Mr. Chairman, Members of the Committee: Thank you for the opportunity to share our vision of the future of the US equity market.
We live in an era during which the global equity markets are being transformed. A greater number and greater variety of participants are accessing those markets than ever before. Merrill Lynch is a global financial services firm whose market position places it at the heart of these changes. Our strategy is to serve individual and institutional clients on both a global and local basis - global in terms of the products, services, and market intelligence we bring our clients, and local in terms of client relationships and ability to participate in key local market activities. Merrill Lynch has stock exchange memberships in 28 countries and participates in local market trading through joint ventures in India, Indonesia, Malaysia, and Thailand. We are a global equity house that last year traded more than 250 billion equity shares around the world (US listed, NASDAQ, all non-US ordinaries and ADRs, according to AutEx), and we are fully prepared to serve our clients and compete in virtually any market and within any market structure. We have some thoughts about how to improve the structure of the equity markets and hope that our global perspective is helpful to the deliberations of this committee.
The US equity market is an important national asset. It is essential to our strong economy, to our leadership in global regulatory efforts, and to the confidence of investors around the globe. Our equity market has operated so well because of its price transparency, liquidity, and integrity. But we need to be mindful of any fragmentation that could undermine the effectiveness of our market. The strength of our equity market must be preserved and enhanced, in light of increased investor participation, innovations in technology, and growing competition from non-US markets. The US must be at the forefront of the client-driven, fast-paced transformation of the global equity markets.
Merrill Lynch is an essential participant in the US equity market. During 1999, we traded approximately 10% of NYSE-listed trading volume and approximately 8% of Nasdaq volume in the hundreds of stocks we trade. As might be expected from these market share numbers, our partnerships with the NYSE and the NASD are strong and highly valued.
The advent of new electronic trading systems has caused us some concern about increasing market fragmentation. These new electronic trading systems are, in and of themselves, positive developments; they are a result of the technology revolution and investors' desire to participate in the market. But a fragmented market can fail to serve investors' best interests.
In our experience, the more customer order flow meets in one central place, the more trading spreads narrow, prices improve, and liquidity increases. We have focused on how best to balance the benefits of multiple exchanges competing for order flow and the benefits of a more central marketplace. We believe that technology can offer a solution by creating a more robust linkage among disparate exchanges and alternative trading systems.
We support an enhanced market-wide linkage of exchanges and qualified ECNs. The goal would be to create a more robust mechanism than exists today for displaying and then accessing the national best bid or offer (e.g., customer limit order) in a particular security. Furthermore, market efficiency would demand the ability to automatically execute against that best bid or offer. We also support a trading protocol of price/time priority at the superlinkage level, with certain exceptions. For example, we would support certain exemptions, such as block size exemptions, where size trumps time. And, block exemptions should not be based on a single size measurement such as "25,000 shares or more." Rather, block exemptions should be based on a multiple of average trading volumes. Such exemptions would permit the execution of large transactions relative to average trading volumes without undue market impact, and, in our view, appropriately reward broker-dealers that have been able to garner sufficient customer order flow to find the other side of a large order. This, in turn, helps lessen the market impact of large trades.
We recognize that our general outline for improvement merits further public consideration and debate. We look forward to working with the Committee, its staff, and the SEC in this effort. In this connection, however, we stress two points:
Before closing, I would like to make some remarks on the regulatory framework governing the securities industry. Certain changes, such as the ability of exchanges to become for-profit entities, have engendered a debate on what regulatory structure should be adopted for the future. We participated in the development of the SIA's White Paper that describes various regulatory models that could be considered. In our view, it may be premature to change a regulatory structure that is considered preeminent and has served investors well. At the same time, there is always room for improvement. We would support a more streamlined regulatory approach, particularly if more exchanges and SROs were to be created, but any major changes must be well-considered. In the near term, and as the status quo evolves along with the creation of for-profit exchanges, the exchanges' self-regulatory function should be independent, well-funded, and robust.
Thank you very much for the opportunity to share these thoughts about the structure of the US equity market.
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