDAQ stocks than New York Stock Exchange stocks. So based on these numbers, shouldn't the SEC be eliminating the rule entirely, as commissioner Glassman suggests? Unfortunately, the SEC instead has indicated that it will impose the regulation on both the NASDAQ and the New York Stock Exchange and has only asked for a public comment on its two ways to apply this expanded trade-through rule, top of book and voluntary depth of book. This is a false choice. Neither is a step forward. Moreover, public comment letters to the SEC make it clear that there are sharp divisions on this issue. The New York Stock Exchange and some others are strong defenders of the regulation. Yet 37 members of the House and Senate signed comment letters last year calling for a repeal of the trade- through rule or, at a minimum, the inclusion of an opt-out provision. They were joined by statewide officials from coast to coast, ranging from California Controller Steve Westly to Florida Attorney General Charlie Crist. Also calling for a repeal or opt-out were more than a dozen State pension funds and labor unions, including some of the largest like CalPERS, OPERS, the Teachers' Retirement Systems of Louisiana, Indiana, and California; and TIAA-CREF. Major financial institutions, such as UBS, Morgan Stanley, JP Morgan, Merrill Lynch, and Citigroup joined retail firms like Ameritrade, Fidelity and Schwab as they all called for the rule's repeal or an opt-out exception. Such sharp divisions should be taken very seriously. We are considering fundamental changes in how our markets operate and compete. While we should not expect full consensus across our industry, I would think the SEC would be wary of sweeping changes with their related costs to investors in the face of such a deep split and with so many questions still unanswered. Let me conclude with Instinet Group's position on the key issues. First, the trade-through rule is an unnecessary burden that hinders competition, ultimately harming rather than protecting investors. Second, on no account should the trade-through rule be extended to the NASDAQ marketplace. The NASDAQ market is an example of a highly liquid and highly competitive market where the competition has reduced investor costs, narrowed spreads and improved performance for all investors. As Chairman Donaldson himself said when re-proposing reg NMS, quote, We need to identify real problems, consider the practical consequences of possible solutions, and then move pragmatically and incrementally towards the goals Congress staked out, unquote. Applying the trade-through rule to the NASDAQ marketplace is not a pragmatic and incremental move. It should be taken only when it is clear that the market is failing and less drastic remedies are inadequate. And third, if the SEC still feels the overwhelming need to protect limit orders by strengthening the trade-through rule and imposing it on the NASDAQ marketplace, it should implement a consistent rule that protects all limit orders to its voluntary depth of book proposal and not one that protects the lucky few at the top of the book. I have commented in greater technical detail on our positions in the documents accompanying my remarks today and ask that they be included in the record. I thank you for your time and effort and would happily answer any questions you might have. [The prepared statement of Edward J. Nicoll can be found on page 184 in the appendix.] Chairman Baker. Thank you very much, sir. Our next witness is Mr. Robert G. Britz, president and the co-chief operating officer of the New York Stock Exchange. Welcome, sir. STATEMENT OF ROBERT G. BRITZ, PRESIDENT AND CO-CHIEF OPERATING OFFICER, NEW YORK STOCK EXCHANGE, INC. Mr. Britz. Thank you Chairman Baker, Ranking Member Kanjorski and members of the subcommittee. Appreciate the opportunity to be with you this afternoon to articulate the NYSE views on this important issue. Mr. Chairman, while we have filed written testimony addressing a variety of the aspects of reg NMS, I thought I would address my verbal remarks to the question that is posed in the title of this hearing: Will reg NMS actually enhance the competitive position of our markets? In my view, the answer to that question is categorically yes. In that regard, I would offer the following general observations. Reg NMS approach to the trade-through utilizing the Market Best Bid effort will incent markets to compete for investor orders by offering them speedy executions and, importantly, at the best price. It will incent someone seeking counter-party interest to improve upon the existing market, thereby reducing bid offer spreads. It will require markets to adhere to a minimum standard of speed in order to compete. It will reward those who create the most marketable bids and offers, thereby encouraging quote competition. And then, very importantly, it strikes a balance between the pure order competition of a consolidated limit order book and market competition that arises from linking competing markets. Specifically by continuing to encourage intermarket competition, reg NMS will help to boost the U.S. capital markets' competitive position globally and particularly when compared with the government monolith that would inevitably spring from a consolidated limit order book. More specifically, I would offer as Exhibit A of the pro- competitive benefits of reg NMS the NYSE's proposal for a hybrid market. While the hybrid is driven by our evolving customer needs and by our own productivity initiatives, wanting to be aligned with the provisions of reg NMS was clearly a part of our thinking. Without getting into the specifics, through a series of hardware and software initiatives between now and this time next year, the hybrid market will enable our customers to execute in our market electronically, anonymously, in subseconds and with no size restrictions. They will see the complete limit order book in real time. They will have the opportunity to reach into that book at multiple prices or sweep to a particular price if they care to do that. They will be able to place undisclosed interest to a broker in the quote or on the book at various price points as they see fit. Their orders will be auto routed to other markets to the extent that better prices exist in other markets. Incoming orders from other markets will be automatically executed in the NYSE market, and in general, both brokers and specialists and by extension the NYSE market will be significantly more productive. I think reg NMS is particularly pro-competitive in the way that it adeptly deals with the trade-through issue. Amid calls, albeit from a small minority, to allow markets to ignore investors' better-priced orders in other markets, the reg NMS proposes to strengthen and extend the current trade-through rule. The commission correctly recognizes that trade-throughs inherently involve treating investors unfairly, never a good idea, and especially so in an environment already tainted by questionable practices on the part of some corporate officials, some auditors, some research analysts, some mutual fund executives, and some securities dealers. Trade-throughs are symptomatic of inefficient markets. Indeed, only an inefficient market could give rise to a trade- through. They are a violation of the trust investors place in the market and inconceivable with any notion of fair dealing. Trade-throughs devalue price as an order execution element and weaken the equity pricing mechanism. They create a disincentive for investors and traders to post better prices because there can be no assurance that doing so will be rewarded. When competing to establish the best price is no longer the key to attracting orders, markets will regress to the lowest common denominator relative to price. When one considers that the fundamental mission of the stock market is to efficiently price securities, how can the price at which investors trade not be paramount? Remember, in a trade-through scenario, several things occur, none of which is desirable. In the first case, one investor pays more or sells for less than is possible. Another investor gets completely ignored, notwithstanding being willing to pay the best price. And importantly, the company shares are mispriced, and trading is more volatile than would otherwise be the case. And so the SEC has proposed reg NMS to create an environment where investor orders will be rapidly executed and at the best prevailing price. This proposed trade-through rule has the practical and desirable effect of directing investor orders to markets that deliver the best prices. And in so doing, it incents competition among those markets to establish efficient prices. Through reg NMS, the SEC is wisely not dictating market structure. It is creating a framework that allows markets to choose the combination of services they wish to offer and lets investors decide which services best meet their needs. Reg NMS encourages well functioning capital markets and highlights the importance of investor confidence in ensuring that result. Were trade-throughs to be sanctioned by the SEC and, therefore, commonplace, how long will it take investors whose orders are ignored to lose confidence in the systems' ability to meet their needs? How long before corporations experience a higher cost of capital due to the increased volatility in their shares? And how long before U.S. capital markets lose ground to foreign competition due to a decline in the efficacy of the securities pricing mechanism? At the end of the day, Mr. Chairman, the investor willing to pay the highest price and his counterpart willing to sell for the lowest price ought to trade. Anything else is not only counter-intuitive, it is downright inefficient. Worst than that, it is anti-investor. In closing, I would like to commend the committee for conducting this hearing and particularly for correctly framing this in terms of the competitiveness of our markets. Speaking for my own organization, the NYSE is by far the largest and most important equity market in the world. Its growth parallels the growth of the U.S. economy. It has helped to both fuel the growth of U.S. enterprise and maintain the global preeminence of the U.S. as a capital market. At the risk of stating the obvious, there is a lot riding on the markets, the SEC and policymakers. Making sure that the question posed in the title to this hearing, the answer to that question is a resounding yes. Thank you, Mr. Chairman. [The prepared statement of Robert G. Britz can be found on page 114 in the appendix.] Chairman Baker. I thank you very much sir. Our next witness is Ms. Carrie E. Dwyer, general counsel of the Charles Schwab Corporation. Welcome. STATEMENT OF CARRIE E. DWYER, GENERAL COUNSEL, THE CHARLES SCHWAB CORPORATION Ms. Dwyer. Chairman Baker, Ranking Member Kanjorski and members of the subcommittee, my name is Carrie Dwyer. I am general counsel of the Charles Schwab Corporation. I also have the distinction, along with some colleagues at the New York Stock Exchange, of being one of the drafters of the original trade-through rule. I am pleased to be here today to present our perspective on an issue that has direct consequences for the individual investors that we serve. For more than three decades, Charles Schwab has been providing individual investors with efficient access to the markets and the tools they need to make informed investment decisions. Today, we serve more than 7.3 million clients with nearly $1.1 trillion in client assets. On an average day, our customers trade about 3.6 million shares on the New York Stock Exchange and NASDAQ combined. Whether investing in equities, mutual funds or through an investment advisor, our customers' investment returns depend on efficient execution. Our customers demand ever greater efficiency, better service and lower cost from us. We believe a regulatory structure that promotes vigorous competition between markets will generate the innovation that will deliver those benefits now and in years to come. As you know, Mr. Chairman, Congress has historically rejected the idea of a government-designed central market. Instead, over the years, this committee has wisely decided to allow market structure to evolve through the interplay of competitive forces while limiting the SEC's role to market oversight. Members have generally agreed that legislators and government regulators cannot foresee how technology and investing will resolve, nor should they choose which competitor should succeed and which should fail. This policy has served us well over the years, fostering the highly efficient and technologically advanced market that we enjoy today, which makes it difficult to justify the SEC's plan to abandon this approach. Regulation NMS and the proposals for expanding the trade- through rule represent a fundamental redesign of the equity markets. In this proposal, the commission seeks to substitute its own algorithm for the interaction of competitive market forces, creating in effect a central market system. Brokers will be forced to route to markets that may not necessarily get the customer the best overall price and which they would otherwise seek to avoid because of a variety of factors, old- fashioned order handling procedures, cumbersome technology or capacity or reliability concerns. Should this design be adopted, there will be no incentive for markets to compete on how orders are executed or how they discover prices or depth because exchanges are guaranteed to receive orders no matter how moribund their technology. Without an incentive to innovate, technological and operational efficiency will suffer. As numerous experts have pointed out, with every broker forced to route to the same market to take out the same quote where they trade, there is a serious risk of market gridlock. With the advent of Internet trading, our customers are used to getting the price they see on the screen within seconds of entering the order. What will we say to them when their orders start taking longer to execute and at worse prices? What is the SEC's justification for this radical change? It is hard to find a solid empirical basis in the commission's release. Is the rationale for a trade-through rule the quality of effective and quoted spreads? Our experience with our own order flow has shown us market quality improvements in the transfer just last fall of the QQQQs from the listed markets which have a trade-through rule to NASDAQ which does not. Is the rationale high rates of trade-throughs? The commission found reported rates of the trade-throughs, as Ed has said, of about 2 percent. Seems too small to justify changing how the other 98 percent of orders are handled. In any case, the commission reports that the trade-through rate is about the same for the New York Stock Exchange which has a trade-through rule and NASDAQ, despite the differences in market structure. Is the rationale to encourage greater use of limit orders? Our own customers choose to enter twice as many limit orders on NASDAQ, which has no trade-through rule, than the New York Stock Exchange. Do not be misled by those who will argue that a trade- through rule is merely about requiring that customers get the best price. From the customer's perspective, the issue is not whether the first part, the first hundred shares of their order is executed at the best quote. The issue is whether they are getting the best price overall for their whole order. There are many factors that go into that analysis, such as speed and the ability to discover additional liquidity for an order. Contrary to the claims of others, the SEC's top of book proposal will result in situations in which individual investors do not receive the best prices for their trades. The SEC's experimentation with the new market design stands in striking contrast to its slow response to a well documented problem that has continued to disadvantage investors. Under the current SEC rules, the exchanges operate as a cartel to fix the price of market data and restrict access to data to the detriment of all investors, but especially individual investors who cannot afford the hundreds of dollars a year the exchanges charge for access to quote services that display market depth information. Needless to say, access to quality market data is vital to the functioning and fairness of our markets. We are talking about a depth of book proposal, but no one can see, other than institutional customers, can see depth of book today. Despite 5 years of study, comment, and debate, the commission proposal is only a first step that merely reapportions the pool of money and fails to address the root cause of the problem and the inequities it creates. Mr. Chairman, facilitating competition means eliminating barriers to competition, such as the trade-through rule, that guarantee a market will receive business even if it refuses to evolve. And it means facing up to cartels that place individual investors at a disadvantage. Regulation NMS represents a step that requires reconsideration by the commission with the thoughtful input of this committee. While Congress has traditionally respected the SEC's historic role in terms of market oversight, it has consistently reaffirmed that competitive market forces should shape market structure, and it should do so again. Thank you for allowing me to share my views, and I look forward to answering any questions. [The prepared statement of Carrie E. Dwyer can be found on page 129 in the appendix.] Chairman Baker. I thank the gentlelady. Our next witness is Mr. Matt Andresen, President Citadel Execution Services. Welcome, sir. STATEMENT OF MATT ANDRESEN, PRESIDENT, CITADEL EXECUTION SERVICES Mr. Andresen. Thank you. Chairman Baker, Ranking Member Kanjorski and members of the subcommittee, I am Matt Andresen, president of Citadel Execution Services, an affiliate of Citadel Investment Group. Prior to joining Citadel, I was CEO of Island, at the time the largest electronic communications network. On behalf of Citadel, I welcome this opportunity to present our views on the proposed National Market System regulations issued by the SEC. Citadel manages approximately $11 billion in investment capital from its headquarters in Chicago and offices in New York, San Francisco, London, and Tokyo. On average, Citadel accounts for between 1 and 2 percent of the daily dollar volume traded on both the New York Stock Exchange and NASDAQ and for more than 10 percent of daily U.S. options volume. With nearly a thousand employees and as an active and substantial investor in the U.S. and throughout the world, Citadel has a vital interest in the development of fair, efficient, transparent, and liquid markets. Because the trade-through rule implicates fundamental questions regarding the transparency and efficiency of the markets, the issues to be addressed at this hearing are of great importance to all investors. American investors, whether retail or institutional, have a vested interest in insuring that U.S. markets remain the strongest and most efficient markets in the world. I would like to refer the committee to our written testimony, which I have submitted and briefly summarizes our position. The status quo is not acceptable. Citadel is not an exchange but rather a customer of exchanges. And as such, Citadel is well acquainted with the limitations of the current regulatory regime. Citadel believes that the existing trade- through rule is unnecessary and should be eliminated. However, the top of book proposal, if adopted, would be substantial improvement over the current regulatory framework. Specific benefits would include, one, the ability to bypass manual markets where appropriate; two, the ability to use an intermarket sweep exemption to execute large institutional orders cleanly and efficiently; and three, the creation of a clear incentive for manual markets to automate. Citadel has asked the commission to act quickly to either eliminate the existing trade-through or to adopt a revised rule. In addition, given that the US options markets are plagued with the same market structure problems as the NYSE and AMEX listed equity markets, Citadel has requested the SEC extend any proposed trade-through changes to the options markets. We would now like to respond specifically to the questions raised by the committee. First, Citadel does not believe that a compelling empirical case has been made for the extension of the trade-through rule to all NMS stocks. Specifically, Citadel does not believe there is any discernable policy justification for any application of the trade-through rule to electronic markets. In the marketplace for NASDAQ stocks, where there is not a trade-through rule and quotes are generally immediately and electronically accessible, market quality is superior and trade-throughs are not an issue. With regard to questions on top of book versus depth of book, Citadel would support a top of book provided there is an ability to bypass manual markets, an intermarket suite exemption, and a clear definition of an automated market. You have also asked what the consequences are if this proposal is adopted. Citadel believes the markets and, therefore, all investors would be better served by an abolition of the trade-through rule rather than by incremental reforms. Nevertheless, Citadel believes that the SEC's proposal, if adopted, will be a meaningful improvement over the model we have now. Tangible benefits that would accrue on the listed equity markets from the proposed rule include an increase in market transparency and liquidity; a decrease in effective spreads and execution costs; and a dramatic improvement of execution speed and certainty. Finally, with regard to your question on the SEC's empirical justifications for the proposal, the SEC has correctly recognized the serious weakness in the current trade- through rule, its failure to reflect the disparate speed of response between manual and automated quotations. A proposed or revised trade-through rule by excluding manual quotations would reduce impact of this fundamental flaw in the current National Market System and thereby improve the system. A number of commentators have pointed out flaws in the SEC's analysis in regard to the question of whether to extend the trade-through rule to the NASDAQ marketplace. Based on our own experience trading large volumes of both NASDAQ and NYSE listed equities, we believe strongly that the execution quality of the NASDAQ marketplace is significantly superior to that of the listed marketplace. In conclusion, let me be very clear about Citadel's position here. We do not believe there should be a trade- through rule. However, the current status quo is unacceptable. If an immediate and complete abolition of the trade-through rule across all markets, over-the-counter, listed and option, is not on the table, then Citadel strongly recommends taking a positive incremental step that, in our opinion, will substantially improve the execution quality of NYSE listed stocks. Thank you. [The prepared statement of Matt Andresen can be found on page 62 in the appendix.] Chairman Baker. Thank you, sir. Our next witness is Mr. Robert H. McCooey, Jr., president and chief executive officer of the Griswold Company, Incorporated. Welcome. STATEMENT OF ROBERT H. MCCOOEY, JR., PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE GRISWOLD COMPANY, INC. Mr. McCooey. Thank you Chairman Baker, Ranking Member Kanjorski and members of the subcommittee. Good afternoon. Thank you for inviting me here to testify in connection with your review of the SEC's re-proposed regulation NMS. I am privileged to be here to share my thoughts, again, before the committee. For those of you who do not know me, my name is Robert McCooey. I am a member of the New York Stock Exchange and one of the agent representatives from the floor to the New York Stock Exchange Board of Executives. In my primary job, I am the president and chief executive officer of the Griswold Company, an agency broker executing institutional orders on the floor of the New York Stock Exchange. I am a practitioner. Chairman Baker, I am pleased to be part of this group you have assembled here today. I hope that I am going to be able to bring some perspective on the impact of the re-proposed reg NMS as well as insight into why, of the two proposals, alternatives, proposed by the SEC, I favor the market BBO alternative over the Volunteer Depth Alternative. Over the past few years we have witnessed a great transformation taking place throughout the National Market System. At the New York Stock Exchange alone, change has been a prevalent theme in our business. We have welcomed new management who have brought with them new ideas and a new perspective. Our Chairman John Reed and our CEO John Thain has been singularly focused on listening to our multiple constituent groups and responding with an aggressive approach to meeting customer needs. A product of this response has been the NYSE's proposed hybrid market initiative. This was created as a direct response to the feedback from our customers. With this initiative, we aim to create a market that enhances choice and best serves the demands of all of our customers. Some of our customers have asked for speed others require certainty and still others desire the opportunity for price improvement. The Hybrid Market offers all of these options. If they want speed, certainty, and anonymity of execution, they can choose the NYSE's automated execution service, an enhancement to a service that already exists today. If they want the opportunity for price improvement offered through the auction process, they can still employ the services of a professional agent to meet that goal. The SEC, too, has been actively listening to constituents. I praise the Commission for its thoughtful proposals and for all the hard work put forth in creating the best marketplace for all investors. I share this goal, and therefore I support a Reg NMS where customers receive the best price for their transactions while also giving them the benefit of competition between marketplaces. I support a trade-through rule that extends to all NMS stocks, as I believe that creates a level playing field for investors and promotes healthy competition among markets. In the SEC's most recent trade-through proposal, two options were presented. I support the first of the two alternatives, the market BBO alternative, in which the best bid and offer in each market would be protected. This top of book alternative will promote competition to provide the best bid or offer within a market with the assurance that their quotes will not be traded through. It will also encourage market participants to quote aggressively, to be that best bid in offer in order to be afforded that protection. This will narrow spreads and foster more display liquidity. Market participants have consistently ranked these two benefits of the proposal as two of their top priorities. I strongly disagree with the second proposal, the voluntary depth alternative, that mandates depth of book order routing which will essentially create a consolidated limit order book, or CLOB, in the marketplace. This alternative, periodically debated and always rejected, harms competition among markets by taxing technology and regulation. One of the great features of the New York Stock Exchange is the interaction between large and small orders. The creation of a government mandated order file would significantly limit customers' ability to achieve the best price as the interaction of orders from institutional clients and individual investors would be dramatically hindered. This bifurcated market where the largest institutions would trade in a different arena than small investors would have a significant negative impact on price discovery. Furthermore, in a CLOB environment, customers' orders would have to be exposed in the market, making them difficult to trade and more costly to execute. All institutional customers worry about the market impact that their orders will have, especially those in small and midcap stocks. The forced display of these orders in a CLOB in order to receive protection is not in the customers' best interest since it undermines the goal of minimizing market impact. I cannot support a model that does not promote the customer's best interest. Additionally, the cost of this model to investors is unjustifiable. The implementation operating costs would eventually fall on investors, and these costs would greatly outweigh any potential benefits. I cannot imagine a reason to unnecessarily alter today's highly competitive system that accrues tremendous benefits to my customers and your constituents. I hope my comments today presented before the committee have underscored the importance of a trade-through rule for all NMS stocks and the overwhelming value of the market MBB alternative versus the negative impact of the voluntary depth alternative in the reproposed Reg NMS. If best serving investors is a goal that we all share, then we must agree on a comprehensive Reg NMS that guarantees the best price for all investors as well as fosters competition. We must continue to put the interest of investors first and provide healthy, competitive, and robust domestic markets. I am pleased that the SEC has recognized the value in maintaining the trade-through rule. It is reassuring that we can collectively recognize the value of updating this important customer protection rule as we make significant changes to the structure of the NYC in response to suggestions from our competitors and, more importantly, constructive dialogue with our customers. I am privileged to be part of this process in creating a better marketplace for all investors and again applaud the SEC for all their efforts. Finally, I want to commend the work that you, Mr. Chairman, your staff, and the committee has done on this issue. Thank you for the opportunity to speak before you today, and I will be happy to answer any questions. Chairman Baker. Thank you, sir. [The prepared statement of Robert H. McCooey can be found on page 176 in the appendix.] Chairman Baker. Our next witness is Mr. Thomas M. Joyce, president and chief executive officer, Knight Trading Group, Incorporated. Welcome. STATEMENT OF THOMAS M. JOYCE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, KNIGHT TRADING GROUP, INC. Mr. Joyce. Mr. Chairman, thank you. I apologize in advance; I am wrestling with a cold. Chairman Baker, Ranking Member Kanjorski, and members of the subcommittee, thank you for the opportunity to participate in this important hearing regarding regulation NMS. I am the chairman and CEO of Knight Trading Group. We manage investor assets of over $3-1/2 billion as well as being the largest market maker in the industry, trading well over 1 billion shares on a typical day. I commend this subcommittee for its interest in ensuring that the capital markets remain competitive and innovative. Although the SEC's regulation NMS addresses some inefficiencies in the equity markets such as ECN access fees to nonsubscribers and subpenny quotations, we have very serious concerns about its proposal to extend the trade-through rule to all markets. Due to competitive forces and the lack of data supporting such a rule, we respectfully submit that the SEC has not demonstrated a meaningful justification of the proposed rule. As such, we firmly believe that neither of the two alternative trade-through rules, market BBO alternative and voluntary depth, are warranted. The solution is simple: Require linkages that efficiently connect all markets and ensure that all display quotations can be accessible and executable. If there are efficient linkages, then the need for a trade-through rule on any market is effectively eliminated. There is no evidence to support the extension of a trade- through rule. In fact, the SEC's data on trade-through rates is nearly the same on the NYSE, which has a trade-through rule, and the NASDAQ market, which does not have a trade-through rule. So it is unclear what is to be gained by instituting such a rule across all markets. Government-mandated paths of trading could have serious unintended consequences and negatively impact the technological innovations that have served to greatly benefit the U.S. investor. The driver of this innovation can be summed up in a single word: competition. Competition in securities markets has allowed the typical U.S. investor to now experience trades at blinding speed and at the best price. By forcing all trades to take a similar route and be handled in a similar manner, we will undermine the very foundation of competition. That is the distinctions in execution offerings that motivate the investor. It is those very distinctions which drive the markets to improve. Rather than a centralized way of trading, the U.S. investors want fast trades, complete fills, minimal impact, superior pricing, and minimal costs. These investor demands force the markets to create and innovate in a highly efficient manner. Too many unnecessary rules create roadblocks and reduce competition. The reproposal significantly underestimates the cost of instituting the trade-through rule for all markets. No trade- through rule has existed in the NASDAQ market, so firms like Knight will face a significant technology cost burden. The costs of these system and compliance technologies and personnel changes will be significant; yet the benefits of a trade- through rule are minimal. The ultimate costs of investors will also be great as they will inevitably suffer from reduced efficiencies brought about by a centralized mandated trading protocol. Competition rather than mandatory--rather than regulatory mandates should drive market participants. Unlike a trade- through rule mandate, the SEC's rule 11Ac1-5 is an example of regulation that increases competition. The rule requires market participants to post execution stats, and as a result, rule 5 transparency and comparability of execution, which order routing firms can and do use to make informed routing decisions, has increased competition and pressured markets to become more efficient, greatly reducing execution times and the cost to investors. This is due to competitive forces, not regulatory fiat. Innovations and increased efficiencies may never occur if we do not encourage and foster a competitive market environment rather than pursuing and expanding antiquated command-and- control methods of trading. An approach such as rule 5 provides a far less invasive and less costly way to achieve the goals of a trade-through rule. There is no evidence to suggest that a trade-through rule will increase limit orders. Charles Schwab data supports the view that small investors would not benefit from an extension of the trade-through rules of the NASDAQ market as their customers, quote, tend to use limit orders approximately twice as often for NASDAQ stocks as for listed stocks, end quote. A trade-through rule simply will not encourage more limit orders since retail investors appear to use limit orders on NASDAQ stocks, which are not governed by a trade-through rule, more than twice as often than on Exchange-listed stocks. This explains why many large retail-based brokers argue there is no need to extend the rule. And let us face facts. Even though the New York Stock Exchange already has a trade-through rule, large institutional investors do not populate the specialist book with limit orders. They simply don't do it. In short, these real market behaviors tell us that a trade- through rule will not encourage limit orders. Rather than imposing a trade-through rule at this time, a phased approach to addressing market structure issues should be implemented. Requiring connectivity would go a long way towards ensuring that investors receive best execution of their orders. Once connectivity and access are established, the SEC would then be better able to determine whether there is a need for further investor protections. If necessary, then a pilot program could be implemented to examine the impact of proposing a trade- through rule. Knight supports the Commission's proposals relating to limiting access fees, banning subpenny quotations, and locked and crossed markets. Each of these by the SEC will help maintain an orderly marketplace, so we urge adoption of those proposals. In conclusion, competition fosters innovation and efficiencies, ultimately benefiting the markets and investors. Connected markets and efficient and fair access will do more to benefit investors than a costly unproven command-and-control trade-through rule. Knight recommends the SEC minimize unintended consequences by taking a market-oriented approach that requires connectivity, efficient and fair access, and then later considers whether a trade-through rule is necessary. Thank you. I look forward to any questions. Chairman Baker. Thank you, sir. [The prepared statement of Thomas M. Joyce can be found on page 166 in the appendix.] Chairman Baker. Our next witness is Mr. Kim Bang, president and chief executive officer, Bloomberg Tradebook, LLC. Welcome. STATEMENT OF KIM BANG, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE NASDAQ STOCK MARKET, INC. Mr. Bang. Thank you, Mr. Chairman, and members on the committee. My name is Kim Bang. I am pleased to testify on behalf of Bloomberg Tradebook. Bloomberg Tradebook is owned by Bloomberg L.P. and is located in New York City. Bloomberg L.P. Provides multimedia, analytical, and news services to more than 250,000 financial professionals in over 100 countries worldwide. Bloomberg News is syndicated in over 350 newspapers and on 550 radio and television stations worldwide. Bloomberg Tradebook is a global electronic agency broker serving institutions and other broker dealers. We count among our clients many of the Nation's largest institutional investors representing, through pension funds and mutual funds, the savings of millions of ordinary Americans. Bloomberg Tradebook specializes in consolidating what has otherwise been a fragmented marketplace by increasing transparency and by providing direct market access to those points of liquidity. We are not competitors of the exchanges; we are liquidity agnostic, if you like. Our challenge is to provide the best possible tools to our clients to empower them to find the best price, whether it is at the New York Stock Exchange, NASDAQ, or any of the other 40 exchanges we route to globally. Currently the trade-through rule protects manual markets by mandating that investors pursue the advertised theoretical best price rather than the available firm price. The rules should be abolished. If manual markets are to continue on the New York Stock Exchange when they exist at no other significant exchange in the world, they must earn that position as a result of competition, not because of regulatory protection. We would respectfully submit that the goals of the National Market System can be most fully and efficiently realized with greater transparency and unintermediated access to firm quotations. Greater mandatory display of liquidity beyond the national best bid and offer, the NBBO, and immediate electronic access would make for a more competitive National Market System. Decimalization has been a boon to investors and an enormous spur to market efficiency. This committee has played a critical role in producing this market evolution. However, the rules governing the display of market data, rules crafted in an era of eighths and sixteenths, have never been updated to reflect this change in decimalization. Since decimalization introduced 100 price points to the dollar in place of the previous 8 or 16, the amount of liquidity now available at the NBBO is much smaller than it was before. As a result, there has been a dramatic decrease in transparency and liquidity found at the inside quotation. The Securities Industry Association in commenting on Reg NMS accurately observed, beginning quote, ``The value of the NBBO, the cornerstone of the market data system, is less than it was prior to decimalization. We believe that the SEC has the responsibility to address this issue in light of the operation of its quote and display rules,'' et cetera, end of quote. We agree. Bloomberg publishes data on en route orders to equity securities markets throughout the world. Every significant market other than the New York Stock Exchange and Mexico currently publishes realtime quotations at a minimum of five levels deep for all investors to see and immediately access electronically. As the largest equity market in the world, the New York Stock Exchange should not continue to deny investors and fiduciaries that same transparency and access. Rather than introduce a new trade-through rule, we believe the Commission should consider amending the limit order display rule to require exchanges, market makers, and other market senders, including ECNs, to publish any customer limit orders within 5 cents of their best published quotations; to require all market centers to have their published quotations, not just the top of file, be firm and immediately touchable electronically. Three, amend the vendor display rule to require vendors such as Bloomberg to carry the depth-of-book quotations on the same terms as top-of-file quotations. Four, review and implement with appropriate modifications the New York Stock Exchange open book and hybrid market proposal before making decisions on Reg NMS. And, fifth, enforce meaningful compliance with fiduciary standards by brokers and investment managers so they use their reasonable means to seek best execution for clients. This is a modest proposal. As a policy matter, it is hard to argue that decimalization should leave investors with less transparency and liquidity. The impact of simply updating the display rules could be profound, positive, encouraging the display of limit orders in a fashion that relies on market forces instead of governmental regulation. It is far less intrusive than a trade-through rule which would be expensive to implement and difficult to monitor and enforce. With better transparency and access to market quotations, brokers and investment managers would have powerful incentives particularly given their best execution duties to reach out for the best prices available in any market, which would improve execution quality, promote intermarket competition, and lower transaction cost. We think the New York Stock Exchange, in fact, has made some very encouraging progress under the constant and effective prodding on the investors and the SEC. Its open book proposal has some shortcomings, we believe, but if implemented properly, it would enhance transparency. The hybrid market proposal and its direct plus element offers enhanced electronic access to the published quotations. Both of those developments represents a welcomed modernization of the market, and we think the Commission should pause to let them be properly implemented before given further consideration as to whether a trade- through rule is necessary or indeed desirable. As to market data itself, the chairman of this committee has observed that market data is the oxygen of the markets. Ensuring that the market data is available in a fashion where it is both affordable to investors and where market participants have the widest possible latitude to add value to that data are high priorities. According to the SEC, the SRO networks spend about 40 million on collecting and disseminating market data, and in return receive over 10 times that much in revenues, 424 million. And those revenue come from investors. We believe the SEC was closer to the mark in 1999 when it proposed market data revenues should be cost-based--excuse me, and that--and its current Reg NMS proposal, which sets forth a new formula for dispensing market data revenue without addressing the underlying question of how to effectively regulate this monopoly function. Regulation NMS is a bold step to bring our markets into the 21st century. This committee and the SEC are to be commended for prompting what has already been a productive debate. Elimination of the trade-through rule, restoring the transparency lost to decimalization, coupled with greater efforts to ensure access to liquidity, and finally control the cost of market data would help promote a National Market System that best serves investors. Thank you. Chairman Baker. Thank you, sir. [The prepared statement of Kim Bang can be found on page 89 in the appendix.] Chairman Baker. And our next witness is Mr. Robert Greifeld, president and chief executive officer of the NASDAQ Stock Market, Incorporated. Welcome. STATEMENT OF ROBERT GREIFELD, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE NASDAQ STOCK MARKET, INC. Mr. Greifeld. Thank you. Chairman Baker, Ranking Member Kanjorski, and members of the subcommittee, thank you for the opportunity to discuss NASDAQ's views on the reproposed Regulation NMS. NASDAQ supports much of the proposed Regulation NMS, including the restrictions on subpenny trading, the proposed access standards, and restrictions on access fees. With regard to the SEC's proposal on market data, we support the SEC's liberalization of proprietary market data; however, we believe the quote credit element is seriously flawed and will be gamed by market participants. Examples of this gaming would be flickering quotes, security targeting, market targeting, shredding quotes, and shifting quotes. This will serve to distort market data and increase investor costs. With regard to the trade-through rule, NASDAQ opposes it because it is not needed. It is costly, and it will not serve the best interest of investors. We are proud of the market quality experienced by investors every day on the NASDAQ Stock Market. We achieve that high quality without the anticompetitive effects of a trade-through rule. We do not believe that extending the trade-through rule to NASDAQ is supported by the facts and may indeed be harmful to investors. Reg NMS will allow investors to make distinctions between fast and slow markets. This will help modernize our overall market structure. While repealing the trade-through rule would be a simpler way to achieve a competitive proinvestor National Market System, the advances proposed by the Commission with regard to floor-based markets are a step forward. This proposal is already driving floor-based markets to develop plans to automate. It will enable electronic markets to compete and will offer investors a better opportunity for best execution. With regard to NASDAQ, the extension of the trade-through rule to our market would be harmful to investors. We are not convinced that the rule would even achieve the SEC's desired goal of increasing the use of limit orders. In contrast, we know that the rule will, in fact, impose financial and technical costs and deprive millions of investors of the ability to determine what is best for them. The Commission relied on two economic studies to support the application of the trade-through rule to NASDAQ securities. We respectfully disagree with the Commission's staff studies. Our full analysis is attached to my written testimony, and in these studies it shows that the trade-through rate on NASDAQ is not, in fact, 2 percent, but today is 1 percent. In general, I will tell you the SEC's study significantly overstates the extent, and it also concludes that differential fill rates for large market orders in NASDAQ and New York Stock Exchange stocks are evidence of a defect in NASDAQ's market structure. This study, in fact, demonstrates a lack of understanding of how the market works, and yet it is used to justify a major change in our market. Many in Congress have asked NASDAQ what we think of the two alternatives in the latest NMS proposal. Just to be clear, neither a top of book proposal nor a depth-of-book version of the trade-through rule is better than the NASDAQ open competitive market. The real question should be, has the trade- through rule outlived its usefulness, and should it be repealed? For those who support a trade-through rule, we found it interesting that the arguments they relied upon conveniently evaporated from their advocacy when the depth of book alternative was proposed by the Commission. In fact, some seem to be taking intellectually inconsistent positions. When the New York Stock Exchange testified before you last February at the New York field hearing, the NYSE stated ``Why should investors ever receive anything other than best price?" There is talk of the importance of speed, anonymity, and other factors, but in a commoditized market like that which exists for equities, if displayed prices across all markets are available immediately, there is absolutely no reason to allow agents to buy and sell on behalf of their clients for anything other than the best price. However, the New York Stock Exchange seems to have had a change of heart. Last month, in a letter to the SEC, the New York Stock Exchange praised the virtue of promoting investors' ability to choose among alternative trading venues and decried the mandatory depth-of-book routing. And it said it will eliminate intermarket competition by giving any limit order regardless of where it was placed the same protection; that is, any limit order would be protected based on price. If you really worship at the altar of best price, the depth of book alternative fulfills that objective perfectly. If someone supports trade-through protection for one price, how can one logically argue against protection of an order as little as one penny away from that price? That is saying that the first investor in line deserves to have his or her spot protected, but the second person in line and any subsequent investors in line do not. We have been given a choice between two competing visions. The first vision is the government continues to function as an involved regulator, presiding over the positive forces of competition as is now the case on the NASDAQ market where there is no trade-through rule. Or the second choice is we rely on the government to define quality stock market services and provide attendant rate protection and price setting. This is the world where a national trade-through rule is administered by the SEC. Some would say there is a level of safety in removing the rigorous jostling forces of competition and applying a government-defined pathway for each and every trade. Others would say competitive vigor is our best hope of providing the most efficient, effective market for investors. I come down squarely on the side of competition, and this is not a theoretical conclusion. The NASDAQ Stock Market operates this way every day and has performed exceptionally well for investors. In the end, NASDAQ is hopeful that Reg NMS is completed in a timely manner. It is important to move competition forward in the trading of New York Stock Exchange issues. Again, we hope the Commission will reject the imposition of any trade-through rule on NASDAQ. The Commission's market structure rules are critical to maintaining our lead in the global equity markets and will impact the way Americans and all investors view the quality and the fairness of our markets. I thank you for holding this hearing and for considering NASDAQ's views. Chairman Baker. Thank you, Mr. Greifeld. [The prepared statement of Robert Greifeld can be found on page 135 in the appendix.] Chairman Baker. And I want to start my questions with you. Based on your obvious concerns about trade-through being extended, setting aside for the moment the consumer interest to respond to this question--and let me quickly add, this should not be considered for litigation purposes a forward-looking statement. I am asking a policy question. If we were to extend the trade-through, or the SEC were to extend the trade-through, with the top of book feature, tell me where the NASDAQ would be 3 years from now. What is it going to look like? What is the bad consequence of that? And take into consideration Mr. Joyce's and others' comments about cost of compliance. Mr. Greifeld. Right. I think the consequence is that the trading in NASDAQ stocks remain essentially unchanged, but we have a drag to participants and investors on their return in that the imposition of trade-through on NASDAQ forces all participants to essentially go through a very rigorous and time-consuming and expensive system reengineering to allow each and every participant to follow the government-mandated rules. At the end of that day, you will have some trade-through on NASDAQ even if there is a trade-through rule. So that is a key point. With the imposition of a trade-through rule, there still will be some level of trade-through, and that is specified in Reg NMS. Chairman Baker. Well, let me jump in. There is one other issue that the SEC, as I understand it, was hoping to achieve with the imposition, and that was to facilitate enhanced utilization of limit orders. Given where you are vis-a-vis the New York Exchange, what is the prognosis if the trade-through is applied with regard to the current utilization? Mr. Greifeld. Well, we see today that there is a greater use of limit orders on the NASDAQ market as compared to the New York Stock Exchange, and we see from a broad range of commenters that they feel their limit orders today are better protected on the NASDAQ Stock Market when compared to the New York Stock Exchange. So we do not have an issue today with investors being wary or unwilling to put limit orders into the market. So, at the end of the day, you are putting a cost structure on to the market, and you are solving a problem that does not exist. Chairman Baker. Let me flip over to Mr. Britz and give you the worst situation. Let us say, for example, that the trade- through is eliminated. Now, other than the consequence to the individual investor, who I am sure you will say may not be best served by that change, what is the consequence to the market structure? Assume for the moment the committee's interest in looking forward is to come up with a philosophical approach to the issue to have the most vibrant and competitive market possible in 3 to 5 years. What is wrong with that as far as the New York Exchange, and why won't your predominant position in the market prevail? Mr. Britz. Well, Mr. Chairman, if I may, I would almost like to answer the question for just briefly that you asked Mr. Greifeld. I think NASDAQ will be, under your scenario, a much better competitor of the New York Stock Exchange in 3 years with the benefit of the trade-through rule than they are today. And as you can imagine, I have some mixed views on that, but they would be in a position where they would strive to deliver the best prices to investors rather than striving--having a business model that strives to deliver cash inducements to brokers and substandard prices to investors. Relative to the New York Stock Exchange, we will continue under all circumstances to have a business model that delivers the best prices to investors with or without a trade-through rule, Mr. Chairman. Chairman Baker. So your response really is if we extend the trade-through to NASDAQ, you are actually facilitating their competitive position; and you are going to argue here that in competition for your financial interest is the way we ought to go? Mr. Britz. Yes, sir. Chairman Baker. That is an interesting approach. Let me ask this: Since the numbers are similar as percentages, I go to the question asked by---- Mr. Britz. Mr. Chairman, if I may. Chairman Baker. Sure. Mr. Britz. The numbers are not similar. There is a fair amount of smoke and mirrors taking place here. Chairman Baker. Please explain. Mr. Britz. There is a difference between the gross number and the net number. There isn't anything in the listed market and in the trade-through rule today that precludes a trade- through from taking place; it simply requires a resolution for the aggrieved party. The trade-through rule at the end of the day was not about the taker of liquidity, it is about the person that gets traded through. Ultimately they raise their hand and complain against the trade-through, and that matter gets resolved. So the net number in NYSE-listed trading within the National Marketing System is dramatically different than the gross number that you are hearing about. Chairman Baker. And what would that number be? If it is dramatically different, what would be the number? Mr. Britz. Virtually zero. Chairman Baker. So are you telling me that there aren't occasions on each trading day where thousands of executions occur which are not at the best price in the market. Mr. Britz. There are always order facts, Mr. Chairman. What I am telling you is that the trade-through rule addresses a procedure whereby those bona fide trade-throughs and aggrieved parties get resolved after the fact. Chairman Baker. I understand your point as to process and the right of the aggrieved party to seek redress. My point merely was in today's market function there are on thousands of occasions on a daily basis within the conduct of the New York Exchange transactions, individuals who do not get execution at the best price. Mr. Britz. That is correct. And what I am suggesting to you, Mr. Chairman---- Chairman Baker. Is there is a way for them to fix it. Mr. Britz. That is exactly right. Chairman Baker. I understand. Mr. Britz. That is what the trade-through rule prescribes today. Chairman Baker. And all I am suggesting is that the defense of the current structure is that we are protecting individual interest. And I think Mr. McCooey made the point in his written testimony that when we went to decimalization, and there were minor fractions that were gleaned for the investor, we should not lose those fractions of a penny or a penny on the aggregate of trades because of the enormity of value that represents in the market. I am simply saying--making the same observation with regard to current trade-through practice: There are thousands of occasions when the trade does not occur at the best price, maybe a penny, maybe a little over a penny, and that also represents significant value. And what I am trying to get out of this--and, you know, a Congressman trying to unravel Wall Street conversation is perhaps a more lengthy task than somebody who has only been here 20 years really has to really understand you guys. But I am kind of getting the picture that, whatever the current system, there are advantages that could further accrue to the average investor--it might be very small amounts--if we let technology work. I think the principal reason--and, again, correct me if I am wrong, one of the principal reasons why the execution might not occur at the best price is the technological barriers between the exchanges that don't allow that transfer of information in a timely manner to meet your own self-imposed trading timelines. Is that a factor in this? Mr. Britz. Proposed Reg NMS, Mr. Chairman, neutralizes the landscape relative to speed. So whatever inefficiencies exist as between so-called manual markets and automated markets today will be a thing of the past under Reg NMS. Chairman Baker. But what I am saying, as to current market practice, that is the principal reason I believe that execution may not occur at the best prices, because of technological lack of translators. Mr. Britz. I am not so sure I would call it technological so much as I would call it different market models, different market structures. Technology, the piece of that, to be sure, but a much more fundamental---- Chairman Baker. We are not getting to the specialist question, are we, with that answer? Mr. Britz. Say it again. Chairman Baker. We are not getting into the specialist question with that answer. Mr. Britz. No, we are not. Chairman Baker. Okay. Mr. Britz. No, we are not. Chairman Baker. I have exhausted my time and probably you as well. I am sorry. Mr. Kanjorski. Mr. Kanjorski. Ms. Dwyer, you helped draft the original trade-through rule, and I assume, because of technological change in advancement, your position now is contrary to what you drafted when you were originally with the SEC? Ms. Dwyer. Well, actually the rule was drafted by the American and New York Stock Exchanges. At that time I represented the American Stock Exchange, and with my companions at the New York Stock Exchange we were being pressured by an SEC that was looking to establish a CLOB because it wasn't happy with the inefficiencies of ITS, which in those days linked regional stock exchanges and some third market makers. And under pressure to avoid the imposition of a CLOB, we did, as Bob has correctly pointed out, create a rule that had nothing to do with best execution, and that rule hasn't had-- for at least 28 of its 30 years, it was merely a means of redressing monetary grievances between specialists that traded through each other. It was a means of avoiding arbitration over every single one of those things. Mr. Kanjorski. I find that interesting, but I suspect, like Abraham Lincoln, it depends on who you represent as to who you stand for. But your company participates, I believe--and I want to ask this as a question--getting payment for order flow; is that correct? Ms. Dwyer. Well, in some respect I think you could characterize the sale of our market-making business lock, stock, and barrel to UBS with an ongoing order routing arrangement as payment for order flow, but it would then be in the realm of many other things throughout the industry that arguably could be called that, but represent not cash payment for order. Mr. Kanjorski. Do you see any conflict of interest involved there? Ms. Dwyer. I actually don't see a conflict of interest there. I see it as the elimination of a potential conflict of interest which we have been managing for many years operating our own market-making business within the Schwab family, and now we have an arm's-length arrangement with the New York Stock Exchange's largest order routing firm and service levels agreements that are, if anything, better than the ones we provided to our customers on our own. Mr. Kanjorski. Let me understand, because I really haven't been able to inquire into the question. My understanding is the broker, or the Exchange, but it is really the broker that is handling the transaction, pays the company for its order flow, and then that money reverts back to the company. But it isn't distributed to the investors in that company if their mutual fund buyers or if their investors through that company, those revenues, stay with the corporation; is that correct? Ms. Dwyer. Well, there are many different kinds of payment for order flow, and in some cases monies are remitted back to customers; in other cases, traditionally the SEC has allowed payment for order flow to stay legal because it reduces the cost that customers pay. In our situation we have a very traditional--today we have a very traditional arrangement on Wall Street, which is paying someone else to execute our orders and being paid for the value of that---- Mr. Kanjorski. Do you see a big distinction between that practice and insurance companies paying brokers for certain insurables? Ms. Dwyer. Well, I hope you are not going to get me indicted here, but I---- Mr. Kanjorski. No, I---- Ms. Dwyer. I do think there is a big difference. Mr. Kanjorski. I can tell you, I have been to a number of exchanges now where the question has been raised to me--and I am flabbergasted--that you all in the securities business don't see the inherent conflict of interest in being paid by the person you are giving the business to, and he is buying perhaps at a higher price which affects your investor. And let me ask anyone else. Do you all see any conflict, potential conflict of interest, or a problem in paying for order flow? Mr. Joyce. Mr. Kanjorski, I would like to take a run at that. We at Knight, in fact, do pay some brokers to provide us with order flow. By definition order flows have value, by definition. That is obvious. But any and all. Mr. Kanjorski. Well, what is that? It is a payment to somebody--somebody gets the business that you give them because they pay you, right? Mr. Joyce. We get order flow brought to us because of, in point of fact, we compensate them under certain circumstances for routing the order flow to us. Now, the point is that---- Mr. Kanjorski. They used to call that rebates or something in the railroad? Mr. Joyce. Rebates. Rebate, payment for order flow. Mr. Kanjorski. I mean, this has been a practice going on in American capitalism for a couple hundred years in different forms. Mr. Joyce. Yeah. And I think it started in the securities industry in the late 1960s when there were eight-point spreads. Mr. Kanjorski. I understand payment for order flow specifically, but rebates and paying for business and the conflict of interest that is inherent in that concept, that has been going on in American business for years. Mr. Joyce. Well, I can't comment on the rest of American business. I do know the conflict of interest in this case, I think, is negligible at best because none of these payments take place before the execution is considered. This is all after the fact of securing the absolute best execution for the investor. Mr. Kanjorski. But it may cause a worse price. Mr. Joyce. With all due respect, Mr. Kanjorski, I challenge that. The best price procedures that are taking place in the NASDAQ--in point of fact, 2 years ago---- Mr. Kanjorski. You mean you pay somebody money for order flow even though you could have had the same order flow from anyone else and have paid them nothing? Mr. Joyce. Or, theoretically, we---- Mr. Kanjorski. Or they wouldn't pay you for the order? Mr. Joyce. Well, we wouldn't have that order flow if we didn't pay for it. We wouldn't just get it. Mr. Kanjorski. Why? Mr. Joyce. Because we have to--one of the reasons, we get it in competition with other members of the industry. By the way, this is not just an isolated case in one firm or another; this is an industry practice. In order to compete in the industry---- Mr. Kanjorski. I understand, it is rather broad. Does anyone at that table, eight of you, see anything potentially as a conflict of interest or improper about that activity on the exchanges? And I am just curious. Ms. Dwyer. Let me see if I could answer that in another way. Any business is full of conflicts, and it is how you manage them that matters; do they affect the quality, as you have pointed out, of what the customer receives. So the SEC in this matter has required, I think very properly, that we all do fulsome disclosure to our customers, and that we still be subject to the highest standards of best execution, which we demonstrate regularly to all and sundry. And I would like you to look at the disclosures that are made so customers know absolutely. Mr. Kanjorski. Unlike the insurance industry---- Ms. Dwyer. I think very unlike the insurance industry. Mr. Joyce. I agree it is unlike the insurance industry. You can look up right now on the Internet, and you can see what our execution statistics and the quality of those statistics are. Mr. Kanjorski. Why would so many brokers---- Mr. Joyce. The insurance industry does that. Mr. Kanjorski. Why would so many brokers---- Mr. Joyce. We are very---- Mr. Kanjorski. When I went on to the floor of one of the exchanges, I must have had 25 brokers come up to me and say, Congressman, you have got to do something about this. This is the most immoral, illegal practice, and most conflict-of- interest practice we have ever seen. And we have no alternative but to pay for order flow. Are they--their idea of this is grossly wrong, or is there something missing in this? Mr. Joyce. I don't know where they are coming from, Mr. Kanjorski. I can't speak for them. Chairman Baker. And let me say, that might be the gentleman's last question, but please feel free to respond, anybody who wants to answer his question. Mr. Bang. A piece of the problem may tie back to access fees that are currently permitted by the SEC to charge access fees, ECNs to charge access fees, exchanges charge access fees. And as a result of those charges, competitive pressures essentially make it such that rebates are funneled back to market participants for posting bids and offers. Our position, Bloomberg Tradebook's position, is that it is a market- distorting element and that we should do away with access fees. Mr. Kanjorski. Your position, you should do away with the payment of order? Mr. Bang. Access fees, which access fees is an element that provide the ability to pay for limit orders. If you eliminated access fees, the ability to pay rebates for limit orders would diminish significantly. Chairman Baker. Mr. Greifeld, did you want to add? Mr. Greifeld. Yeah. I think the broader issue is a conflict between acting as principal and agent. And our industry really has had to grapple with that through the years, where you have traders who can act both as principal and agent. And most notably in the recent history is the specialists on the New York Stock Exchange, where they did a very good job for a number of years, decades, and postdecimalization you saw that they were putting their principal interest ahead of the customer interest, and that resulted in the $250 million fine. Now, NASDAQ market makers have also run into problems with managing that principal and agency conflict. I think Carrie says it properly: Conflict is there, it is a question of how the SEC, the SROs discharge their responsibilities to make sure that conflict is managed. Mr. Joyce. And if I just may clarify. Knight Trading Group neither endorses nor opposes payment for order flow. It is simply a function of the competitive environment. What we do feel exceptionally strong about is that the retail investor has never had it so good. So any and all payment for order flow issues are above and past the execution issue, because the execution issue is one that is public, and we are exceptionally proud that the retail investor gets top-flight executions, and then the payment for order flow issue comes in. But we neither endorse it nor oppose; it is just sort of a competitive part of life, and it does not, repeat not, affect the quality of the execution. Mr. McCooey. As a pure agency broker, the Griswold Company sees the conflict and does not pay for any order flow. Chairman Baker. Mr. Fossella, did you have a question at this time or comment? Mr. Fossella. Thank you, Mr. Chairman. Thank you, panel. Just to follow up on Mr. Britz's comments. I guess I don't--I guess I will paraphrase it. But I think he said that the Reg NMS, I guess, will neutralize the differences relative to the speed of execution among the exchanges. Given that, if that is true, is there anybody on the panel who thinks on balance that a Reg NMS as currently proposed is bad for the markets and thus bad for investors, or does everybody believe that on balance Reg NMS is good for the markets and thus good for investors? Mr. Joyce. I would be happy to comment. I think parts of Reg NMS are good for investors, like getting rid of subpenny trading and limiting access fees. It is a fundamental difference that I guess some of us have. There is a view that regulation, i.e., extending the trade-through rule, is going to enhance markets. I fundamentally believe that regulation stops innovation. Long-term innovation will improve the investor experience. So as long as Reg NMS includes an extension of the trade-through rule, it will be, in point of fact, a detriment to the investor experience. Mr. Fossella. Is there anybody who believes that it will be a detriment? If not, is it safe to assume that everybody thinks that, on balance, as currently proposed, it is a plus for the markets and thus investors? Ms. Dwyer. I think, speaking for me, I think I testified to the opposite, that, on balance, it would not be a benefit. I would say--before I came here, I looked at some order execution statistics from our own order flow in the last week, and, contrary to Bob's assertion that we would normalize speed in this market, last week, for example, New York Stock Exchange executions, which were of an equal quality of execution that we received elsewhere, were on average four times slower. And I think what I said in my testimony--across all bands of orders. And I think what I said in my testimony was that that kind of a break on the current trading process, something that clogs the pipeline and slows it down. If you think about the fact that a firm like ours sends probably 40,000 orders an hour out into the markets to be executed, you start to put a drag on that pipeline, and it is not just one investor who may get an execution for seconds, you know, slower or faster, it is the cumulative effect on that entire stream. Mr. Fossella. And that is currently--you don't feel that, as proposed, Reg NMS will satisfy that? Ms. Dwyer. No. It will make it worse. Mr. Fossella. Because Mr. Britz followed up, again, different markets, different models, different structures, and different models, that it would be an incentive for these regional markets including the Stock Exchange to become more hybrid, and thus speed of execution will, his point--is to neutralize it. You don't buy it? Ms. Dwyer. Speaking for us, we think the opposite. Mr. Fossella. Okay. Ms. Dwyer. That the ability--that the necessity to compete fully with more automated markets will cause the Stock Exchange, which is one of the greatest markets in the world, to move forward and innovate. Mr. Britz. If I may, it is inarguable that Reg NMS will normalize the speed across markets in order to have quotes eligible for competition in the marketplace. I don't know at what level right now the language is automatic execution, essentially untouched by human hands. Our own speed for automatic execution is now down to seven-tenths of 1 second. But the point is inarguable that under a Reg NMS regime, speed, or at least some minimum standard of speed, will be normalized across all markets. I would make one other point relative to Carrie's comment. She was, I am sure, accurately portraying her own firm's data. If you look at the data required to be filed with the Securities and Exchange Commission, you will see that the New York Stock Exchange in a number of trade size categories, for example, the largest trades, is actually faster than any other marketplace. Ms. Dwyer. Bob is correct, I was speaking for us alone. Mr. Andresen. I think that one thing that is important to note here is that I think the trade-through debate has been mischaracterized as a choice between speed and price. I think that, speaking for Citadel or speaking for any market participant, this is always a choice about price. But there are different factors in price. There is the advertised price of a trade, and there is the true price of a trade. When you buy an automobile, you have delivery charges, you have taxes that might impact the true cost of execution that may very well differ from the advertisement you saw in the newspaper. And when we talk about normalizing execution costs between exchanges with Reg NMS, the possibility here is to face each-- before each exchange a binary choice to either be a manual market or an electronic market. Once you are in an electronic market, one of the most major implicit costs of execution on the floor of the New York or the American Stock Exchanges disappear. That is the optionality for someone trading their own account to selectively trade with that incoming order. Once that choice is removed, and they must immediately execute that trade or immediately not execute that trade, then the incoming order cannot be gamed. And that--if that is the case, in someone's manual, whether they are seven-tenths of a second or seven-tenths of a millisecond, as long as the gaming is gone, then an investor can take those costs into effect when choosing their routing table. Mr. Joyce. If I may just say, normalizing to me sounds like appealing to the lowest common denominator, which sounds like to me a complete lack of competition, which sounds like to me a detriment to the investor community long term. Mr. Greifeld. When we think about Reg NMS, when we started this process, we truly had hopes and dreams that it would represent a true step forward for the U.S. equity marketplace. So I guess I take some issue with saying is it detrimental. I believe that is not the right question. It is a question of are we doing this once in a generational change to the markets, and are we taking best advantage of this opportunity. There are things in Reg NMS, as I stated in my testimony, that clearly improve the markets. But when we look at the imposition of a trade-through on NASDAQ where there is no discernable benefit and there is substantial cost, we are wondering if we really are spinning our wheels and wasting our time for this really unique set of opportunities. Chairman Baker. The gentleman's time has expired, unless there is somebody else who wants to respond. If not, Mr. Ackerman. Mr. Ackerman. Thank you, Mr. Chairman. I am still trying to get my arms around this whole issue. I would like to ask the panel, which of you would like to go away with the award for having lousy testimony, having little effect on the committee, but having been the fastest in delivering it? No takers. I remember a couple years ago I got a hip replacement, and I was talking to a whole bunch of different surgeons about it. One had told me that he was renowned because he could do six hip replacements before noon. He wasn't that good at it. I went with the guy who could do three but was an excellent surgeon. I think for me anyway it was the right choice. It might not have been the right choice for everybody. I mean, some people just don't want to be on the operating table that long. But that should be their choice. I remember when I was a teacher, we used to have questions like, two planes leave New York for Washington at 3:00; one travels at 400 miles an hour and crashes and burns upon landing. The other travels 250 miles an hour, gets there 15 minutes later, safely. If I would ask my students which plane would they rather be on, I think they all get it right. Is there an application of these things to what we are talking about now? Mr. Bang. I would like to comment briefly on that. We believe that investor choice is really the cornerstone of the creating a competitive, dynamic marketplace. The problem what we have right now is that there is no true choice, because customers, clients, investors do not have the ability to see available liquidity and access it without being intermediated by a manual process. And that means they don't really have the choice between opting in for an option process, let us say manual execution, and a purely electronic direct market access choice. We don't favor a trade-through rule, but what we favor is providing that transparency and that ability for the investor to make the choice, go for the direct electronic execution, immediate execution, or choose to go to the auction process in the manual market. But that choice does not exist in today's market structure for the New York Stock Exchange. Mr. McCooey. I am sorry, but, yes, it does. We have an automatic execution at the New York Stock Exchange. We have had it for years. Right now the average trade size is 399 shares at--and--across all listed securities at the New York Stock Exchange. That is the average print size, the trade size. Our execution facility direct plus is 1,100 shares and under. So it encompasses the 399 shares that is the average share size, and that is an automatic execution. There is no human intervention. That is, the order is there. There is an offer that wants to be taken, a bid that wants to be hit, the investor hits that bid and immediately is removed from the screen, and there is no human intervention. So that is a mischaracterization on how the market works today. Mr. Bang. The markets are capped. There is a trade size cap to up to just a little over--under 1,100 shares. And you can only repeat that process every, I think, 15 or 20 seconds. So there is a speed bump, if you would like, along the way. With the proposal, hybrid market proposal, from the New York Stock Exchange, they are proposing to do away with that, and we commend that. But as it is today, it is capped in both time and size, and there is no realtime visibility beyond the top of file. So one penny below, you have no visibility and no access to that liquidity. Mr. Ackerman. What is the object of an investor? Mr. Bang. To get done, typically. Mr. Ackerman. To get done? I had this house I bought, and as I was looking around for painters, I hired this painter, I said, I have got to get this done in 3 days. I got there at the end of the second day to see how he was doing, and he was wrapping up. There was paint pouring down the exterior brick walls of the house, the inside had paint all over the floors and everything. And I said, you messed up my whole house. And he says, yeah, but I finished in 2 days. Mr. Joyce. Ah, but the wonderful thing is you had choice. The wonderful thing is, in that example, you had a choice, and you made it. And the way this is--the way NMS is laid out, there will be a limitation of choice. Mr. Ackerman. But if my choice was to get the painter out of there faster, I could have shook hands with him the day I met him and sent him home. Mr. Joyce. But at least you had a choice. Mr. Ackerman. The object that I was gunning for was to get my house painted. I would think that the object of an investor--and correct me if I am wrong, but if I am an investor, I am investing money with the object of making money. And if somebody says to me, you are going to lose money, but you are going to lose it faster, you know, is that what the investors are looking for? Mr. Britz. Congressman, if I may. If your question is one more of whether or not, from a public policy point of view and the health of our U.S. capital markets, unleashing this raw speed to the traders, who have great a appetite for it, will ultimately serve U.S. capital markets, the jury is going to be out on that for sure as to whether or not that injects increased volatility into the marketplace. When I broke into this business 30 years ago, it used to be that behind every order that came to the New York Stock Exchange was someone looking at a balance sheet and an income statement and doing some fundamental work, and then coming to a conclusion and sending an order to our market or anyone else's market. Regrettably, Congressman, that is a very quaint notion today. People simply trade on a momentum basis. They cancel. The cancel rate for orders that are sent to the New York Stock Exchange, the so-called manual slow market, is about 80 percent of all orders that are sent to us are cancelled. And an extraordinary percentage of those are cancelled within the same second that the original order is sent to us. So what becomes of all of this endless speed vis-a-vis the health of the U.S. Capital markets is a question that I don't think anybody can answer right now. Chairman Baker. And that is the gentleman's last question, but if anybody else wants to respond? Mr. Greifeld. I just wanted to say that this Reg NMS debate clearly has gone on for too long, because I do remember the house painting analogy I guess it was a year ago, and I chuckled at it then, I chuckle at it now. Just a comment I will make. With NASDAQ, it is not a question of speed versus price. You truly get both speed and price. And by any objective measure, today the NASDAQ Stock Market yields a better outcome for investors than the New York Stock Exchange. Chairman Baker. The gentleman's time has expired. If no one else wishes to comment on that question---- Chairman Baker. Mr. Hensarling. Mr. Hensarling. Thank you, Mr. Chairman. Assuming for the moment that best price is what the consumer is looking for and assuming for the moment that, be it through regulation or legislation, we should impose this, I was reading in Ms. Dwyer's testimony that in the New York Stock Exchange you can have a delay between 30 seconds and 2 minutes on order execution and that the price volatility obviously can cause an investor, under the trade-through rule, not to actually get the best price. My guess is, Mr. Britz, here in part of your testimony that you disagree with that factual assertion. If so, where has she gotten her facts wrong? Mr. Britz. Congressman, I think the author of that disagrees with that. Ms. Dwyer. If you are referring to my testimony--maybe not. Mr. Hensarling. I think I was--I guess Mr. Andresen. Maybe it was in Mr. Andresen's testimony. It was in somebody's testimony. I don't think I made it up. Mr. Britz. Congressman, I will take a shot at responding to it. The average turnaround time for every order that is sent to the New York Stock Exchange across the board, as we speak, is about 12 seconds. I wouldn't deny that there are occasions when it is something north of that by definition. That is an average, so there has to be something north of that. The facility that we have in place that now handles 11 percent of our volume, the direct-plus facility that Bob McCooey referenced a moment ago, is a sub-second execution which accommodates a multiple of average trade sites, even with the current restriction as to the limitation on size. So any notion that there is a 30-second or a 2-minute execution experience at the NYSE is an artifact, Congressman. Mr. Andresen. I think that you know one important thing to consider here is the certainty of an execution. Citadel executes over a hundred million shares a day through various venues. If I knew when I was sending an order that I was definitely going to get an execution, I just wasn't going to find out about it for 12 seconds, I really wouldn't care that much. The issue is, if in 12 seconds I might find out that I got, I might find out that I didn't get it. If I was trying--you know, if I offered you tickets to the Duke Carolina game later this year for $10, you would probably think it is a pretty deal. But if I didn't deliver the tickets until after the game was played, you would not think it was such a good deal. There is a time value to having the certainty of an execution realized. And we talk about like how quickly we get execution. The real issue here is not just, you know, if the execution is fast. It is, you know, if it happens at all. And especially is there an option for the person on the other end of that line to take advantage of price fluctuations in the meantime. If I send an order and it takes 12 seconds to respond but the stock moved during that intervening time and I only get filled if the stock moved against my order and never filled when it went with my order, then that 12 seconds starts to look like a pretty raw deal. Mr. Britz. Congressman, if I may respond that. Matt, I don't disagree with the principle you articulated, but I find it interesting that when you trade NYSE stocks, if you trade them away from the NYSE, you have certainty of execution. You get a fill rate on NASDAQ at 59 percent; INET at 18 percent; ARCA, 40 percent; and Brut, 29 percent; versus 79 percent for the NYSE. So who wins the certainty race there, Matt? Mr. Andresen. Actually, our percentage executions are actually far lower than that. But that speaks to our strategies. When you are standing ready to buy or sell something and you put in an order, that price is good as long as the value doesn't change. When the value changed, you must cancel that and replace it to update what the new price is. Mr. Hensarling. Mr. Andresen, let me ask you different question here. And that is, it appears that the ECNs have a much greater market share in NASDAQ traded stocks than they do New York Stock Exchange. Does the trade-through rule play any factor in this, or what are the factors that account for that? Mr. Andresen. Well, the most important thing is inertia. The New York Stock Exchange has been around a long time. They have done a very good job with their business. They have over 80 percent market share. If you are going, you know, shopping and 80 percent of the time you find everything you want in one place, you will tend to stay in that place. So, first, you know credit is due to the New York Stock Exchange for their business. When you look at NASDAQ marketplace, maybe 6, 7 years ago electronic markets had also a very small percentage of volume, but they have been able to be successful there and have not been successful on the New York Stock Exchange. I think part of the reason is the competitive nature of the New York Stock Exchange, but also part of that is the trade-through rule. Electronic markets attempt to compete using--across various value propositions. There is the cost of the execution--not the price of the trade but the actual explicit cost and fees associated with making a transaction. They offer varying degrees of certainty of execution. They offer different speeds. And the trade-through rule right now, because where there is a better price away your choice as a market is either to match that price internally or route it to that better price. Well, if you are an electronic marketplace that acts as an agent, you are not allowed to trade for your own account. Therefore, your only choice is to send that order away. Now if you are an electronic market, you are trying to sell services based off speed of execution. But every time there is a superior price you have to mail that off to a different marketplace. You have then lost control of the user experience on that order. And once that happens the customer--and I used to run an electronic network. Now I am part of the problem. I am a customer of these. I don't like that result. Chairman Baker. The gentleman's time has expired, unless somebody else wants to jump on in on that. Yes, sir. Mr. Nicoll. I would just like to remind everybody here that the--a couple of fundamental--I think we need to step back, okay? We have two markets. One has a trade-through rule; one doesn't have a trade-through rule. Whenever you are considering the parade of horribles that the New York Stock Exchange marches before you about what will happen to their market without a trade-through rule, you have to say to yourself, why hasn't that happened in the NASDAQ marketplace? That's number one. Number two, you are going to be thrown a lot of statistics which are always in the favor of the person who is delivering them to you. Let's take this issue that Bob just brought up of fill rates. Fill rates are a consequence of how many executions you get versus how many orders you send. So if you send down 10 orders and you only get one execution, you have got a 10 percent fill rate. If for every order you send you get an execution, you get 100 percent fill rate. Now you would think 100 percent is better than 10 percent. But the fact of the matter is that the better the marketplace, the more certain the marketplace is, the more apt you are to send more orders to them, and the more comfortable you feel sending those orders. Therefore, the better marketplaces don't have higher percentages of fill rates. They actually have lower percentages of fill rates. Now I am saying that to you because I have a low fill rate percentage. Bob is going to say to you, no, no, my 79 percent is better than his. Okay? I assure you that whoever makes the argument is going to be using the statistics for their own benefit. I hope you buy my logic. But what I want you to buy, first and foremost, is that these are very sophisticated people up here, what we call on the street, arguing their own book, making the best case for themselves and using very sophisticated arguments to do that. And to me, in a situation like that, the best public policy is to allow competition to play out. Don't buy into these arguments that you need to overregulate these markets. What we need are minimal regulations. Let these markets compete with each other and let investors choose. Let investors choose which are the best markets. I assure you the New York Stock Exchange, with its 80 percent market share, all it has to do is meet the needs of investors and it will retain that 80 percent market share. It doesn't need the benefits of the trade-through rule and the barriers to competition that the trade-through rule creates. Chairman Baker. I thank the gentleman. Ms. McCarthy. Mrs. McCarthy. Thank you, Mr. Chairman. I probably agree with you, Mr. Nicoll. It sounds like Republicans and Democrats when we are trying to sell each one of our points. I remember when this conversation started, I guess about 18 months ago or 2 years ago, and we first started hearing about trade-through and best price; and now we seem to be, 18 months later, dealing with a situation that in my opinion seems worse than what we started off with. Mainly because I happened to ask the question going back then--I have NASDAQ and I have the New York Stock Exchange, certainly wonderful members of New York, and they add to the economy to, certainly, our great State. But the question kept going back, competition. If we overregulate, don't think it is going to be good for anybody. But, with that, the one question I still don't get a real answer for, the companies, the investors, the clients are going to go to whoever they feel comfortable with or who they feel they are getting the best service for. So here we are, in my opinion, starting to even more overregulation than what we started off in the beginning, and nobody is happy. I don't even know how this all started, to be honest with you. I don't have the answers. But I am certainly more confused today than I was before I read all my notes and all the testimony before we started. So I know it is a separate language down on Wall Street, and it is, and it is a different world. But, you know, we are here, I think all of us, to really try and figure out what is the best thing for the consumer. I mean, that is what we are concerned about in the end. And, hopefully, I think, in my opinion, that we should proceed very cautiously before we make any radical changes. I think that the rules that are coming through, again, looking at them, and I guess I will ask Mr. Andresen and Mr. Bang, I--from hearing your testimony, it seems to me that you are suggesting a cautious approach to what Congress and the SEC can judge the impact of any new proposals on the national market. And I guess if your answer is yes--or if it is no, tell me differently. To me, the market and the BBO alternative seems to offer the more cautious approach. That is my--from hearing everything, between those--between NASDAQ and the New York Stock Exchange and all of you in between. And correct me if I am wrong or give me suggestions on where we should be going. Mr. Andresen. You are absolutely correct. The BBO alternative is the more incremental approach. But if you look at the NASDAQ example, right now there is no trade-through rule. The BBO, alternatively, merely says, well, you have to look at the best price from a competing marketplace. Depth of book says that if someone displays all of their orders, whether it be the best price, the next-best price, the next, next-best price, you must consider all of those. So, naturally, if we are concerned about the costs and unintended consequences of additional regulation, then making someone look at one order versus a potentially infinite number of orders, it is clear which one is less invasive and less apt to have unintended consequences. Mr. Bang. You are basically correct that we do favor a phased or cautious approach, particularly because the New York has two proposals out there that we think will have significant impact on the way market structure evolves. New York's open book proposal, which is essentially to extend in real time transparency beyond just top of file, which we think is very significant; and, secondly in the hybrid proposal which has this element of extending the direct plus, direct immediate access capability without any share limits and without any time limits. That goes also beyond just the top penny quotation. Once that happens--although, you know, there are some technicalities with both of those proposals that we have some issues with, but that can be debated and sort of sorted out. But once that happens, investors will have much greater choice. They will have choice to route and go for this electronic, unintermediated approach for an execution, or they will have the choice to go through the auction process. And we believe that market participants today have very sophisticated execution management systems. They have linkages to these various points of liquidity, and bandwidth is very cheap, and there are smart routers that are designed to get best execution, which in most cases are always best price. It is, you know, not the speed issue. It is a best-price issue. So, yes, we do favor a phased approach. Once you go through those steps, however, we don't think there is any need for any sort of trade-through rule, whether top of file or depth of book. Chairman Baker. Will the gentlelady yield on that point? I just want to echo one perspective of her comment in going slow. I would think going slow would be to take most of the recommendations made, if that would be the committee's wisdom, and not extending the trade through the NASDAQ. To me, that is just as Draconian as repealing the trade-through rule for the New York. There ought to be some mid-ground here. I think taking the old western style of ranching and applying it to the modern dairy doesn't make a lot of sense until we get all the pieces sorted out. And I just want to commend the gentlelady's observations and say to her, unless she has further comment---- Mrs. McCarthy. Well, taking on that point and just explain that to me, because it seems to me that NASDAQ does not want to go through the trade-through rule and the New York Stock Exchange wants to go through the trade-through rule but doesn't--probably doesn't like the--I lost it here. So neither one of them like---- Chairman Baker. There is enough wrong here to go around for everybody, yeah. Mr. Greifeld. We are certainly not in favor of the trade- through rule. And going back to your original comment, how did this come about? It came about that investors recognized that something was broken on the floor of the stock exchange in this decimalization world. And there was a hue and a cry to bring about some reform. They are the only floor-based market essentially left in the world. So, as the rules were put in place to encourage them to automate it, automate their markets, the rules then were extended to NASDAQ. NASDAQ is already an automated market, already has a fast and efficient price discovery mechanism, and we are left wondering why do we bear the burden of the cost for a market that already works so well. Mrs. McCarthy. Well, then going back to the New York Stock Exchange, is actually, because competition is actually moving everything to faster time, correct? Mr. Britz. Correct, Congresswoman. Congresswoman, if I may, I don't know whether this will bring you the clarity that you seek, and it probably won't, but of the 130 respondents to the SEC across all market participants on reg NMS, 100 were in favor of keeping the trade-through rule in New York, extending it to New York. It breaks out 92 top of book market BBO, if you will, and 8 depth of book. And another five were in favor of the trade-through rule tied to the NBBO, which is more closely aligned to some trade-through rule than it is none at all. Only 27 out of those 130, again across a broad constituency, were in favor of eliminating the trade-through rule. Chairman Baker. The gentlelady's time has expired. Mrs. McCarthy. Thank you, Mr. Chairman. Mr. Bang. Can I get one quick comment? Chairman Baker. Sure. Mr. Bang. A middle-of-the-road opportunity may be to take the proposed reg NMS which is looking at firm quotations and extending transparency to five levels deep, which is nothing more than restoring transparency that was lost to decimalization. And then investors will then chose and route accordingly. Chairman Baker. Gentlelady's time has expired. Chairman Oxley. Mr. Oxley. Thank you, Mr. Chairman; and congratulations on putting together an excellent panel. I see a lot of familiar faces out there who have compiled this panel before on a number of occasions. We have always enjoyed your expertise and good cheer. This is, what, your fifth or sixth hearing, Mr. Chairman, on the new market system? Chairman Baker. I have lost count. Mr. Oxley. Somewhere around there. Who is counting when you are having fun? Chairman Baker. I will say, though, I note this one wasn't nearly as entertaining as the field hearing in New York. Mr. Oxley. Well, I am so sorry that I missed the field hearing in New York. Chairman Baker. It was real entertainment, I have got to tell you. I think we need to go back. Mr. Oxley. Yes, we do. And our good friend, Mr. Andresen, I noticed talked about Duke and North Carolina versus Duke versus Maryland, which I thought was---- Mr. Andresen. We don't talk about that. Mr. Oxley. I didn't think you would want to pursue that subject. This--I guess we are here today, and the whole issue revolves around, and I would be interested in the comments from the panel, two relatively recent phenomena that have affected the market. One, obviously, is technology, IT technology, and what technology can do in terms of accuracy and speed and productivity and all of that. And, secondly, of course, was going to decimals. Have I missed anything? Is that--are those the two issues that are driving this whole debate? Is there any other--does anybody want to pile on or add anything else? Okay. And I think this Committee can take some credit for certainly the second--the decimals, which we finally joined the rest of the world in trading in decimals, and Mr. Andresen still has his famous penny somewhere I think that provided visual aids for the hearing a few years ago. That really did, I think, change the whole equation for all of us as policymakers, for you, market makers and participants in the most robust markets in the world. To that end, there is no question we wouldn't be here today discussing the proposed rule by the SEC had it not been for those two phenomena. Given that and where we are today, it just seems to me that both the advent of technology and the change to decimals have made this a much more vigorous competitive marketplace. And the entry of ECNs, the NASDAQ's coming of age, all of these changes have meant one thing and that has been an incredibly competitive marketplace that has benefited all of our constituents, those folks who are participating in the market, either directly or indirectly, and it has had an enormous impact on our country and our society. Over half of the households today are invested in stocks. Ninety-five million plus own mutual funds. People are trading on the Internet. Some of the debate we are going to have about Social Security individual accounts in many ways will involve the arguments that we have got today in terms of people's ability to make decisions in the marketplace for their own future. The ability of those people to amass a fairly good nest egg over 40 or 45 years of saving and investing, the safety of the market, the cost of setting up these accounts, all of these issues and more really bring us to where we are today. What if--and I will just ask each one of the panel. I have got a pretty good idea where you are coming from. But let's say that, instead of the trade-through rule, that we say to the SEC, let's go back to the old fiduciary duty that brokers and investment managers owe to their clients, including the duty to obtain the best execution of their clients orders, and that we allow this unfettered competition to take place, we allow people in the marketplace to determine whether speed is their thing or whether best price is their thing or a combination-- however. What would be wrong with that approach going forward, given these incredible changes that have taken place in a relatively short period of time? Also, understanding that we as policymakers, whether we are in the Congress or the SEC, many times find ourselves following, not leading the changes that take place in the markets; that, in fact, in the case of Gramm-Leach-Bliley, we were essentially making a law that in many cases out in the real marketplace had already taken place because of technology, because of things that had happened in the marketplace--and so I don't think we are smart enough as policymakers to see into the future, and the only thing that happens is some--most of the time you get it wrong. So what is wrong with going back to this whole idea that, instead of this intrusive government regulation, we simply go back to the tried and true concept of best execution of the clients' orders which ultimately is their fiduciary responsibility. Let's begin with Mr. Nicoll. Mr. Nicoll. Well, I couldn't agree, first of all, that fiduciary responsibility exists today and has existed and will continue to exist. So the trade-through rule, these rules are on top of those existing fiduciary obligations which are established both in common law and enshrined in the SEC regulations. We already have that fiduciary responsibility imposed upon all of the agents in the marketplace. What--and when we started out this debate, we started with that issue. People said, well, if we have a trade-through rule, then people are going to take advantage of it and trade through for their customers and it will be unfair. So the SEC initially came up with this idea of an opt out and said, okay, in case there are unscrupulous people out there, if you want to trade through, you have to absolutely opt out. You have to say to your broker, I want to opt out. Okay. So now there can be no question with an opt out that people who are trading through are doing it in the interest of their customer. Well, when that happened, people said--people still wanted a trade-through rule. And so they shifted the argument. They no longer said that it is about protecting the person placing the order. They made this very complicated argument about limit order which said it is not about the person placing the order, it is about the order that is already there. That order that is already there might get traded through, and people will lose confidence. That order that is placed is important because limit orders are important to what is called price discovery, and what that really means is it is important to narrow the spreads between the bids and the offers. The problem with that argument is it is just not supported in evidence, and there is a lot to suggest that all that you need are a couple of simple rules of transparency and access. And, by the way, and surprise, surprise, people will not trade through better prices if they can get a better price. It is not a surprise that people seek the best price in the marketplace, and people do not trade through. The evidence that the SEC has already adduced with respect to the NASDAQ has shown that there are very little trade-throughs, and the NASDAQ says that the SEC evidence even overstates how many trade-throughs there are. So this is all about this sort of bizarre notion that there is this public good in these existing limit orders and if we don't protect them they are going to get traded through and that will impair the quality of the market. It is an interesting story. But, as I said, in my testimony, the facts just don't bear it out. And nobody talks about the--when they make this argument about this, they will always talk about the future. It is always in the future, okay? But they never talk about the facts. The fact is, we have a market without a trade-through rule and we have one with a trade-through rule; and there is not a whole lot of difference in the number of trade-throughs between those two market places. Whether it is 2 percent or 1 percent or even 0 percent, there is very, very little difference. I would suggest to you that all that we need is that fiduciary responsibility to get the best price and let markets compete and we will have sufficient protection in the marketplace. Chairman Baker. Thank you. Mr. Britz? Mr. Britz. I would say to Ed, if you wear your seatbelt, why would you be worried about some sort of a prescription that requires you to wear a seatbelt? Congressman, more directly in response to yours, I think you cannot consider this in a vacuum. We don't have a blank sheet of paper here. Congressman Kanjorski has left us, but earlier he was voicing concerns relative to other things that are in the marketplace like payment for order flow. Payment for order flow and the lack of trade-through rule is a prescription for a bad price. Best execution is--I have yet to hear anyone clearly delineate what best execution means. It is a very broad, to use your word, fiduciary principle. And it is, at best, after the fact proved that you have gotten your customer best execution, whereas trade-through rule insures that you will get them the best price in real time. You know, I think, Congressman, through SEC hearings and congressional hearings and SEC concept releases and rule proposals we make this much more complicated than it needs to be. If you are a market destination that runs your business to deliver to investors the best prices, your best friend is the trade-through rule. On the other hand, if you are a market destination that runs your business off a business model that is based upon inducements to brokers and inferior prices for investors, I do understand why you would have a problem with the trade-through rule. What I don't understand is why you would think that that kind of a business model is worthy of relief from this body vis-a-vis the trade-through rule. We talk about--there is a lot of ``don't overlegislate and competition.'' the folks who are here talking about the trade- through rule are asking you for relief from a rule that requires them to provide investors with the best price. Competing on the basis of other than the best price in a world where speed is neutralized, I don't understand that kind of deregulatory competition. Mr. Oxley. Thank you. Miss Dwyer. Ms. Dwyer. Chairman Oxley, I think a lot of folks at the SEC where I used to work had an unofficial motto when they taught about rulemaking which was, first, do no harm. I think, as Ed has said, we have two models in front of us, one with a trade-through rule and one without. The one without is wildly competitive, produces, you know, equal order execution statistics to anything that the vaunted specialist system can produce, sometimes a lot better. I think we ought to be guided by what we see in front of us in terms of what works and what doesn't and be very careful about layering, you know, protectionist rulemaking on top of a market where two and a half billion shares a day pass through it. It is fairly fundamental to the health of our economy. There are conflicts everywhere. We have to continually strive to manage them better, even on the floor of the New York Stock Exchange, as we have seen in the last few years. Do we have suboptimal performance? I think that allowing the markets to work freely, possibly even being incremental-- the SIA, which represents the majority of the securities industry, has commented against the trade-through rule and has proposed something that I think was very ingenious which, as a compromise, would be an exemption from the trade-through rule across all markets for highly liquid securities that obviously don't need one. Something to think about. Also, the opt out is very a fruitful suggestion. So that you have a trade-through rule if you feel you need one only where you need to have it. I think we ought to look at those things before we impose what is a government design on how every single firm operates. I don't think I can explain the trade-through rule to our customers. I don't think it matters to them. They want to look at the price they got. As we said earlier, I think that the best possibility of getting best price consistently for customers is in a freely competitive market. Mr. Oxley. Thank you. Mr. Andresen. Mr. Andresen. Thank you. Thanks for bringing up Maryland again. I can't get enough of that. Well, Citadel, as we noted in our testimony, is in favor of the top of book reg NMS proposal for the listing department. And we do that because we think it puts in front of each of the manual markets a choice, that you either have to be--go ahead and stay a manual market or you have to have your quote be immediately and automatically executed without human intervention. That is Citadel's primary concern. You know, we talk about, well, you know, best price or you know maybe it is not best price. The thing to keep in mind is that just because a price is on a screen does not mean that that is the price you are going to get. You might get no price. You know, the Palm Pilot IPO years ago moved 27 points in the first 30 seconds. That is an extreme example. You can see with, you know, stocks like Taser or stocks like Fannie Mae, when they had bad news, that there are violent moves in securities. In those instances, it is most dramatic when you have big swings in stocks how much money is really at cost here, when there is optionality and time value, to someone deciding whether or not to execute your trade. What I am excited about with the top of book is, if markets are forced to choose to say, well, competitively, I have to be a so-called fast market, I have to be an automated market, once the price is automated I am less concerned as an investor about getting that price back in a second versus a millisecond. Than I am about making sure I either get it or don't and no one is taking advantage of my order. Mr. Oxley. Thank you. Mr. McCooey. Mr. McCooey. Chairman Oxley, thank you for bringing up this point. I think, as the agent here who has this fiduciary responsibility for his clients here every day, I would agree with you. I think it is important for the SEC to take up that mantle with, obviously, the oversight of this committee and to move forward with trying to define best execution obligations. I think it is very--for us, it is very difficult each and every day to have to deal with brokers and see trade-throughs and see our customers traded through in a way where we are not getting an execution because other markets have traded through us. We want to make sure that we get the best execution we can for our customers, and it would certainly be much easier for us in this regulatory environment, where people have been put into regulatory jeopardy over the past number of years, to have a better understanding of what the SEC does define as best execution. So we would support that, and we think that that is something that this committee should encourage the SEC to take up. Mr. Oxley. Thank you. Mr. Joyce. Mr. Joyce. Chairman Oxley, just as an observation, Mr. Britz keeps referring to inferior prices to investors as some business model that I think he has referred to two or three times today. I get a sense it is a veiled shot at NASDAQ. Perhaps it is. Perhaps it isn't. In any event, I can assure you that we trade a lot of NASDAQ stocks, and never in the history of retail investors have retail investors gotten such a good deal trading the NASDAQ stocks or New York Stock Exchange stocks, for that matter, too. And it is because of what you said earlier. There is vibrant competition taking place in the markets, and I think what this committee and what the SEC needs to focus on is maintaining, encouraging that vibrant competition to continue. As you see the results over the last 2 years, where turnaround times have come down from 20 seconds, in some cases, to sub-seconds now, to people getting the best price they see on the screen, if not an enhanced price, those best-execution responsibilities in a competitive, transparent environment have driven those results. So I believe, sir, that your blueprint is entirely accurate. A light regulatory touch enhancing and encouraging transparent competition is the only blueprint that this market should pursue. Mr. Oxley. Thank you. Mr. Bang. Mr. Bang. We believe that change is needed. We believe that leveling the playing field between professional market participants and the investor is really important. That is what is going to promote greater competition and choice for the investor. For the investor to really have choice, we believe that there needs to be firm quotations in the marketplace, greater level of transparency, at least restoring what was lost to decimalization and perhaps a dose of additional oversight in terms of what the fiduciary obligation of the particular market participants are with regard to best execution. Now, best execution is not clearly defined, if you like, but there are certainly a number of guidelines, one through the 11Ac1-5 statistics, or through third-party independent performance cost analysis firms such as Abel Moser, Plexus and Elkins/McSherry. All of these attempt to measure the quality of execution, and it is certainly something that is available to investors, particularly, you know, the professional institutional investors. They watch those sort of statistics very carefully, and, based on that information, they decide where to send their orders for execution. But, right now, there is not a level playing field and in that choice certainly, not with respect to the manual markets of the New York Stock Exchange. Mr. Oxley. Thank you. Mr. Greifeld. Mr. Greifeld. My comment is very easy. Mr. Chairman, I agree with your thought, and it is the way the NASDAQ stock market operates today. There is not a trade- through rule. There is not a heavy burden of unnecessary regulation. Our market does not trade through, and it trades incredibly well, and, by objective measures set up by the Commission, namely the -5 stats, it trades better than the New York Stock Exchange. I think it is interesting, if we flip the scenario, where NASDAQ was the institution that had been around for 211 years and NASDAQ was the electronic market, and the entrant who had been in business for 30 years had the manual slow market, we wouldn't conceive of imposing upon the larger markets the solutions that are intended to fix the smaller market. So we have a situation here where, by all objective measures, the New York Stock Exchange has to move forward based upon technology and based upon decimalization, and there is no clear or compelling case or really any case for imposing their remedies upon the NASDAQ stock market. Mr. Oxley. Thank you. Thank you, Mr. Chairman. Chairman Baker. The gentleman's time has expired. Mr. Sherman. Mr. Sherman. Thank you, Mr. Chairman. I believe I am--well, I guess--I thought I was going to be last, next to last. That doesn't mean I will be brief. The gentleman from Ohio, I think, reflects wisdom in his question, which is, basically, why not rely on the fiduciary rule and allow investors, perhaps, to specify what they are looking for? Some, as Mr. Ackerman points out, just want the hip replaced as quickly as possible. Others may care about the quality. Some will want a top of the book, others want a depth of book. Some will want to opt out. And I don't always agree with the chairman. It is a joy to do so. I think most wisdom comes from California. And CALPERS---- Chairman Baker. You just lost the chairman again. I am sorry. Mr. Sherman. I had him for a second--writes us and says we still believe that investors should have an opportunity to make choices and, therefore, an opt-out provision appropriate within regulation NMS. And they go on to say that CALPERS, it looks for best execution, but best depends upon best price discovery, and also they have a number of different objectives--speed of execution, price, probability of trade completion, convenience and, for them, anonymity. So I am a little surprised that an SEC appointed chiefly by the other party, a party that is always telling us to avoid excessive regulation and to allow investor choice is about to, I guess, clash with the right wing libertarians at CALPERS and, I might add, with perhaps its most prominent board member, our treasurer, Phil Angelides, who writes us pretty much along the same lines. So, again, I am surprised that it would take government to impose one model or the other, in part--I don't see whether investors are crying out for this, and I am going to ask Ms. Dwyer, because I know your company is in a marketing competition. Some brokers are offering, you know, free trades; some will give you a free toaster. Some will give you this; some will give you that. You have got a huge marketing department trying to figure out what investors might want, and you can offer them what they might want, and I recommend the toaster oven. But the--is there anybody in your business that has a plan, a marketing plan, a way you can sign up for an account where they guarantee you top of the book? Has anybody got that as a marketing strategy? Ms. Dwyer. Well, I would answer that by saying I think we already guarantee them much more than that. Mr. Sherman. I know. The SEC is about to put a rigid rule, or one of two rigid rules in place, and I wanted to know if there is--any of your marketing geniuses have discovered a group of investors who want either of these two rigid rules. Ms. Dwyer. No, our customers want---- Mr. Sherman. Okay. Is there anybody out there who has come up with a marketing strategy of depth of book? And I realize that might be a little harder to offer, but is anybody offering as close to an equivalent of that as possible? Ms. Dwyer. Not that I am aware of. Mr. Sherman. So they are all offering the fiduciary duty that the chair put forward, that is to say, best execution, and we--none of the marketing geniuses have been able to find a group of investors who want a rigid rule imposed, at least for their own trades. I wonder if anyone else has a comment on that? Mr. Britz. Congressman, you talk about investor choice. Let's maybe get a little granular here. Supposing you are the investor and supposing you choose to be the best bid and offer in the marketplace. You want to--you have topped the best bid because you aggressively want to buy the securities. And suppose it trades in another marketplace, and you are willing to pay $20, and it trades at $19.90 in another marketplace. Did you choose to get traded through? There is an old expression, Congressman, it takes two to tango; and there are both sides of that. You would not have opted out in that. Mr. Sherman. It does. The buyer's broker is retained by the buyer. The buyer's broker--hey, if I am buying a house and my-- and I retain a broker and I say I don't want one that is purple, great. Well, lo and behold, you know, if the best deal on the block is purple, he won't show it to me. And I would say that if you have got the highest offer on one side and for some reason the broker on the other side doesn't pick you, that is a choice, just as if you have a purple house, my real estate broker has the right to pass you by. I wonder if we could get some comment on the idea of why this SEC rule doesn't give investors the choice. Because there are at least three choices: opt out, top of book or depth of book. What if I am just fanatically in favor of top of the book and the SEC comes up with depth of book? Will I be given a chance to have my fanaticism reflected in my trading behavior? Mr. Nicoll. A couple of things. First of all, I ran two large retail brokerage firms before. I now run Instinet. In each one of those instances over the past 20 years I have represented customers in the NASDAQ marketplace without a trade-through rule. It is my responsibility to make sure that I got my customers their price. And if they were traded through, they give me a limit order, I was the one responsible for that. I have the fiduciary responsibility. So in Mr. Britz--the proper response to Mr. Britz is, if that happened, you would be calling up your broker and say, why the hell are you on the wrong market, you idiot. And you owe me an execution. And, by the way, you would get it. Okay? So we are confusing here the broker's responsibility with the customer's responsibility. Second, as to why the SEC is proposing what it is proposing, all I can say is that it has been--the market reg apparently has been in love with the CLOB for a long, long time. It has tried to impose it before. It--and each time it does, I think cooler heads prevail. I think this was another opportunity for rethinking the marketplace; and, once again, the SEC, you know, tended to go towards its roots. I mean, it is a regulator. It believes in regulations. It tends to propose what it believes in, and I just think that it missed the mark. And I don't---- Mr. Sherman. Thank you. I see my time is expiring, but, Mr. Chairman, I would hope that we would bring the SEC before our subcommittee and ask them why they want to deprive those investors who would want to opt out with the opportunity to do so and, also, if for some reason they oppose a depth of book rule, why they would prohibit investors from choosing a broker who goes with a top of the book rule. I would like to explore why the SEC seems opposed to investor choice. Chairman Baker. I thank the gentleman for his perspective and would just say for the record the Commission is bipartisan and it is unclear, quite yet, which members are voting which way. I have my suspicions, but I would not wish to prejudice those positions until they are finally determined. But let me quickly add---- Mr. Sherman. Mr. Chairman, you know the SEC is about to make a mistake when I am trying to give you responsibility for them and you are trying to say that we should take responsibility for them. Chairman Baker. I appreciate the gentleman's effort to make it my fault, and I am conscious of his continuing efforts to do that. But I also want to join with him in his observations that we would--perhaps are losing sight here of something. It is an investor giving his money to somebody. And if the investor chooses to dictate how his resources are deployed, it just seems to me--and I am agreeing with the gentleman, even if he is from California--that there is something basically fair about that. And if we are not getting to a standard of fairness, then we need understand why we are not and how we can without bringing unnecessary adverse consequences to a marketplace where has performed admirably by making reckless change in the conduct of the market. But it is certainly worth, I think, continued effort on the part of the economy to understand more comprehensively the consequences of this debate today and certainly--and I can assure the gentleman of our renewed interest, and we will return to this subject perhaps more times than most members would like. I thank him for his courtesy. I wish to express my appreciation to all of you for your long-suffering patience. Our meeting stands adjourned. [Whereupon, at 5:46 p.m., the subcommittee was adjourned.] A P P E N D I X February 15, 2005 [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED] [GRAPHIC] [TIFF OMITTED]