Chairman Gramm, Senator Dodd, and Members of the Committee:
Thank you for the opportunity to address you on a subject that I believe is among the most complex and important that I have faced during my tenure. I am particularly grateful to have the attention of this Committee directed at the issues surrounding the structural transformation of our national market system.
Let me say at the outset that our task as regulators is not to design the perfect marketplace of the future. We cannot afford to freeze the natural progression toward a better marketplace. We have all had experience with ideas that appear theoretically sound but prove to be practically unworkable; approaches that are viable one day but obsolete the next.
Senator Gramm and others on this committee understand well a simple but sometimes ignored truth: It is competition, above all else, that produces efficiency in our markets over time, and efficiency is a core element of the protection of investors. This truth defines our mandate: Ensuring that competitive forces continue to shape our marketplace so that the market's natural genius is permitted to fully unfold.
And the unfolding continues. The first new securities exchange in twenty-seven years, the International Securities Exchange, was registered just last week. Competition among options markets has been energized already by the potential entry of this completely electronic market. Multiple listing is now a reality, and spreads are substantially narrower. In addition, the NYSE has proposed the repeal of Rule 390, removing a long-standing barrier to competition in the trading of listed securities. I commend Chairman Grasso and the leadership of the NYSE for initiating this important step toward more competitive markets.
At this critical point in the evolution of our markets, I remain solidly optimistic about the future. My optimism is tempered, however, with two concerns. First, if it has not become clear already, our traditional markets must be as nimble and value-driven as their newest breed of competitor. While the leadership of these markets has taken important, positive action, I fear that some are attached to conventions that may be more reflective of the past rather than the future, that embedded factions may be inclined to stand in the way of essential progress.
To them, I say heed the lesson that the history of our markets has taught: Embrace change, add value, listen intently to the voice of investors and you will prosper.
Second, I worry about the level of interaction between buying and selling interest in our market. As we all know, the greater the opportunity for buyers and sellers to meet, the more efficient the price-setting mechanism. But, in today's market, dealers who quote aggressively and investors who offer to buy or sell at prices better than any other price in the market may go unrewarded. I'm sure we can all agree that competition in all its forms must be preserved and fostered: Competition among market centers to innovate; competition among dealers to improve quotes and prices; and competition driven by investors who, through limit orders, participate directly in the price-setting process.
As you likely will hear today, market participants differ as to whether fragmentation is, in fact, a problem, and what, if any, regulatory action should be taken to address it. These are difficult questions, but I firmly believe that a failure to face them squarely now may jeopardize the quality of our national market system in the future. It's absolutely imperative that we have a thorough, open and thoughtful dialogue of these issues. This is the goal of the Commission's recent concept release.
Around the world, efficient, low cost trading systems have developed with new variations seeming to emerge almost daily. Indeed, I come before you today with a sense of urgency about the future course of our markets. As Senator Schumer correctly noted some months ago, technology has made the prospect of order flow shifting quickly more than just a theoretical possibility. We do need to keep a watchful eye on the development of trading systems abroad. We cannot afford to ignore features of these systems that might sharpen our global competitive edge.
At the same time, however, it's important to keep a sense of perspective when we compare our markets to those abroad. While it is true that a substantial amount of trading volume is now executed in electronic systems in some foreign markets, significant trading also occurs outside of these same systems. Any meaningful comparison must take into account the entire universe of transactions, and the interplay between multiple pools of liquidity. There is a big difference, in short, between an efficient trading system and an efficient national market system. Our sights should be set on the latter.
Competition among markets, transparency of pricing, better linkages between market centers, and best execution of customer orders -- the national market system goals set forth by Congress twenty-five years ago -- must continue to illuminate the path ahead.
Thank you very much.
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