By Paul D. Cohen*
Stanford Journal of Law, Business and Finance | Winter, 1999
LENGTH: 19386 words
* Duke University, B.A., 1992; Washington University School of Law, J.D., 1996; Washington University John M. Olin School of Business, M.B.A., 1997. I would like to express my appreciation to Professor John C. Coffee, Jr., Adolf A. Berle Professor of Law, Columbia University School of Law, for his insights and suggestions; to Ms. Ann D. Wallace, Special Associate Director, Division of Corporation Finance, U.S. Securities and Exchange Commission, for her advice and inspiration; to Kevin Coenen, Kirkland & Ellis; and to Scott J. Golde, Greensfelder, Hempker & Gale, for their comments.
… Moreover, new economic approaches to investing have led to modernized trading strategies. … All types of investors have access to an Internet-based bulletin board to trade securities. … One crossing system promises to provide investors access to a database of offers to buy and sell as well as the ability to communicate with other investors. … These markets will enhance an investor’s ability to trade securities in short periods of extreme trading. … Implementing the tiered approach to regulation of Internet-based trading systems would require the SEC to use an expanded application of the “limited volume” exception for exchange registration. … The proposed rules would permit Internet-based trading systems to choose between regulation as a national securities exchange and regulation as a broker-dealer with additional requirements depending on their activities and level of trading volume. … For those exchange-listed and NASDAQ securities in which a system has five percent or more of the trading volume, Regulation ATS requires Internet-based trading systems registered as broker-dealers to publicly disseminate through a registered exchange or the NASD their best priced orders, including institutional orders. … The regulations also prohibit unfair discrimination by an Internet-based trading system that has twenty percent or more of trading volume. …
n10 David P. Brown, Why Do We Need Stockbrokers? 52 FIN. ANALYSTS J. 21 (1996). The Designated Order Turnaround (DOT), technologically updated with the SuperDOT system, permits exchange members to forward orders of up to 100,000 shares to the trading floor electronically. Nyquist, supra note 2, at 298, 318. Other markets also offer automatic routing systems. Id. at n. 86. Money managers often use electronic networks such as SuperDOT, which charge 2.5 cents per share, because of the price advantages they offer. By using these systems, money managers also reduce or avoid market impact. Use of SuperDOT accounts for 80% of the orders placed on the NYSE and more than half of the NYSE’s annual share volume that measures 74.4 billion shares. Alyssa A. Lappen, The Cost of Inefficiency, MONEY MANAGEMENT, [Institutional Investor] Mar. 1995, at 65. For further discussion of these systems, see LOUIS LOSS & JOEL SELIGMAN, 5 SECURITIES REGULATION 2556, 2557-58 (1990).
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