Hearing on "Maintaining Leadership in the Financial Marketplace of the Future"



9:00 a.m., Monday, May 8, 2000
3rd Floor Conference Center - Federal Reserve Bank of Chicago
230 South LaSalle Street, Chicago, Illinois

Good morning, Mr. Chairman and members of the Committee. My name is Robert H. Forney and I am the President and Chief Executive Officer of the Chicago Stock Exchange. I am pleased to appear before you today to discuss the future of the U.S. securities' market and the regulatory environment in which it will operate.

The Chicago Stock Exchange was founded May 15, 1882 and today is the second most active U.S. stock exchange in terms of share and trade volume. The CHX is also the fastest growing U.S. stock exchange providing the strongest force for competition in the U.S. equity markets. The CHX trades more than 4,500 NYSE, Amex, Nasdaq and CHX-exclusive issues, more stocks than any other stock exchange in the world. Located in the heart of Chicago financial district, the CHX has 450 members representing 349 broker/dealers. We stay on top of the ever-changing market by providing low cost, high quality service and by responding quickly to the needs of our customers, our members and the investing public.

I want to take this opportunity to thank you, Senator Gramm, for your efforts in introducing S. 2107, legislation that would reduce Section 31 fees. The fees, as you know, are paid by investors on each stock trade and serve to provide funding for the Securities and Exchange Commission (SEC). While the industry agrees that it is important that the SEC be fully funded, we also believe that the excessive collections due to the large increase in volume must be brought into line with the true budget requirements of the SEC. In other words, the fees should be set at a more appropriate level without sacrificing the underlying budget of the SEC. Your proposal will accomplish this.

I will leave to others here today to address the competitive inequalities that can occur when financial instruments that compete with each other are regulated by different regulators under different regulatory structures. The Chicago Stock Exchange is a member of the U.S. Securities Market Coalition and supports the coalition's position on futures on individual stocks and narrow-based securities indices. Mr. Brodsky, also a member of the Coalition, will address these issues in more detail in his testimony. The point I wish to make to you is that regulatory disparity also occurs when the exact same financial instruments are traded by competitors subject to the same regulator and the disparities will only grow worse as regulatory mandates supplant the opportunities for those competitors to innovate and compete.

With respect to the future of US financial markets, my overarching message to you is that it should be driven by competition, not regulation. Consequently, as mandated by Congress in the 1975 Amendments to the Securities Exchange Act, the SEC should facilitate the evolution of the national market system by promoting fair competition, transparency, and improved investor access to the best markets. The SEC should not be permitted to undermine innovation by expanding or deviating from its role as facilitator.

However, a recent SEC proposal on the structure of the national market system implies that it has the authority to mandate a market-wide time/price requirement or a central limit order book (CLOB) for the securities markets and to otherwise design and dictate market structure. This proposal followed shortly after another SEC proposal suggesting that the Commission also has rate-setting authority over market data fees and can, if it chooses, decide what the securities exchanges can charge for their market data.

We are concerned about both proposals and believe that the direction given to the SEC in the Securities Exchange Act to facilitate the establishment of a national market system does not support such an expansive view of SEC authority. More importantly, we believe that regulations that dictate market structure, despite any intended benefits to the investor, will serve only to stifle innovation, reduce competition, and harm investors in the long-term.

It is our strong opinion that market regulators should focus greater attention on assuring that they do not diminish competition by placing disproportionate regulatory burdens on certain classes of market competitors. For example, a broker-dealer ECN that competes with the Chicago Stock Exchange for order flow is free to change the price improvement it offers to customers - whenever the competitive demands of the marketplace require it to do so.

The Chicago Stock Exchange also provides automated price improvement to its customers but, because we happen to be an exchange, where when we propose to increase the amount of price improvement to respond to that market competition, we must first obtain SEC approval, a process that can take months. Nor is our regulatory burden confined to only those matters affecting public investors. We cannot even change a simple member ID badge processing fee without first submitting it to the SEC. These processes are slow-moving and make it very difficult to compete in the fast-changing financial markets. The competitive pressures are a particular problem in the international financial marketplace, where, if we are not careful, will result in U.S. exchanges being disadvantaged due to a lack of innovation and excessive government oversight.

We understand and appreciate the importance of regulation. We also understand that different types of market participants require different forms of regulation. However, we are also firm in our belief that competitive market forces, when equally allowed to compete, provide a powerful force for the creation of a better marketplace.

Regulations should be designed to set basic business standards and protect investors. As such, regulators should eliminate regulations that serve only to dictate how to achieve such standards and focus their resources on assuring that those standards are met. This approach would tend to level the competitive environment but, more importantly, it also would free markets to distinguish themselves them their competitors through the development of better services, products and technology. Such a streamlining of regulations would enable the regulators to devote more resources to assuring that all market participants are meeting the underlying standards. By limiting the role of the SEC to facilitating market competition through the establishment and enforcement of uniform standards, the U.S. securities markets will continue its reign as the international financial leader.

I recognize that an SEC reassessment of its regulations in light of the approach that I am advocating will require time and resources but critical and complete reassessment of how one does business have become a fact of life for those who wish to remain effective participants in the securities markets. In this respect, the SEC is no different.

In conclusion, in order to maintain the growth and superiority of the US financial market, competitive forces, not regulatory initiatives, must drive market structure. The SEC should promote efficiency and ensure parity among competitors with respect to regulatory burden and the cumulative effect on systems capacity. We urge this Committee and the U.S. Congress to consider these comments carefully in the consideration of any decision to alter or expand the current regulatory framework under which the US financial markets currently operate.

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