Release No. 34-40760

63 Fed. Reg. 70843 - Dec. 22, 1998

Regulation of Exchanges and Alternative Trading Systems
 

VIII. Effective Dates and Compliance Dates

The rules and rule amendments adopted in this release are effective on April 21, 1999, except for Exchange Act Rules 301(b)(5)(D) and (E) and Rules 301(b)(6)(D) and (E), which shall become effective on April 1, 2000. Alternative trading systems, however, will only have to comply with the public display requirement in Rule 301(b)(3) for fifty percent of the securities subject to this requirements on April 21, 1999. Alternative trading systems will have to comply with Rule 301(b)(3) for all such securities by August 30, 1999.⁵⁵³ Prior to April 21, 1999, the Commission will publish a schedule of those securities for which alternative trading systems must comply with Rule 301(b)(3) on April 21, 1999.

IX. Costs and Benefits of the Rules and Amendments

To assist the Commission in its evaluation of the costs and benefits that may result from the rules and amendments, commenters were requested to provide analysis and data, if possible, relating to the costs and benefits associated with the proposals. The Commission initially identified certain costs and benefits associated with its changes in the Proposing Release. Although the Commission received seventy comment letters, as of December 1, 1998 concerning the proposed rules, none of the commenters responded specifically to the request for comment on the cost/benefit analysis. Some commenters did raise related issues and the Commission will address those comments in this analysis. After considering the comments, the Commission continues to believe that the benefits of the rules and amendments justify the associated costs.

A. Costs and Benefits of the Rules and Amendments Regarding Alternative Trading Systems

The Commission identified several benefits and costs to investors and market participants in the Proposing Release with regard to alternative trading systems. The Commission is not making any changes to the rules or amendments that increase the cost estimates for alternative trading system notice, reporting and recordkeeping obligations. The most significant change

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the Commission is making in the rules as adopted is to revise the fair access provisions. The rules and amendments in the Proposing Release provided investors with a right of appeal to the Commission and required alternative trading systems to provide investors denied or limited access to the system with notice of that action and their right to appeal the decision to the Commission. The Commission has decided not to adopt the right of appeal provisions and the requirement of notice to investors denied or limited access. Instead, alternative trading systems with significant volume will be required to provide quarterly notices to the Commission on Form ATS-R of all grants, denials, and limitations of access as well as descriptive information regarding those access decisions. The net effect of these changes to the fair access requirements is a decrease, relative to the original proposal, in the burdens on alternative trading systems with significant volume. Several commenters objected to the proposed fair access rules on various grounds.⁵⁵⁴

Several commenters had general comments with regard to the burdens imposed on respondents under Regulation ATS. One commenter argued that the Commission should impose only minimal requirements on start-up or smaller trading systems.⁵⁵⁵ The alternative trading system rules have been tailored to minimize their burden on alternative trading systems generally and small systems specifically. Because many of the provisions in the rules are triggered by a volume threshold, the Commission expects that small alternative trading systems will not have sufficient volume to trigger those thresholds and will, therefore, not have to comply with those provisions. The recordkeeping and reporting requirements with which smaller, lower volume alternative trading systems will have to comply under Regulation ATS are substantially similar to those with which alternative trading systems currently comply. Consequently the costs for smaller alternative trading systems should remain unchanged.

One commenter argued that material changes on Form ATS should be reported twenty days after such a change is made rather than twenty days before.⁵⁵⁶ The Commission believes that is important to have some advance notice of significant changes in order to permit it to carry out its market oversight and investor protection functions. By requiring notice before such changes are made, the Commission has an opportunity to make inquiries to clarify any questions that might arise. Currently, alternative trading systems are required to give twenty days prior notice of material changes on Part 1-A of Form 17A- 23. This burden remains unchanged under the new rules.

Several commenters pointed out areas for possible reductions of regulatory overlap. One commenter argued that the Commission should eliminate those broker-dealer requirements that would be irrelevant for alternative trading systems.⁵⁵⁷ The Commission, however, does not believe that the broker-dealer requirements as they apply to alternative trading systems, are irrelevant or overly burdensome. Another commented that recordkeeping burdens should be coordinated with the NASD's OATS program.⁵⁵⁸ These recordkeeping rules do not specify the manner in which such records must be maintained, but only that they must be made available upon request. Such records may be required for other purposes, but it is important to assure that all alternative trading systems maintain records sufficient to construct an audit trail.

One commenter argued that the Commission's rules and amendments impose costs and burdens on market innovators rather than encouraging such systems.⁵⁵⁹ As discussed above, however, the Commission does not intend its new regulatory framework to impose a penalty on systems because of their use of technology. The Commission's new framework is based on the functions performed by a trading system, not on its use of technology.

Finally, a large number of institutional subscribers to alternative trading systems submitted comments within the last two weeks. These commenters expressed a number of concerns about the public display requirement. Among the concerns voiced by these commenters was a concern about decreasing liquidity, limiting a potentially advantageous trading strategy, being able to provide best execution for their clients, and increasing costs to execute trades. The Commission responds to these concerns below.⁵⁶⁰

The Commission solicited comment on the feasibility of permitting alternative trading systems to file forms electronically. Three commenters supported electronic filing as an option to reduce the burdens on respondents.⁵⁶¹ While not feasible at this time, the Commission intends to make electronic filing an option when it is possible.

Three commenters argued that the Commission's rules should not apply to debt securities, in part, due to the burdens that such requirements would place on a largely decentralized market.⁵⁶² Other commenters supported including debt securities within Regulation ATS.⁵⁶³ The Commission continues to believe that many of the same concerns about the trading of equity securities on alternative trading systems apply equally to the trading of fixed income securities on alternative trading systems. Debt securities are increasingly being traded on alternative trading systems, similar to the way that equity securities are traded. Accordingly, the Commission's new regulatory framework would require alternative trading systems trading debt securities, other than alternative trading systems trading solely government and related securities, to register as an exchange or register as a broker-dealer and comply with Regulation ATS. If an alternative trading system chooses to register as a broker-dealer, Regulation ATS applies the same notice, recordkeeping, and reporting requirements on debt alternative trading systems as apply to equity alternative trading systems. Because of the way the debt market currently operates, however, the transparency provisions do not apply to alternative trading systems that trade debt securities. Only those alternative trading systems that trade at least twenty percent of certain categories of debt are be subject to the fair access requirements ⁵⁶⁴ and the provisions governing systems capacity, security, and integrity.⁵⁶⁵

Under the rules and amendments in this release, alternative trading systems have a choice between registering as a national securities exchange or registering as a broker-dealer and complying with Regulation ATS. The choice between these two options is

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complex and each alternative trading system will make a choice based on its business plan and the role it wishes to play in the market. There are several factors that will have an impact on each alternative trading system's decision.

First, the regulatory costs associated with registering and operating as a national securities exchange are higher than the regulatory costs associated with registering as a broker-dealer and complying with Regulation ATS. Second, registered exchanges have national market system obligations that require those exchanges to bear the expenses associated with joining the CTA, CQS, and ITS plans. To offset some of those costs, however, registered exchanges also participate in the revenue generated from the sale of quotation information. Third, registered exchanges are SROs and, therefore, have obligations to surveil trading activity and member conduct on the exchange. These obligations can be significant in terms of time, personnel, and financial resources. However, a significant advantage to a registered exchange of being an SRO is that it is not subject to oversight by a competitor. Fourth, registered exchanges are subject to the statutory requirement to provide fair access, which requires a commitment of resources to consider membership applications and to report denials to the Commission and defend any denial decisions before the Commission if an appeal is made.

Because of the range of obligations of registered exchanges, operation as an exchange requires a significant investment of financial resources. A relatively high volume of trading may be required to justify this financial investment. While the advent of for-profit and non-member owned exchanges may make it easier to raise the financial resources necessary to operate as a registered exchange, the Commission does not expect that many alternative trading systems will choose to register as exchanges.

On the other hand, alternative trading systems that register as broker-dealers must comply with the filing and conduct obligations associated with being a registered broker-dealer including membership in an SRO and compliance with that SRO's rules. They must also comply with Regulation ATS, which includes filing, recordkeeping and reporting obligations. Unlike registered exchanges, alternative trading systems are subject to oversight by an SRO, which may operate a competing market. Regulation ATS is designed to impose few requirements on lower volume alternative trading systems. Only alternative trading systems with significant volume are required to link to an SRO and publicly display orders, provide investors with fair access, and comply with systems capacity, integrity, and security requirements. These obligations for alternative trading systems with significant volume are similar, although not identical, to obligations of registered exchanges. Therefore, it is more likely that a high volume alternative trading system will consider the costs and benefits of registering as an exchange to be more comparable to the costs and benefits of regulation as a broker-dealer alternative trading system. The costs associated with regulation as a registered exchange, and with operating as a broker-dealer and complying with Regulation ATS are discussed more fully below.

1. Benefits

a. Improved Market Transparency. The Commission's amendments and rules enhance transparency of trading on alternative trading systems. Transparency of orders helps ensure that publicly available prices fully reflect overall supply and demand and helps reduce the negative consequences of market fragmentation (e.g., the chance that an order for a security in one market will be executed at a price inferior to that available at the same time in another market). The Commission has been particularly concerned that the development of so-called ''hidden markets,'' in which a market participant privately publishes quotations at prices superior to the quotation information it disseminates publicly, impedes national market system objectives. Some systems that permit this activity have become significant markets in their own right, but are not currently required to integrate their orders into the public quote because they are not registered as national securities exchanges or national securities associations.

For alternative trading systems choosing to register as broker- dealers, the Commission's amendments and rules improve the transparency of orders in systems that account for a significant portion of the trading volume in any security. The amendments and rules help to incorporate alternative trading system quotes into the national market system, thus reducing fragmentation, improving liquidity, facilitating price discovery, and narrowing the quoted spread.⁵⁶⁶

Because non-market maker broker-dealers and institutions at times enter the best priced orders in an alternative trading system, the Commission expects that display of these orders in the public quote will also improve the NBBO. For example, of all orders on ECNs by non- market maker broker-dealers and institutions that could improve the NBBO if included in the public quote stream, only about six percent of those orders were actually entered into the public quote stream. Consequently, about ninety-four percent of those orders that could have improved the NBBO were not included in the public quote stream and thus did not impact the NBBO. These orders were therefore unavailable to some investors, in particular, retail investors, who do not have direct access to ECNs. The unavailability of these quotes continues to effectively result in a two-tiered market. While the Commission is unable to precisely quantify the market impact of these changes, it does believe that the benefit for investors will be significant based on preliminary estimates.

Based on an analysis of ECN trading activity during a four day period in June 1997 (June 23, 1997 to June 27, 1997), the staff estimates that spreads could decrease by as much as four percent for Nasdaq issues when non-market maker broker-dealer and institutional orders are displayed in the public quote. In making this estimate, the staff has assumed an average spread of 35 cents per share, a maximum increase of eleven percent for the times that ECNs could narrow the inside, and a maximum of 12.5 cents per share improvement. In addition to the effects on the bid-ask spread, retail investors and other non- subscribers will gain access to the liquidity and better prices now available only to alternative trading system subscribers. Moreover, because many broker-dealers offer retail customers automatic execution of their small orders at the publicly quoted price, a better price in the public quote potentially improves the price received by thousands of broker-dealer customers. Larger orders negotiated between institutions and broker-dealers also potentially benefit because the price negotiated will reflect a smaller spread. For these reasons, the Commission believes that new display and access requirements will result in significant benefits to investors.

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The above data is consistent with the results of the transparency improvements achieved through the implementation of the Order Handling Rules.⁵⁶⁷ The NASD studied the effect of the Order Handling Rules on the Nasdaq market by comparing various measures between a pre-period of twenty days in the beginning of 1997 (December 18, 1997 to January 17, 1998) and a post-period of twenty days in the beginning of 1998 (January 5, 1998 to February 2, 1998). The success of the Order Handling Rules further supports the view that the amendments and rules the Commission is adopting today will further investors' opportunities to trade at the best prices.

In its study, the NASD also found that quoted spreads in the Nasdaq market decreased by an average of forty-one percent. The NASD estimates that this reduction in spreads resulted in annual savings to investors of between $284 million and $673 million. Because of the increased market transparency provided by the display of institutional and non- market maker broker-dealer orders, the Commission believes that the rules and amendments in this release will also further shrink spreads.

Finally, the Commission believes that improved transparency of orders in alternative trading systems will reduce the potential for alternative trading system subscribers to manipulate the public market. It has been alleged that institutions and non-market makers intentionally influence the market by displaying an order in an alternative trading system that locks the price displayed in the public market. For example, if the public market is displaying a bid of 20 and an offer of 21, an institution or non-market maker might display an offer of 20 in an alternative trading system. Market participants often then assume that the order in the alternative trading system indicates the direction in which the market is moving and begin selling to market makers bidding 20, pushing the public market lower. The price in the alternative trading system is then canceled and the institution or non- market maker buys securities at a lower price. This type of activity is possible only because institution and non-market maker orders in alternative trading systems are not displayed to the public market. The Commission believes that the integrity of the public markets is threatened when institutions and non-market makers can affect the public markets without participating in them.

The transparency of trading on alternative trading systems that choose to register as exchanges will also improve. All registered exchanges are expected to participate in the national market system plans, such as the CTA, CQS, and ITS. These plans form an integral part of the national market system, and contribute greatly to the operation of linked, transparent, efficient, and fair markets. In addition to improving transparency, alternative trading system participation in these market-wide mechanisms will benefit investors by reducing trading fragmentation.

b. Improved Investor Protections. The Commission's amendments and rules provide benefits to investors by improving the surveillance of trading on alternative trading systems. Adequate surveillance of the trading on alternative trading systems is critical to the continued integrity of our markets. This is particularly the case with regard to alternative trading systems that have a significant percentage of the trading volume in one or many issues of securities. The oversight of trading activities on alternative trading systems that choose to register as broker-dealers will improve because the proposals clarify the relationship between SROs and alternative trading systems.

The notice, reporting, and recordkeeping requirements under Regulation ATS also contribute to the Commission's and the SROs' ability to effectively oversee alternative trading systems regulated as broker-dealers. The Commission believes that these enhancements to the surveillance and oversight of alternative trading systems regulated as broker-dealers benefit the public by helping to prevent fraud and manipulation.

The surveillance of trading on alternative trading systems that choose to register as exchanges under the Commission's proposal will also be improved. All registered exchanges are SROs, which have direct obligations to surveil the trading on their own markets. The Commission believes that, through improved surveillance mechanisms, it will be better able to detect fraud and manipulation that could occur on alternative trading systems. For example, alternative trading systems can be used to artificially narrow the NBBO spreads for the sole purpose of trading through a broker-dealer's automatic execution system at the artificial prices.⁵⁶⁸ The Commission and the SROs will be able to more readily detect such activity through enhanced surveillance. The Commission believes that this more direct oversight of trading activities will therefore benefit investors and the market generally by helping to prevent fraud and manipulation.

c. Fair Access. The Commission's rules require alternative trading systems with significant volume to provide a fair opportunity to participate in alternative trading systems. Fair and non-discriminatory treatment of potential and current subscribers by alternative trading systems is important, especially when an alternative trading system captures a large percentage of trading volume in a security. Although an alternative trading system with significant volume is required to provide access to orders that it is required to display in the public quote stream, there are other benefits to direct participation on an alternative trading system. In particular, participation on an alternative trading system allows an investor to enter its own orders, view contingent orders not publicly displayed (such as all or none orders) and use special features of an alternative trading system, such as a negotiation feature or reserve size feature. Accordingly, the rules prevent discriminatory denials of access and ensure that market participants are not prevented from gaining access to significant sources of liquidity.

d. Systems Capacity, Integrity, and Security. The Commission believes that its rules regarding systems capacity, integrity, and security of alternative trading systems provide several benefits to the marketplace and to investors. Marketplaces are increasingly reliant on technology and most of their functions are becoming highly automated. Alternative trading systems are subject only to business incentives to avoid system breakdowns that may disrupt the market. In the past, alternative trading system failures have affected the public market, particularly during periods of high trading volume. Some alternative trading systems have had prolonged shut-downs during the busiest trading sessions due to systems problems. For example, during the past year, Instinet, Island, Bloomberg, and Archipelago (operated by Terra Nova) have all experienced systems outages due to problems with their automated systems. On a number of occasions, ECNs have had to stop disseminating market maker quotations in order to keep from closing altogether, including during the market decline of October 1997 when one significant ECN withdrew its quotes from Nasdaq because of lack of capacity. Similarly, a major IDB in non-exempt

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securities experienced serious capacity problems in processing the large number of transactions in October 1997 and had to close down temporarily.

The Commission's rules require alternative trading systems that handle a significant volume of trades to establish reasonable capacity estimates, conduct stress tests, implement procedures to monitor system development, review systems vulnerability, and establish adequate contingency plans. Investors will benefit from the rules because significant systems will be less likely to shut down as a result of systems failures and will be better equipped to handle market demand and provide liquidity during periods of market stress. The ability of alternative trading systems to provide more reliable and consistent service in the market benefits investors and the public markets generally. The Commission also believes that investors will benefit from robust system security provided by ensuring that significant alternative trading systems maintain sufficient security measures to prevent unauthorized access.

All currently registered exchanges participate in the Commission's automation review program. Alternative trading systems that choose to register as exchanges will similarly be expected to participate in this program. Under the automation review program, exchanges are expected to maintain sufficient systems capacity to meet current and anticipated volume levels. The benefits to investors and the public generally, as with significant alternative trading systems, will be the assurance that systems are reasonably equipped to handle market demand and provide liquidity during periods of market stress.

2. Costs

The alternative trading system rules and amendments have been tailored to minimize their burden on alternative trading systems and especially small systems. Many of the provisions in the rules and amendments are triggered by a volume threshold. The Commission expects that small alternative trading systems will not have sufficient volume to trigger those thresholds and will therefore not have to comply with those provisions. The recordkeeping and reporting requirements with which smaller, lower volume alternative trading systems have to comply under Regulation ATS are substantially similar to those with which alternative trading systems currently comply. Consequently the costs for smaller alternative trading systems should remain materially unchanged. The paperwork, filing, and recordkeeping costs are discussed in the Paperwork Reduction Act section below.

a. Notice, Reporting, and Recordkeeping.

All alternative trading systems that will be subject to notice, reporting, and recordkeeping requirements under the Commission's new rules are currently subject to similar requirements under Rule 17a-23. The requirements under Regulation ATS, however, require some additional information that is not currently required under Rule 17a-23.

Under Regulation ATS, alternative trading systems file an initial operation report, notices of material systems changes, and quarterly reports. The rules also include new Forms ATS and ATS-R to standardize reporting of such information and make it more useful for the Commission. The rules require information that is not currently required under Rule 17a-23, such as greater detail about the system operations, the volume and types of securities traded, criteria for granting access to subscribers, procedures governing order execution, reporting, clearance and settlement, procedures for reviewing systems capacity and contingency procedures, and the identity of any other entities involved in operating the system.

Regulation ATS requires staff time to comply with the initial notice and amendment requirements. While the Commission has designed the requirements in an effort to balance the costs of filing with the benefits to be gained from the information, some effort will be necessary to gather and file this information. Most of the information, however, already exists. Alternative trading systems will only be required to gather this information and supply it in the required format to the Commission. The periodic updating requirements will also require staff time over the life of the alternative trading system to comply with the rules.

The Commission estimates that there are currently about forty-five alternative trading systems that will be required to register as exchanges or register as broker-dealers and comply with Regulation ATS.⁵⁶⁹ The Commission also estimates that, over time, there will be approximately three new alternative trading systems each year that choose to register as broker-dealers and comply with Regulation ATS.⁵⁷⁰ The Commission also estimates that, over time, there will be approximately three alternative trading systems that file cessation of operations reports each year. Thus, the Commission anticipates that, over time, if all forty-five current alternative trading systems choose to register as broker-dealers and comply with Regulation ATS, there will be approximately forty-five alternative trading systems operating each year.

b. Public Display of Orders and Equal Execution Access.

Regulation ATS requires that alternative trading systems with significant volume display their best-priced orders for securities in which they have 5 percent or more of total trading volume in the public quote. The Commission identified the anticipated benefits of this requirement above. Below is a discussion of possible costs associated with this requirement.

One possible cost is the impact on institutional order flow to alternative trading systems generally. Institutions have several options available to them to execute trades. They can send orders to block trading desks, a number of different types of alternative trading systems, or directly to registered exchanges through broker-dealer give-ups. Although not currently displayed to the public, orders sent to an alternative trading system by institutions are displayed to other alternative trading system subscribers.⁵⁷¹ Thus, placing large orders, or a series of successive small orders, in an alternative trading system signals to a large number of sophisticated market participants the interest in a particular security.

The Commission is not persuaded by commenters that suggest that institutions currently willing to use alternative trading systems to display their orders to other alternative trading system subscribers, including other institutions, market-markers, and broker-dealers, will be less willing to use alternative trading systems that must display those orders to the public market. Our reasons are as follows. The primary group of market participants

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that will benefit from the public display of institutional orders is retail investors. Retail investors are not currently alternative trading system subscribers. To avoid market impact, institutions try to avoid signaling other institutions and market professionals, not retail investors. Almost all market professionals and a significant number of institutions already subscribe to alternative trading systems. Thus, the Commission believes that the additional exposure to the market should not affect institutions' use of alternative trading systems. Moreover, to the extent that institutions want to display small sized orders in the public market, rather than their entire order, they will still be able to make use of an alternative trading system's ''reserve size'' feature. This will enable institutions to avoid exposing the total size of their order to the public market.

Nonetheless, assuming institutions do have a preference for showing their sized orders to other alternative trading system subscribers but not the public market, there may be two reactions by institutions. First, institutions could choose to move their orders to more opaque venues, such as block trading desks. The cost of this movement of orders would be a loss of transparency to the limited group of alternative trading system subscribers who now benefit from the display of institutional orders on alternative trading systems, and the loss of business to alternative trading systems. While block trading desks would benefit from the increased business, it likely would increase institutions' transaction costs. For this reason, as well as those discussed above, the Commission believes it unlikely for institutions to react this way. Second, because the public display requirement only applies to alternative trading systems with five percent or more of the volume in a particular security, there is a possibility that institutions may move their order flow to smaller alternative trading systems in order to avoid the public display requirement. Such movements of order flow could benefit some alternative trading systems in the form of increased revenue and be a cost to other alternative trading systems who lose revenue.

Currently, alternative trading systems are able to attract subscribers because prices in their systems are often better than the prices available in the public markets. Because alternative trading systems are now required to publicly display their best priced orders for securities in which they represent five percent or more of the trading volume, the best priced orders for certain securities will also be available through the public markets. Alternative trading systems will no longer be able to provide subscribers with the unlimited ability to avoid public display in the NBBO and possible interaction with non-subscribers. Consequently, some subscribers could leave an alternative trading system if they think there are fewer advantages than before in having direct access to the alternative trading system.

However, the growth of ECNs since the Order Handling Rules were implemented indicates that alternative trading systems can, and are, attracting subscribers.⁵⁷² As mentioned above, there are still significant benefits to being a subscriber to an alternative trading system, including, but not limited to: the ability to enter orders and the use of such features as a negotiation feature or a ''reserve size'' feature; the ability to access the best priced orders for securities in which an alternative trading system represents less than 5 percent of the trading volume and therefore is not subject to the transparency requirements; and access to the entire ''book,'' not merely the ''top of the book,'' that contains important real-time market information regarding depth of trading interest. All of these benefits will be retained under the new display requirement.

Despite the impact on high volume alternative trading systems, integrating their best-priced orders into the public market is critical to the national market system. Section 11A of the Exchange Act directs the Commission to facilitate a national market system and to carry out Congress' objectives of, among other things, assuring ''the practicability of brokers executing investors' orders in the best market.'' ⁵⁷³ The public display requirement adopted today furthers the objectives in Section 11A of the Exchange Act by ensuring that the public markets reflect the best priced orders displayed in alternative trading systems that have a significant trading market in particular securities.

Several commenters also expressed concern about whether or not alternative trading systems will be permitted to continue charging fees to non-subscribers that access alternative trading systems publicly displayed orders. Currently, alternative trading systems charge a range of fees to subscribers. In particular, alternative trading systems may allow institutional subscribers to select higher fees and then have soft-dollars rebated in an amount equal to the excess above the actual cost for execution of a trade. Because of the presence of soft dollars, it is difficult to estimate the amount of revenue that alternative trading systems receive from institutional subscribers. The Commission notes, however, that it is not requiring alternative trading systems to change their fee structures. The Commission is merely limiting alternative trading systems to charging non-subscribers fees that are consistent with equivalent access.⁵⁷⁴ The Commission does not believe that such limitations will substantially affect an alternative trading system's revenues. In fact, some alternative trading systems may have increased revenues from the fees charged to non-subscribers.

The rules the Commission is adopting today prohibit an alternative trading system from charging fees that would effectively deny non- subscribers equivalent access to an alternative trading system's publicly displayed orders. As long as a fee does not deny equivalent access, it would be permissible under these rules. The SROs will be able to establish rules to ensure that alternative trading system fees are not inconsistent with the standard of equivalent access. Any SRO rule impacting an alternative trading system's access fees would have to be filed with the Commission for public comment, review, and approval. The Commission cannot approve any SRO rule unless it finds that such rule is consistent with the Exchange Act, including whether the rule will promote ''efficiency, competition, and capital formation.'' ⁵⁷⁵

As discussed above, one of the expected benefits of displaying the best-priced orders in alternative trading systems to all investors is that spreads will shrink. The success of the Order Handling Rules indicates that the Commission's current proposal should further enhance liquidity and price improvement opportunities in the public markets. Because non-market maker broker-dealers and institutions at times enter the best priced orders in an alternative trading system, the Commission expects that display of these orders in the public quote will improve the NBBO. As a result, some market markers may experience a loss of revenue. For example, a market maker

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may currently be at the NBBO even when an alternative trading system is better than that market maker's bid or offer. Accordingly, if the better priced institutional or non-market maker broker-dealer order were displayed in the public quote, that market maker would not execute an order unless it improved its quote. While reduced spreads may represent a cost to market makers, as discussed above, it represents a corresponding benefit to investors. Moreover, reduced spreads make the overall market more efficient by reducing transaction costs. If trading is less expensive, all other things being equal, investors can be expected to trade more.

The staff also notes that a market maker is not required to execute a customer order at the NBBO if the best available price is represented by an alternative trading system quote. Instead, a market maker may attempt to execute that customer order against the alternative trading system quote. If the market maker acts as agent in effecting the customer's trade, it may be entitled to a brokerage fee. Therefore, market makers may be able to offset, at least partially, the loss of trading profits with additional brokerage revenues.

c. Fair Access.

Under Regulation ATS, alternative trading systems with significant volume are required to establish and maintain standards for granting access to their system and keep records of such standards. In addition, such alternative trading systems must apply those standards in a fair and non-discriminatory manner and submit certain information regarding grants, denials, and limitations of access with their quarterly reports on Form ATS-R. Based on current volume estimates, at most two alternative trading systems will be initially subject to this requirement. The Paperwork Reduction Act section of this release summarizes the filing and recordkeeping costs associated with the fair access requirement.

The fair access requirement, as adopted, differs from that proposed. The proposal would have provided market participants who believe they had been unfairly denied or limited access to an alternative trading system subject to the fair access requirement with a right to appeal that alternative trading system's action to the Commission. Alternative trading systems subject to the fair access requirement would also have been required to provide investors with notice of a denial or limitation of access and their right to appeal that action to the Commission. The fair access requirement being adopted today does not include any right to appeal an alternative trading system's access decisions to the Commission. Instead, the Commission intends to enforce the prohibition on alternative trading systems with significant volume unfairly denying access through its inspection and enforcement authority. The Commission believes the fair access requirement it is adopting will be less costly to alternative trading systems than the one proposed because alternative trading systems will not be required to defend their access decisions in appeals before the Commission. Moreover, the requirement adopted does not require alternative trading systems to send notice of their decisions to market participants.

d. Systems Capacity, Integrity, and Security.

The Commission does not believe that its amendments and rules requiring alternative trading systems to meet certain systems related standards imposes significant costs. The standards the Commission is adopting are general standards that are consistent with good business practices. In addition, smaller alternative trading systems will not be subject to the proposed requirements. For those alternative trading systems that do not, for business reasons alone, ensure adequate capacity, integrity, and security of their systems, there will be costs associated with complying with the requirements. The costs associated with upgrading systems to an adequate level may include, for example, investing in computer hardware and software. In addition, alternative trading systems will incur costs associated with the independent review of their systems on an annual basis. An independent review should be performed by competent, independent audit personnel following established audit procedures and standards. If internal auditors are used by an alternative trading system to complete the review, these auditors should comply with the standards of the EDPAA. If external auditors are used, they should comply with the standards of the AICPA and the EDPAA. The review must be conducted according to established procedures and standards. The costs involved may vary widely depending on the business of the alternative trading system. Alternative trading systems will also be subject to paperwork burdens and recordkeeping and reporting requirements. These requirements are necessary for the Commission and the appropriate SROs to ensure compliance with systems related requirements. In addition, keeping such records permits alternative trading systems to effectively analyze systems problems that occur. While alternative trading systems are not required to file such documentation with the Commission on a regular basis, the Commission recognizes that generating and maintaining such documentation will impose some additional costs.

The notification requirement for material systems outages should impose relatively little additional costs on alternative trading systems. Moreover, the Commission believes that this small burden is justified by the need to keep Commission staff abreast of systems' developments and problems. The Paperwork Reduction Act section of this release summarizes the costs associated with the recordkeeping and reporting burdens of compliance with the systems capacity, integrity, and security requirements.

e. Costs of Exchange Registration.

The framework the Commission is adopting today for alternative trading systems is designed to allow such systems the option of registering as national securities exchanges. If an alternative trading system chooses to register as an exchange, corresponding regulatory obligations could impose costs on such systems, however, the elective nature of exchange regulation under the framework the Commission is adopting today ensures that only those entities for whom it is cost-effective will choose exchange registration and therefore bear the costs.

For example, exchange-registered alternative trading systems will have to be organized to, and have the capacity to, carry out the purposes of the Exchange Act, including their own compliance and the ability to enforce member compliance with the securities laws. Consequently, any newly registered exchange will have to establish appropriate surveillance and disciplinary mechanisms. In addition, newly registered exchanges will incur certain start-up costs associated with this obligation, such as writing rule manuals.

National securities exchanges currently operating have significant assets and expenses in order to carry out their functions. The cost of acquiring the necessary assets and the operating funds required to carry out the day-to-day functions of a national securities exchange are significant. For example, for the fiscal year 1997, the NYSE had total assets of $1,174,887,000 and total expenses of $488,811,000. The Cincinnati Stock Exchange (''CSE''), currently the only completely automated national securities exchange, had total assets of $13,124,585 and total expenses of $5,343,403. Due to these costs, it appears that an alternative trading system will need to have

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significant volume in order to make the benefits of exchange registration outweigh the costs.

As registered exchanges, alternative trading systems will also be subject to more frequent inspection by the Commission. As broker- dealers, alternative trading systems will be inspected on a regular basis by any SRO of which they are a member, and by the Commission only on an intermittent basis. As registered exchanges, these systems will be inspected more regularly by Commission staff, but will, of course, no longer be subject to examinations by SROs.

The Commission inspects different SRO programs on independent review cycles. For example, separate inspections are conducted for an SRO's surveillance, arbitration, listings, and financial soundness programs. Where appropriate, SROs will be examined for other programs they may operate, such as index programs. Each type of examination will be performed at regular intervals, which are typically two to three years. An SRO, however, may expect several examinations throughout a particular year, each in a different program. Each examination typically involves three to four attorneys and/or accountants from the Commission, who spend one week at the SRO, or up to two weeks for particularly large programs, to examine records and interview SRO personnel. In order to comply with section 17(b) under the Exchange Act, an SRO must expend resources to provide copies of relevant documents to, and answer questions from, the Commission staff. The cost to an SRO of each examination varies greatly depending on the scope of the examination and the size or complexity of the SRO's particular program.

In addition, there will also be costs associated with meeting the obligations set forth in section 11A of the Exchange Act and the rules thereunder. These costs include the costs of joining, or creating new, market-wide plans, such as the CQS, CTA, ITS, and OTC-UTP, although some of these costs will be offset by the right to share in the revenues generated by these plans. For example, to join the CTA plan, applicants will be asked to pay, as a condition to entry into the plan, an amount that reflects the value of the tangible and intangible assets created by the CTA plan that will be available to the applicant. ⁵⁷⁶ Similarly, new participants in ITS will have to pay a share of the development costs, which will reflect a share of the initial development costs, which were $721,631, and a share of costs incurred after June 30, 1978. ⁵⁷⁷ These costs will also include the costs of complying with Rule 11Ac1-1(b) under the Exchange Act, ⁵⁷⁸ which requires national securities exchanges and national securities associations to make the best bid, best offer, and aggregate quotation size for each security traded on its facilities available to quotation vendors for public dissemination.⁵⁷⁹

The Commission notes that the remaining costs will be partially offset because the alternative trading systems assuming the costs of exchange registration will no longer be regulated as broker-dealers. Consequently, they will no longer be obligated to comply with the broker-dealer requirements, such as filing and updating Form BD, maintaining books and records in accordance with Rules 17a-3 and 17a-4 under the Exchange Act, and paying fees for membership in an SRO. In addition, because exchange-registered alternative trading systems share the responsibilities of self-regulation, the regulatory burden carried by currently registered exchanges should be reduced. Other benefits include the freedom from oversight by a competing SRO, no obligation to comply with net capital requirements, the right to establish trading and conduct rules, the right to establish fee schedules, the ability to directly participate in the national market system mechanisms, and the right to share in the profits and benefits produced by the national market system mechanisms such as the CQS, CTA, ITS and OTC-UTP plans.⁵⁸⁰

The costs of exchange registration also include certain paperwork, filing, and recordkeeping requirements. These costs are discussed in the Paperwork Reduction Act section below.

The Commission anticipates that only a few of the existing alternative trading systems would consider registering as a national securities exchange. For most of the alternative trading systems currently in existence, the Commission believes that the costs and obligations discussed above potentially make registering as a national securities exchange less commercially viable than registering as a broker-dealer and complying with Regulation ATS.

B. Amendments to Application and Related Rules for Registration as an Exchange

The Commission identified several costs and benefits to investors and market participants in the Proposing Release with respect to amendments to the application and rules for exchange registration. Only two commenters identified areas of concern regarding exchange registration. These commenters suggested that the Commission was seeking to reimpose annual filing requirements previously eliminated in 1994.⁵⁸¹ In response, the Commission has made technical modifications to Rule 6a-2 to clarify the operation of the rule. The Commission does not believe that these filing burdens are reimposed under the rules as adopted. These commenters also questioned the value of requiring exchanges to compile and submit amendments to Form 1 that contain information that has been provided to the Commission throughout the year in other contexts. The Commission continues to believe that it is important to have all the required information gathered in one place in order to make it useful for Commission staff. In addition, the additional costs should be minimal because the respondents are required only to compile existing documents rather than generate new material.

1. Benefits

The Commission believes that the amendments provide benefits to organizations that are currently

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registered, or in the future will apply for registration, as national securities exchanges. Generally, the Commission expects that the regulatory framework discussed in this release accommodates automated and for-profit exchanges and makes registering as a national securities exchange more commercially viable for possible future exchanges.⁵⁸² First, the amendments to Rules 6a-1, 6a-2, and 6a-3 ease compliance burdens by simplifying the rule. By simplifying the rule language itself, the Commission anticipates that parties attempting to comply with Rules 6a-1, 6a-2, and 6a-3 will be better able to understand the rules' requirements and comply with them. Much of the information required on Form 1 will not change, but the revised form recasts the questions and exhibits in a different format that will ease compliance and make the responses more relevant to investors and the Commission. While national securities exchanges have traditionally been membership- owned, Form 1 also is revised to accommodate proprietary national securities exchanges.

Second, the amendments give national securities exchanges the option of complying with certain ongoing filing requirements by posting information on an Internet web site and supplying the location to the Commission, instead of filing a complete paper copy with the Commission. The Commission anticipates that exchanges will choose to use the Internet to comply with Rules 6a-2 and 6a-3 rather than filing many exhibits on paper. The availability of such information on the Internet will also provide the public with easier and less expensive access to the information than requesting paper copies from the Commission or the national securities exchanges as currently required. In addition, permitting exchanges to use the Internet as a means of compliance will reduce expenses associated with clerical time, postage, and copying.

The amended rules also reduce the frequency of certain ongoing filings to update the information in Form 1, directly reducing the compliance burden on national securities exchanges while still meeting investors' and the Commission's need for reasonably current information. Specifically, the amendments eliminate exchanges' requirement to submit changes to their constitution, their rules, or the securities listed on the exchange within ten days. The amendments also permit exchanges to file certain information regarding subsidiaries and affiliates every three years rather than annually. These amendments will conserve registered exchanges' staff time to comply with the rules. 2. Costs

The amendments are intended to simplify the filing requirements and reduce the compliance burdens for national securities exchanges and will likely impose few additional costs on national securities exchanges. Initially, there may be some additional personnel costs required to review the proposed rules and revised Form 1, but the Commission believes that the simplified requirements will reduce overall compliance burdens and costs over time. Reducing the frequency of filings for some requirements may result in some information being less current. The Commission, however, believes that much of this type of information does not change frequently. Moreover, the option of posting such information on an Internet web site should encourage more frequent updating of current information. Compliance with Rules 6a-1, 6a-2, and 6a-3 also include certain paperwork costs, which are discussed as ''burdens'' in the Paperwork Reduction Act section below.

C. Costs and Benefits of the Repeal of Rule 17a-23 and the Amendments to Rules 17a-3 and 17a-4

The Commission identified several costs and benefits to investors and market participants in the Proposing Release with respect to Rules 17a-23, 17a-3, and 17a-4. One commenter stated that the transfer of recordkeeping burdens would impose no additional burdens.⁵⁸³

Approximately forty-five of the broker-dealer trading systems currently filing reports under Rule 17a-23 will be alternative trading systems under the amendments and rules in this release. These trading systems will not fall within the definition of ''internal broker-dealer system,'' and will, therefore, not be required to maintain records under the new provisions of Rules 17a-3(a)(16) and 17a-4(b)(10). In its Paperwork Reduction Act analysis, the Commission notes that annual aggregate burdens for the recordkeeping obligations under Rule 17a-23 will be eliminated. Although the reporting requirements under Rule 17a- 23 will be eliminated, alternative trading systems will be subject to similar recordkeeping requirements under Regulation ATS.⁵⁸⁴ These paperwork ''burdens'' are discussed below in the Paperwork Reduction Act section.

D. SRO Pilot Trading System

The Commission identified several costs and benefits to investors and market participants in the Proposing Release with respect to Rule 19b-5. While the Commission solicited comment on the costs and benefits of Rule 19b-5, no comments were received specifically on that point. Several commenters did, however, address the Commission's proposal. One commenter agreed that Rule 19b-5 would reduce regulatory costs and encourage innovation, but believed that the rule's limitations should be reduced.⁵⁸⁵ Two other commenters expressed support for the goals of Rule 19b-5, but argued that burdens wouldn't be reduced as a practical matter due to the limitations of the rule.⁵⁸⁶ In response, the Commission notes that it has adopted the rule with some changes that should permit SROs more flexibility in taking advantage of the temporary exemption from rule filing requirements.

By permitting SROs to begin operating eligible pilot trading systems immediately and to continue operating for two years under a flexible regulatory scheme, the Commission believes that Rule 19b-5 will benefit SROs and investors. Rule 19b-5 will enhance competition in the trading markets without imposing significant SRO compliance burdens.⁵⁸⁷ Rule 19b-5 will permit the timely implementation of pilot trading systems without the widespread dissemination of critical business information. Therefore, Rule 19b-5 will reduce SRO costs associated with the Commission approval process and improve the competitive balance between SROs and alternative trading

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systems that are regulated as broker-dealers.⁵⁸⁸ Moreover, the Commission believes that Rule 19b-5 will foster innovation and create a streamlined procedure for SROs to operate pilot trading systems and will reduce filing costs for SROs pilot trading systems.

The costs of complying with Rule 19b-5 includes certain paperwork, filing, and recordkeeping requirements that are discussed below in the Paperwork Reduction Act section.

X. Effects on Competition, Efficiency and Capital Formation

Section 23(a)(2)⁵⁸⁹ of the Act requires that the Commission, when promulgating rules under the Exchange Act, to consider the impact any rule would have on competition and to not adopt any rule that would impose a burden on competition that is not necessary or appropriate in the public interest. In the Proposing Release, the Commission solicited comment on the effects on competition, efficiency and capital formation of the rules and amendments. Specifically, the Commission requested commenters to address how the proposed rules and amendments would affect competition between and among alternative trading systems, broker-dealers, exchanges, investors, and other market participants. The Commission received no comments specifically regarding these issues.

The Commission has considered the rules and rule amendment in light of the standards cited in section 23(a)(2) of the Act and believes they would not likely impose any significant burden on competition not necessary or appropriate in furtherance of the Exchange Act. As discussed above in the Cost-Benefit Section, the Commission recognizes that some alternative trading systems and their institutional users will be affected competitively by the rules adopted today. Nonetheless, the Commission believes that the rules and amendments will encourage innovation, accommodate the growing role of technology in the securities markets, improve transparency for market participants and ensure the stability of trading systems with a significant role in the markets, thereby furthering the development of a national market system in accordance with the goals under section 11A of the Exchange Act. In particular, as discussed above in the Cost-Benefit Section, the Commission believes that the rules and amendments will significantly reduce spreads, thereby benefiting all investors.

In adopting these rules and amendments, the Commission has considered whether the action will protect investors, and promote efficiency, competition, and capital formation.⁵⁹⁰ The Commission believes that the rules and amendments will allow the Commission to better oversee the activities of alternative trading systems and integrate alternative trading systems into the national market system. The rules and amendments will also better accommodate automated and for-profit exchanges and permit SROs to operate pilot trading systems temporarily without Commission approval. These steps will help to protect investors by preventing discriminatory denials or limitations of access, preventing systems related failures, and permitting access to best-priced orders. In addition, alternative trading systems should continue to compete based on innovation, price, and service rather than access to ''hidden markets.''

Rules 3a1-1, 3b-16, and Regulation ATS adopted today are intended to provide a choice between registering as a broker-dealer and registering as an exchange for markets operated as alternative trading systems.⁵⁹¹ In addition, the amendments to Rules 6a-1, 6a-2, and 6a-3 adopted today are intended to update the requirements for registered or exempt exchanges in order to accommodate different forms of organization and methods of operation. The Commission believes that these changes will create a more efficient market, encourage competition among alternative trading systems, and stimulate capital formation by making the regulatory framework sufficiently flexible to accommodate new or different approaches to exchange formation and operation, including automated and for-profit exchanges. The Commission further believes that the costs identified in the above analysis are not substantial enough to deter any market participants from attempting to become an alternative trading system.⁵⁹²

In addition, Rule 19b-5 and Form Pilot are intended to provide SROs the opportunity to develop and operate pilot trading systems with less cost and time delay. As previously stated, currently, SROs are required to submit a rule filing to the Commission and undergo a public notice, comment, and approval process, before they operate a new pilot trading system. Rule 19b-5 would permit SROs that develop pilot trading systems to begin operation shortly after submitting Form PILOT to the Commission. One of the consequences of SROs filing rule changes before implementation is that the rule filing process informs SROs' competitors about the proposed pilot trading system and provides an avenue for those competitors to copy, delay, or obstruct implementation of a pilot trading system before it can be tested in the marketplace. As a result, the Commission believes that proposed Rule 19b-5 and Form Pilot should help create a more efficient market, encourage competition between SROs and alternative trading systems, and stimulate capital formation by creating a streamlined procedure for SROs to operate pilot trading systems and reducing filing costs for SROs generally.

XI. Summary of Final Regulatory Flexibility Analysis

A Final Regulatory Flexibility Analysis (''FRFA'') has been prepared in accordance with section 4 of the Regulatory Flexibility Act (''RFA'').⁵⁹³ The FRFA relates to the adoption of new rules 3a1- 1,⁵⁹⁴ 3b-16,⁵⁹⁵ 19b-5,⁵⁹⁶ Regulation ATS,⁵⁹⁷ new Forms ATS,⁵⁹⁸

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ATS-R,⁵⁹⁹ PILOT,⁶⁰⁰ amendments to rules 6a-1,⁶⁰¹ 6a-2,⁶⁰² 6a- 3,⁶⁰³ 11Ac1-1,⁶⁰⁴ 17a-3,⁶⁰⁵ 17a-4,⁶⁰⁶ the Commission's rules of practice,⁶⁰⁷ to Form 1, and the repeal of Rule 17a-23⁶⁰⁸ under the Exchange Act.⁶⁰⁹ The FRFA notes the potential costs of operation and procedural changes that may be necessary to comply with the new rules and rule amendments (''new regulatory framework''). A summary of the Initial Regulatory Flexibility Analysis (''IRFA'') appeared in the Proposing Release.⁶¹⁰

As more fully discussed in the FRFA, market participants have developed a variety of alternative trading systems that furnish services traditionally provided solely by registered exchanges. Our current regulatory framework, designed more than six decades ago, however, did not foresee many of these trading and business functions. Alternative trading systems now handle twenty percent or more of the orders in securities listed on Nasdaq, and almost four percent of orders in listed securities. Even though these systems provide services that are similar to those provided by the registered exchanges and Nasdaq, the current regulatory framework largely ignores the market functions of alternative trading systems. This creates disparities that affect investor protection, market intermediaries, and other markets. For example, activity on alternative trading systems is not fully disclosed to, or accessible by, public investors and may not be adequately surveilled for market manipulation and fraud. Moreover, these trading systems have no obligation to provide investors a fair opportunity to participate in their systems or to treat their participants fairly. In addition, they do not have an obligation to ensure that their capacity is sufficient to handle trading demand. Because of the increasingly important role of alternative trading systems, these differences call into question not only the fairness of current regulatory requirements, but also the efficacy of the existing national market system structure.

As described in the FRFA, under the new regulatory framework, the Commission will offer trading systems a choice between broker-dealer regulation and exchange regulation. Specifically, the Commission proposed to allow alternative trading systems to choose whether to register as national securities exchanges, or to register as broker- dealers and comply with additional requirements under proposed Regulation ATS depending on their activities and trading volume. In conjunction with this proposal, the Commission proposed to repeal Rule 17a-23, which currently requires alternative trading systems--as well as broker-dealer trading systems that are not alternative trading systems--to maintain certain records and file reports with the Commission. The Commission also proposed amendments to Form 1, which securities markets file to register as national securities exchanges, and related rules. Finally, to enable registered exchanges and national securities associations to better compete in the fast changing marketplace, the Commission proposed to temporarily exempt certain pilot trading systems operated by such exchanges and associations from the rule filing requirements of the Exchange Act.

In the Proposing Release, the Commission solicited public comment on the proposed new rules and rule amendments which were designed to resolve many of the concerns raised by alternative trading systems. As discussed in the FRFA, commenters generally supported the Commission's proposals and welcomed the regulatory flexibility these proposals offered. While no public comments were received in response to the IRFA, several of the comments were related to the IRFA. Several commenters encouraged the Commission to accept electronic filings as a means of reducing the burden on market participants. The Commission is, in fact, working toward the goal of accepting filings in electronic form. One commenter suggested that the Commission impose only minimal regulatory requirements, if any, on alternative trading systems that trade only minimal volume in order to avoid erecting significant barriers to entry and innovation. The Commission believes that the requirements of Regulation ATS are minimal for new alternative trading systems, especially as compared to the current no-action letter process. Regulation ATS sets forth concrete requirements for a system to operate, imposes only notice filings, and reserves more burdensome requirements for high volume systems. Another commenter stated that the reporting requirements under proposed Regulation ATS are similar to current Rule 17a-23 and, thus, are not inappropriately burdensome. The Commission agrees and notes that most current potential respondents under Regulation ATS already have experience with the requirements and burdens associated with Rule 17a-23, so Regulation ATS will not impose significant new burdens on currently operating alternative trading systems.

The Commission is adopting new Regulation ATS substantially in the form it was proposed.

The FRFA addresses how the proposal would affect broker-dealers that operate alternative trading systems and internal broker-dealer trading systems that are small entities. As more fully explained in the FRFA, the Commission believes that the improved regulatory framework provided by Regulation ATS justifies the costs incurred by industry participants to comply with Regulation ATS. The FRFA also describes the Commission's consideration of significant alternatives to Regulation ATS. The FRFA concludes that the alternatives, in the context of a new regulatory framework, would not accomplish the stated objectives of Regulation ATS. A copy of the FRFA may be obtained by contacting Denise Landers, Attorney, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., Mail Stop 10-1, Washington D.C. 20549.

XII. Paperwork Reduction Act

As explained in the Proposing Release, certain provisions of the rules and rule amendments contain ''collection of information'' requirements within the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (''PRA''). Accordingly, the Commission submitted the collection of information requirements contained in the rules and rule amendments to the Office of Management and Budget (''OMB'') for review and were approved by OMB which assigned the following control numbers: Form 1, Rules 6a-1 and 6a-2, control number 3235-0017; Rule 6a-3, control number 3235-0021; Rule 17a-3(a)(16), control number 3235-0508; Rule 17a-4(b)(10), control number 3235-0506; Rule 19b-5 and Form PILOT, control number 3235-0507; Rule 301, Form ATS and Form ATS-R, control number 3235-0509; Rule 302, control number 3235-0510; and Rule 303, control number 3235-0505. The collections of information are in accordance with Section 3507 of the

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PRA.⁶¹¹ With regard to Rule 301, Form ATS, and Form ATS-R, Rule 302, and Rule 303, the Commission staff has changed its estimate of the paperwork burdens slightly due to an increase in the estimated number of respondents that will be affected and a change to the fair access rules. Accordingly, the Commission has submitted a PRA change worksheet to OMB.⁶¹²

The collection of information obligations imposed by the rules and rule amendments are mandatory. However, it is important to note that an alternative trading system operating as a broker-dealer is optional, operation of a national securities exchange is optional, and operating a pilot trading system is optional. The information collected, retained, and/or filed pursuant to the rules and rule amendments under Regulation ATS will be kept confidential to the extent permitted by the Freedom of Information Act (5 U.S.C. Sec. 552 et seq.). The information collected, retained, and/or filed pursuant to the rules for registration as a national securities exchange will not be confidential and will be available to the public. The information collected, retained, and/or filed pursuant to the rules for operation of pilot trading systems will not be confidential and will be made available to the public when the pilot trading system starts to operate. An agency may not conduct or sponsor, and a person is not required to comply with, a collection of information unless it displays a currently valid OMB control number.

The collections of information are necessary for persons to obtain certain benefits or to comply with certain requirements. As described in the Proposing Release, the rules and rule amendments to which the collections of information are related allow the Commission to respond to the impact of technological developments in the securities markets and permit the Commission to more effectively oversee the growing number of alternative trading systems. The collections of information are also necessary to permit the Commission to effectively oversee SRO pilot trading systems. With the exception of two changes to the final rules, there are no material changes to the rules and amendments as adopted that affect the burden estimates in the Proposing Release. The Commission is adopting different fair access requirements from those it published in the Proposing Release. The Commission has determined to not adopt the fair access requirements that would have required investors denied or limited access to have a right to appeal to the Commission and alternative trading systems making access denial or limitation decisions to notify such investors of the decision and their right of appeal to the Commission. Instead, the Commission has decided to adopt rules that require alternative trading systems to report quarterly to the Commission a record of all grants, denials, and limitations of access as well as other descriptive information surrounding the decision. These changes eliminate the proposed paperwork burden of providing notice to investors and adds a compliance burden on Form ATS-R to report such information to the Commission. Aggregate paperwork burdens have also been revised to reflect updated information regarding the estimated number of alternative trading systems that will be subject to the rules. In the Proposing Release, the Commission staff estimated that there were approximately forty- three alternative trading systems operating. The Commission staff now estimates that there are forty-five alternative trading systems operating, so the aggregate paperwork burdens have been revised to reflect this change.

The Commission solicited public comment on the collection of information requirements contained in the Proposing Release. While the Commission received no comments that specifically addressed the PRA portion of the release, it did receive several comments that touched on PRA related issues.

Several commenters encouraged the Commission to accept electronic filings as a means of reducing the burden on market participants. The Commission is, in fact, working toward the goal of accepting filings in electronic form. The Commission anticipates that the option of electronic filing will be made available to respondents at some point in the relatively near future. Several commenters also suggested that the Commission reduce the burden on national securities exchanges by relieving them of the obligation to file annual amendments to Form 1 due to the same information being submitted to the Commission in other forms periodically throughout the year. The Commission believes that it is important to have one complete annual filing that compiles all the changes to the information contained on Form 1 throughout the year and all other required SRO information. Additionally, the Commission believes that such a filing represents only a compilation of existing information, so the additional burden of requiring an annual filing is largely clerical and generally minimal.

One commenter suggested that the Commission impose only minimal regulatory requirements, if any, on alternative trading systems that trade only minimal volume in order to avoid erecting significant barriers to entry and innovation. The Commission believes that the requirements of Regulation ATS are minimal for new alternative trading systems, especially as compared to the current no-action letter process. Regulation ATS sets forth concrete requirements for a system to operate, imposes only notice filings, and reserves more burdensome requirements for high volume systems. Another commenter stated that the reporting requirements under proposed Regulation ATS are similar to current Rule 17a-23 and, thus, are not inappropriately burdensome. The Commission agrees and notes that most current potential respondents under Regulation ATS already have experience with the requirements and burdens associated with Rule 17a-23, so Regulation ATS will not impose significant new burdens on currently operating alternative trading systems.

As noted above in the Cost-Benefit section, below is a summary of the paperwork burdens that were identified in the Proposing Release. Although not mandated by the PRA, to give regulated entities and others an understanding of the paperwork costs, the discussion below provides dollar estimates assuming certain labor costs.

A. Form 1, Rules 6a-1 and 6a-2

These amendments are intended to simplify the filing requirements and reduce the compliance burdens for national securities exchanges and will likely impose few additional costs on national securities exchanges. Initially, there may be some additional personnel costs required to review the proposed rules and revised Form 1, but the Commission believes that the simplified requirements will reduce overall compliance burdens and costs over time. Reducing the frequency of filings for some requirements may result in some information being less current. The Commission, however, believes that much of this type of information does not change frequently. Moreover, the option of posting such information on an Internet web site should encourage more frequent updating of current information.

The Commission staff has estimated that each respondent will incur an average burden of forty-seven hours to comply with Rule 6a-1 and file an

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initial application for registration on Form 1. This represents a two hour increase from the current average burden due to the estimated additional burden of the added exhibits. The Commission staff has estimated that the average additional cost per response will be approximately $30.⁶¹³ Because the Commission receives applications for registration as an exchange on Form 1 from time to time, and not on a predictable basis, it cannot estimate the annual aggregate costs and burden hours associated with such filings.⁶¹⁴

The Commission notes that it is making no material changes to Rule 6a-1, Rule 6a-2, or Form 1 from the Proposing Release. Thus, the collection of information burdens are not changing from those proposed.

B. Rule 6a-3

The Commission anticipates that the amendments will not change the paperwork burden associated with complying with Rule 6a-3. The Commission staff has estimated that the average burden for each respondent to comply with Rule 6a-3 is one-half hour per response because compliance only requires photocopying existing documents. The Commission also estimates that each respondent will file supplemental information under Rule 6a-3 approximately twenty-five times per year. The estimated average cost per response for each individual respondent is $9.50, resulting in an estimated annual average cost burden for each respondent of $237.50.⁶¹⁵

C. Rule 17a-3(a)(16)

No additional recordkeeping burdens will be imposed on internal broker-dealer systems under the amendments to Rule 17a-3. The amendments apply only to systems that are presently subject to the recordkeeping requirements of Rule 17a-23. Because the Commission is repealing Rule 17a-23 and amending Rules 17a-3 and 17a-4 by transferring the recordkeeping requirements from Rule 17a-23, the Commission does not anticipate any new recordkeeping costs or burdens for respondents.

Based on Commission experience with the burdens associated with Rule 17a-23, the Commission has estimated the burdens that will be associated with Rule 17a-3(a)(16). The Commission staff has estimated that there will be approximately ninety-four broker-dealers operating one hundred twenty-three internal broker-dealer systems that will have to make the records described in Rule 17a-3(a)(16). The Commission staff has estimated that each respondent will spend approximately twenty-seven hours per year keeping the required records under Rule 17a-3(a)(16) at an annual cost of $1,298.16.⁶¹⁶ The aggregate burden for approximately ninety-four broker-dealers operating internal broker- dealer trading systems is estimated to be 2,619 hours for a total average cost of $122,027.04.⁶¹⁷

D. Rule 17a-4(b)(10)

No additional recordkeeping burdens will be imposed on internal broker-dealer systems under the amendments to Rule 17a-4. The amendments apply only to systems that are presently subject to the recordkeeping requirements of Rule 17a-23. Because the Commission is repealing Rule 17a-23 and amending Rules 17a-3 and 17a-4 by transferring the recordkeeping requirements from Rule 17a-23, the Commission does not anticipate any new recordkeeping costs or burdens for respondents.

Based on Commission experience with the burdens associated with Rule 17a-23, the Commission has estimated the burdens that will be associated with Rule 17a-4(b)(10). The Commission staff has estimated that there will be approximately ninety-four broker-dealers operating one hundred twenty-three internal broker-dealer systems that will have to keep the records described in Rule 17a-4(b)(10). The Commission staff has estimated that each respondent will spend approximately three hours to preserve the required records under Rule 17a-4(b)(10) at an annual cost of $144.24.⁶¹⁸ The aggregate burden for approximately ninety-four broker-dealers operating internal broker-dealer trading systems is estimated to be two hundred eighty two hours for a total average cost of $13,558.56.⁶¹⁹

E. Rule 19b-5 and Form PILOT

For SROs that choose to operate pilot trading systems and avail themselves of the provisions of Rule 19b-5, compliance with Rule 19b-5 and the filings required on Form PILOT are mandatory. Initial filings on Form PILOT are confidential until the pilot system is operational and subsequent filings are not confidential. Thus, after a pilot trading system starts to operate, all filings on Form PILOT are available to the public. Rule 19b-5 reiterates SROs' existing recordkeeping obligations under Rule 17a-1, which requires that such records be kept for not less than five years, the first two years in an easily accessible place.

The Commission anticipates receiving approximately 6 notices per year regarding pilot trading systems on Form PILOT.⁶²⁰ An SRO will be required to submit a Form PILOT providing detailed operational data and update this information quarterly. The Commission staff has estimated that an SRO will expend twenty-four hours to file an initial operation report and three hours to file a quarterly report and a systems change notice.⁶²¹ The Commission also estimates that an SRO will file two amendments per year to report changes to the system.⁶²² The Commission staff has estimated that an SRO will expend $1,242 per initial Form PILOT filing and $155 for each quarterly Form PILOT and system

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change notice filed.⁶²³ Thus, the total estimated annual burden for SROs to comply with Rule 19b-5 by filing an initial notice on Form PILOT is estimated to be one hundred forty-four hours for a total average cost of $7,452.⁶²⁴ The total estimated annual burden for SROs to file systems change notices and quarterly reports on Form PILOT is estimated to be one hundred eight hours for a total average cost of $5,580.⁶²⁵

The total estimated average cost of $155 to file quarterly reports and system change notices on Form PILOT is composed of $100 for in-house professional work (two hours at $50 per hour), $15 for clerical work (one hour at $15 per hour) and $40 for printing, supplies, copying and postage (approximately thirty-five percent of the total labor costs).

F. Rule 301, Form ATS and Form ATS-R

For alternative trading systems that choose to register as a broker-dealer, the requirements of Rule 301, Form ATS and Form ATS-R are mandatory. All filings required under Rule 301, Form ATS and Form ATS-R are considered confidential and are not available to the public. All records required to be made under the Rule are required to be preserved for three years, the first two years in an easily accessible place.

The alternative trading system amendments and rules have been tailored to minimize their burden on alternative trading systems and especially small systems. Many of the provisions in the proposed rules are triggered by a volume threshold. The Commission expects that small alternative trading systems will not have sufficient volume to trigger those thresholds and will therefore not have to comply with those provisions. The recordkeeping and reporting requirements with which smaller, lower volume alternative trading systems have to comply under proposed Regulation ATS are substantially similar to those with which alternative trading systems currently comply. Consequently the costs for smaller alternative trading systems should remain unchanged.

1. Notice, Reporting, and Recordkeeping

All alternative trading systems that will be subject to notice, reporting, and recordkeeping requirements under the Commission's rules as adopted today are currently subject to similar requirements under Rule 17a-23. The requirements under Regulation ATS, however, require some additional information that is not currently required under Rule 17a-23.

Under Regulation ATS, alternative trading systems file an initial operation report, notices of material systems changes, and quarterly reports. The rules also include new Forms ATS and ATS-R to standardize reporting of such information and make it more useful for the Commission. The rules require information that is not currently required under Rule 17a-23, such as greater detail about the system operations, the volume and types of securities traded, criteria for granting access to subscribers, procedures governing order execution, reporting, clearance and settlement, procedures for reviewing systems capacity and contingency procedures, and the identity of any other entities involved in operating the system.

Regulation ATS requires staff time to comply with the initial notice and amendment requirements. While the Commission has designed the requirements in an effort to balance the costs of filing with the benefits to be gained from the information, some effort will be necessary to gather and file this information. Most of the information, however, already exists. Alternative trading systems will only be required to gather this information and supply it in the required format to the Commission. The periodic updating requirements will also require staff time over the life of the alternative trading system to comply with the rules.

The Commission staff has estimated that there are currently about forty-five alternative trading systems that will be required to register as exchanges or register as broker-dealers and comply with Regulation ATS.⁶²⁶ The Commission also estimates that, over time, there will be approximately three new alternative trading systems each year that choose to register as broker-dealers and comply with Regulation ATS.⁶²⁷

The Commission also estimates that, over time, there will be approximately three alternative trading systems that file cessation of operations reports each year. Thus, the Commission anticipates that, over time, if all forty-five current alternative trading systems choose to register as broker-dealers and comply with Regulation ATS, there will be approximately forty-five alternative trading systems operating each year.

The Commission staff has estimated that the average burden per respondent to file the initial operations report on Form ATS will be twenty hours. This burden is computed by estimating that completing the report will require an average of thirteen hours of professional work and seven hours of clerical work.⁶²⁸ The Commission staff has estimated that the average cost per response will be $1,019 representing the twenty hours and cost of supplies.⁶²⁹ If all forty- five alternative trading systems opt to register as broker-dealers and comply with Regulation ATS, the total, one time cost to comply with the proposed requirements to file initial operation reports is estimated to be $45,855.⁶³⁰ The Commission also estimates that, over time, approximately three new alternative trading systems will register as broker-dealers per year, incurring an annual aggregate burden of sixty hours for an average total cost of $3,057 after the first year following adoption of Regulation ATS.⁶³¹

In addition, the rules require alternative trading systems to amend their initial operations report to notify the Commission of material systems changes and other changes to the

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information contained in the initial operations report. The Commission staff has estimated that each respondent will file six such amendments per year.⁶³² The Commission staff has estimated that each respondent will incur an average burden of two hours per response and incur an average cost of $111.50 for each amendment to the initial operation report that it submits.⁶³³ If all forty-five alternative trading systems opt to comply with Regulation ATS rather than to register as exchanges, the total aggregate cost per year to comply with the proposed requirement to file amendments to the initial operation reports is estimated to be $30,105.⁶³⁴

Alternative trading systems registering as broker-dealers will also be required to file quarterly reports on Form ATS-R, reporting participating system subscribers, the securities traded on the system, and aggregate volume information. The Commission staff has estimated that the quarterly reports will cause each respondent to incur an average burden of 4 hours per response and incur an average cost of $223 for each Form ATS-R that it submits.⁶³⁵ The annual burden per respondent is estimated to be $892.⁶³⁶ If all forty-five alternative trading systems opt to register as broker-dealers and comply with Regulation ATS, the total cost per year to comply with the requirement to file quarterly reports is estimated to be $40,140.⁶³⁷

Finally, alternative trading systems registered as broker-dealers will be required to submit a notice and a report on Form ATS when they cease operations. The Commission anticipates a total of three such filings per year. The Commission staff has estimated that individual respondents will incur a burden of two hours to file the cessation notice. The Commission staff has estimated that individual respondents will incur a cost of $111.50 to file the cessation of operations report on Form ATS.⁶³⁸ The annual aggregate burden for three alternative trading systems to file cessation of operations reports is estimated to be $334.50.⁶³⁹

2. Fair Access

Under Regulation ATS, alternative trading systems with significant volume are required to establish and maintain standards for granting access to their system and keep records of such standards. In addition, alternative trading systems with significant volume are required to submit certain information regarding grants, denials, and limitations of access with their quarterly reports on Form ATS-R. The Commission staff has estimated that each respondent obligated to establish and maintain such records will incur a burden of seventeen hours per year to make and keep standards for granting access for a total estimated cost of $958.50.⁶⁴⁰

Although these estimates reflect a program change from the Proposing Release, the total burdens on respondents are decreasing slightly as a result of the program changes. The Commission is eliminating the proposal to require alternative trading systems that deny investors access to the system to provide them with notice of the denial and their right of appeal to the Commission. Under the rules as adopted, there is no right of appeal to the Commission. In the Proposing Release, the Commission estimated that the burden to comply with the notice requirement would be approximately twenty-seven hours per year for each respondent. Under the rules as adopted, such alternative trading systems are required to submit fair access information on Form ATS-R on a quarterly basis. The burden for this requirement is only twelve hours per year for each respondent. Thus, the changes from the Proposing Release are anticipated to reduce the burden on each respondent by approximately fifteen hours per year. The Commission staff has estimated that only two respondents will be affected by this program change, resulting in an aggregate reduction of thirty burden hours for all respondents. This reduction, however, is offset by an increase in the estimated number of respondents. Specifically, the aggregate paperwork burden for Rule 301, Form ATS, and Form ATS-R is increasing by one hundred sixty hours due to updating the estimate of the number of potential respondents from forty-three in the Proposing Release to forty-five currently.

3. Systems Capacity, Integrity, and Security

The notification requirement for material systems outages should impose relatively little additional costs on alternative trading systems. Moreover, the Commission believes that this small burden is justified by the need to keep Commission staff abreast of systems' developments and problems.

The Commission staff has estimated that each respondent will incur an average annual burden of fifteen hours to comply with the recordkeeping requirements associated with the systems capacity, integrity, and security provisions of Regulation ATS. The Commission staff has estimated that each respondent will make an average of five system outage notices per year, for an estimated average burden of 1.25 hours per year.⁶⁴¹ The Commission staff has estimated that the total estimated average cost of compliance for each respondent will be $85 per year.⁶⁴² Such alternative trading systems will

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also be required to keep records relating to the steps taken to comply with systems capacity, integrity, and security requirements under Regulation ATS. The Commission staff has estimated that each respondent will incur a burden of ten hours per year to comply with such recordkeeping requirements for a total estimated cost of $675 per year.⁶⁴³ The Commission staff has estimated that two alternative trading systems will be required to comply with the systems capacity, integrity, and security provisions of Regulation ATS due to their significant volume. The estimated aggregate cost for these alternative trading systems chose to comply with the systems capacity, integrity, and security requirements is $1,520.⁶⁴⁴

G. Rule 302

Rule 302 requires alternative trading systems to make certain records with respect to trading activity through the alternative trading systems. This collection of information will permit the Commission to detect and investigate potential market irregularities and to ensure investor protection. Such information is not available in any other form from any other sources.

For alternative trading systems that choose to register as a broker-dealer, the requirements of Rule 302 are mandatory. All records required to be made under Rule 302 are considered confidential and are not available to the public. All records required to be made under the Rule are required to be preserved for three years, the first two years in an easily accessible place.

The Commission staff has estimated that each alternative trading system that chooses to register as a broker-dealer will be required to expend an average of thirty-six hours to comply with Rule 302 at an average cost of $1,730.88.⁶⁴⁵ If all forty-five alternative trading systems opt to register as broker-dealers, rather than as exchanges, the total cost for recordkeeping under Rule 302 is estimated to be $77,889.60 per year.⁶⁴⁶

The Commission notes that it is making no material changes to Rule 302 from the Proposing Release. The collection of information burdens are increasing slightly due to an updated estimate of the number of respondents and not due to any changes to the rule as proposed.

H. Rule 303

Rule 303 requires alternative trading systems registered as broker- dealers to preserve certain records produced under Rule 302, as well as standards for granting access to the system and records generated in complying with the systems capacity, integrity and security requirements for alternative trading systems with significant trading volume. Alternative trading systems registered as broker-dealers are not required to file such information, but merely to retain it in an organized manner and make it available to the Commission upon request.

For alternative trading systems that choose to register as a broker-dealer, the requirements of Rule 303 are mandatory. All records required to be made under Rule 303 are considered confidential and are not available to the public. All records required to be made under the Rule are required to be preserved for three years, the first two years in an easily accessible place.

The Commission staff has estimated that each alternative trading system that chooses to register as a broker-dealer will be required to expend an average of four hours per year to comply with Rule 303 at an average cost of $192.32.⁶⁴⁷ If all forty-five alternative trading systems opt to register as broker-dealers, rather than as exchanges, the total cost for record preservation is estimated to be $8,654.40 per year.⁶⁴⁸

The Commission notes that it is making no material changes to Rule 302 from the Proposing Release. The collection of information burdens are increasing slightly due to an updated estimate of the number of respondents and not due to any changes to the rule as proposed.

⁵⁵³ Because the rules and rule amendments regarding Regulation ATS, exchange registration, and Rule 19b-5 constitute ''major rules'' within the meaning of the Small Business Regulatory Enforcement Act of 1996, 5 U.S.C. 801 et seq., the rules and rule amendments cannot take effect until 60 days after the date of publication in the Federal Register. Although the amendments to Rules 17a-3 and 17a-4 and repeal of Rule 17a-23 and Form 17A-23 do not constitute ''major rules,'' they will become effective at the same time as Regulation ATS because they operate in an integrated fashion with Regulation ATS.

⁵⁵⁴ See ICI Letter at 4 (stating that requirements would be overly burdensome for alternative trading systems); IBEX Letter at 13 (arguing that appeal process should begin at the SRO level); Instinet Letter at 19 (stating that a right of appeal to the Commission could lead to frequent frivolous appeals).

⁵⁵⁵ TBMA Letter at 16.

⁵⁵⁶ SIA Letter at 17-18. But see IBEX Letter at 5 (stating that the reporting requirements under proposed Regulation ATS were not inappropriately burdensome).

⁵⁵⁷ CBB Letter at 4.

⁵⁵⁸ Instinet Letter at 20.

⁵⁵⁹ Instinet Letter at 10.

⁵⁶⁰ See supra Section IV.A.2.c.

⁵⁶¹ See IBEX Letter at 5; SIA Letter at 18; American Century Letter at 6.

⁵⁶² See TBMA Letter at 6-7, 21; SIA Letter at 3, 11; DBSI Letter at 1; MSDW Letter at 13.

⁵⁶³ See NYSE Letter at 6; IBEX Letter at 2-3.

⁵⁶⁴ Rule 301(b)(5), 17 CFR 242.301(b)(5).

⁵⁶⁵ Rule 301(b)(6), 17 CFR 242.301(b)(6).

⁵⁶⁶ The Office of Management and Budget has recognized that although it may be difficult to quantify the benefits of price transparency, ''[t]here is a strong consensus among economists that regulations requiring the disclosure of information about the price and quality of products and services can produce significant benefits for consumers and improve the functioning of markets when this information would not otherwise be available.'' Office of Management and Budget, Draft Report to Congress on the Costs and Benefits of Federal Regulations, 63 FR 44034 (Aug. 17, 1998).

⁵⁶⁷ See supra note 177. Under the Order Handling Rules, market makers who enter orders on ECNs are required to reflect those prices in their public quotations. In the alternative, the ECN can make the best market maker prices publicly available through an SRO.

⁵⁶⁸ See supra note 5.

⁵⁶⁹ This estimate is based on filings made with the Commission under Rule 17a-23. At the time of the Proposing Release, the Commission estimated that forty-three alternative trading systems would be required to register as exchanges or broker-dealers and comply with Regulation ATS. The Commission now estimates that there are forty-five alternative trading systems operating.

⁵⁷⁰ Based on the Commission's experience over the last three years with Rule 17a-23, it appears that there are more than three new alternative trading systems per year. However, we expect that in the future, there will be approximately three new alternative trading systems per year. The rapid growth experienced over the last several years is unlikely to continue in perpetuity.

⁵⁷¹ A number of ECNs, however, currently display the best order in their system in the public quote, regardless of whether that order is entered by an institution, market maker or another broker-dealer although the Commission's Order Handling Rules only require the display of market maker orders. Thus, institutional orders sent to these systems are already displayed to the public.

⁵⁷² When the Order Handling Rules were implemented on January 17, 1997, four ECNs linked to Nasdaq. Today there are a total of nine ECNs linked to the public quote stream. See supra note 178.

⁵⁷³ Section 11A(a)(1)(C) of the Exchange Act, 15 U.S.C. 78k- 1(a)(1)(C).

⁵⁷⁴ Under the Order Handling Rules, ECNs are limited to charging non-subscribers fees consistent with equivalent access.

⁵⁷⁵ Section 3(f) of the Exchange Act, 15 U.S.C. 78c(f).

⁵⁷⁶ The amount to be paid to the CTA plan will vary on a case- by-case basis and may reflect a current independent valuation of the CTA facilities, prior valuations, an assessment of costs contributed to the plan by existing members, the estimated usage of the plan facilities by the applicant, costs for anticipated system modifications to accommodate the applicant, and other relevant factors as determined by the current participants. CTA Plan: Second Restatement of Plan Submitted to the Securities and Exchange Commission Pursuant to Rule 11Aa3-1 under the Securities Exchange Act of 1934, May 1974 as restated March 1980 and December 1995, at 8-9. See supra note 391. The terms of the CQ plan are substantially similar with respect to the assessment of a payment upon entry into the system. CQ Plan: Restatement of Plan Submitted to the Securities and Exchange Commission Pursuant to Rule 11Ac1-1 under the Securities Exchange Act of 1934, July 1978, as restated December 1995, at 8-9. See supra note 392.

⁵⁷⁷ Plan for the Purpose of Creating and Operating an Intermarket Communication Linkage Pursuant to Section 11A(a)(3)(B) of the Securities Exchange Act of 1934, Composite: Amendments through May 30, 1997, at 78-79.

⁵⁷⁸ 17 CFR 240.11Ac1-1.

⁵⁷⁹ The Commission estimates that each national securities exchange or national securities association will submit information to vendors approximately 24,266,000 times per year, which reporting is generally done through automated facilities that conduct the reporting on a continuous basis. Due to the continuous nature of the information feeds, the Commission does not believe that it is feasible to estimate the average cost per response or annual burdens hours involved in complying with Rule 11Ac1-1(b) for a new registered exchange. 17 CFR 240.11Ac1-1(b).

⁵⁸⁰ See supra Section III.B.1.

⁵⁸¹ See NYSE Letter at 10; Amex Letter at 5-6.

⁵⁸² For example, the International Securities Exchange, which announced its intentions to register as a national securities exchange on November 10, 1998, would not be able to register as a national securities exchange without the changes to the rules as adopted today. See International Securities Exchange Will be First Fully Electronic Options Exchange in U.S., International Securities Exchange Press Release, Nov. 10, 1998.

⁵⁸³ TBMA Letter at 25-26.

⁵⁸⁴ The costs and benefits associated with these recordkeeping requirements are discussed in Section IX.A.2.a. supra.

⁵⁸⁵ CBOE Letter at 8-9.

⁵⁸⁶ See CME Letter at 3-4; PCX Letter at 8.

⁵⁸⁷ The Commission estimates that the current preparation and filing of proposed rule changes pursuant to section 19(b)(2) of the Exchange Act to operate a pilot trading system constitute major market impact filings requiring approximately 100 hours and $10,000 to $15,000 of SRO time and money, respectively, for each proposal. This does not include the cost to the SRO of any delay in obtaining Commission approval or in disclosing business information; nor does this include the benefit to an SRO of bringing its new pilot trading system to market in a shorter amount of time. The cost per hour and per filing is derived from information supplied by the SROs. For the purposes of our estimates, we have valued related overhead at thirty-five percent of the value of legal work. See GSA Guide to Estimating Reporting Costs (1973).

⁵⁸⁸ The Commission estimates that under current procedures, a rule filing for a new pilot trading system takes 90 days, on average, from the date of the original submission to be approved. In contrast, the expedited treatment of SRO rule changes for pilot trading systems in this release permits SROs to operate a pilot trading system twenty days after submitting an initial operation report on Form PILOT, so long as such system complies with Rule 19b- 5 under the Exchange Act.

⁵⁸⁹ 15 U.S.C. 78w(a)(2).

⁵⁹⁰ 15 U.S.C. 78c(f).

⁵⁹¹ The Commission further believes that repealing Rule 17a-23 and amending Rules 17a-3 and 17a-4 under the Act will help to create a more efficient market, encourage competition, and stimulate capital formation innovation.

⁵⁹² As previously stated, alternative trading systems are able to attract subscribers because prices in their systems are often better than the prices available in the public markets. Because alternative trading systems are now required to publicly display their best priced orders for securities in which they represent more than 5 percent of the trading volume, the best priced orders for certain securities will also be available through the public markets. Consequently, some subscribers could leave an alternative trading system if they think there are fewer advantages than before in having direct access to the alternative trading system. However, the growth of ECNs since the Order Handling Rules were implemented indicates that alternative trading systems can, and are, attracting subscribers. As mentioned above, there are still significant benefits to being a subscriber to an alternative trading system, including, but not limited to: the ability to enter orders and the use of such features as a negotiation feature or a ''reserve size'' feature; the ability to access the best priced orders for securities in which an alternative trading system repr