Mr. Chairman. Members of the Committee. I am honored to appear before you this morning to discuss the equity marketplace of the future. Several months ago, our Board created a Special Committee of directors not associated with the securities industry to undertake a comprehensive review of market structure, governance and ownership issues affecting the NYSE. The Special Committee's recommendations on market structure will be considered by our full Board on April 6. As has been discussed with Committee staff, since this report addresses issues covered by this morning's hearing, we ask that it be included in the hearing record as my written statement when it is final.
This morning, I would like to share some general thoughts about the future of the equity markets and the NYSE, the world's largest equity market serving almost 200 million direct and indirect investors.
The NYSE is facing the most challenging competitive environment in its 208-year history.
It would be foolish to try to predict what the competitive landscape will look like in a few years. Technology, globalization, decimalization, extended trading hours are all factors which will effect profound changes in our markets.
I do know, however, that with robust growth in share volume, a rapidly expanding list of US and non-US companies, an unparalleled technology infrastructure and the lowest transaction costs of any market in the world, the NYSE is well-positioned to strengthen its global position.
Our success will be destined by our continuing to embrace and deploy technology to offer investors, through their brokers, a wide range of information products and execution services.
As use of the Internet grows - and the traditional separation between consumer and producer is diminished -- business models in all walks of commerce will be challenged to demonstrate the value-added of traditional intermediation in commerce. Whether one sells books or bonds, socks or stocks, the role of adding intermediation value will define winners and losers -our business included.
We see continued value in our time-tested, agency auction model. No other system, electronic or otherwise, can match our prices, narrow spreads and high rates of price improvement. It will be our model for the foreseeable future.
But our customers want choice as to how best we serve their needs; thus we intend to complement our floor-based system with the launch of a number of new products that will give investors more opportunities to interact electronically with our market.
The most groundbreaking of these is NYSeDirect, which, for the first time, will give investors the ability to obtain an automatic execution on orders of less than 1,100 shares.
For institutional investors, we have developed Institutional Xpress, which will provide greater immediacy in the execution of orders of 15,000 shares or more and the means of anonymously routing large orders to our floor.
For all investors, we will offer "NYSE Virtual." This product will allow investors to "fly" through a 3-D depiction of our trading floor, drill down on specific listed stocks, and obtain real-time proprietary data about those stocks, including a look at limit orders in the specialist's book.
Our overriding mission at the NYSE is to serve the almost 200 million direct and indirect investors who use our marketplace. We believe a platform of choice in information and execution services is what these investors want.
Competition - among market centers and most importantly, among orders both large and small - is the model that can best serve public companies and the investors who own them.
A monolithic structure would, in my opinion, stifle competition and innovation, and perhaps cause alternative systems to relocate offshore.
Since it is unlikely that institutions would send their orders to a unitary, fully transparent system, such a move in my view would diminish competition and transparency and potentially lead to off-shore executions.
Of great concern to our listed companies would be the elimination of the affirmative market making obligations of specialists, which would increase the risk of substantially higher volatility.
And most importantly, a monolith denies investors a choice in where their orders are routed and how. We believe a better approach is to have a platform that includes products with features like automatic execution for those who want them, while maintaining traditional order routing and execution services for those customers who choose them.
Finally, I would like to specifically address the issue of market fragmentation.
The listed market is not materially fragmented. When order flow is diverted from our central market, it is generally due to practices such as internalization, preferencing and payment for order flow.
The NYSE has traditionally opposed such practices. In its concept release on market fragmentation, the SEC has laid out a number of options for curbing them which do not necessitate a radical market restructuring. One of these is our own proposal to prohibit firms' from internalizing unless they are offering their customers a price that is better than the nationally displayed best bid or offer. This rule could also be applied to payment for order flow and preferencing arrangements.
I am confident that we can and will maintain our market position through competition, the deployment of new technology and services, and by offering investors the widest range of choice as to how they use the NYSE. If another market comes up with a better model, that is exactly the market where investors' orders should go.
The partnering role of government, both the Congress and the SEC, should in my view continue to be one of stimulating change to reflect the global competitive landscape. It would be premature for government to impose major changes on the listed markets to address perceived problems that may never arise. Carefully targeted regulatory initiatives are sufficient to address internalization and other directed order flow arrangements. The Commission under Chairman Levitt's leadership has an excellent track record of balancing rulemaking and private sector initiatives to the benefit of public investors.
In concluding, let me emphasize that the need for linkages among the markets is one I fully support. Linked markets help to ensure consumers are well protected. However, instead of debating whether more government intervention is required to achieve those protections, we should allow instantaneous communications and competition to fully blossom, which may render the question moot.
Given rapid advances in technology, the private sector appears well equipped to meet whatever global demands emerge.
I look forward to working with the Committee and the Commission to ensure America maintains its preeminent role in global capital markets.
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