SEC Chairman Levitt Discusses Securities Market Issues

Washington, DC, March 21, 2000 - In a recent speech, "Visible Prices, Accessible Markets, Order Interaction," SEC Chairman Arthur Levitt discussed the "seismic shifts" taking place today in our securities markets and their implications for the future. His remarks focused on transparency, decimalization, market linkages, and market fragmentation.

Transparency
Chairman Levitt noted that today, by and large, the best dealer quotes and customer limit orders can be seen and accessed by all market participants, thereby fueling price competition. In the view of Chairman Levitt, limit orders, which he described as "the building blocks of transparency," serve a critical market function by promoting price discovery through revealing the supply and demand for a security. He said that this, in turn:

• increases the information available to the overall market;
• allows all market participants to better determine prices; and
• helps level the playing field between dealers and the investing public.

Levitt also mentioned that he has asked the Office of Compliance Inspections and Examinations, together with the Office of Economic Analysis, to prepare within the next 45 days a public report that analyzes the display of limit order in equity and options markets, including the adequacy of the markets' surveillance and disciplinary programs for the Limit Order Display Rule.

Decimalization
Levitt described decimal pricing as "an event on the horizon that will truly be a watershed for our markets," and noted that it will benefit investors—particularly small investors using market orders—by reducing spreads and making prices more efficient for investors. Notwithstanding this, he expressed two potential concerns with decimalization. First, it may provide an incentive for market makers and other professionals to step ahead of existing orders, thereby resulting in investor limit orders going unexecuted and investors' incentives to place limit orders being diminished. Second, it may obscure liquidity.

After noting that the NYSE, Nasdaq, and some ECNs have taken steps to increase the transparency of their books, he encouraged all market participants "to move toward open books across all markets." While acknowledging that some customers would prefer not to have their limit orders displayed, and "the choice should remain with investors—not market intermediaries," he stated that "the ability of all investors to see the depth of supply and demand in any stock would be a giant step towards a true National Market System" and "a step that our markets should take now, before the uncertainty of decimalization is upon us."

Market Fragmentation
Levitt expressed concern that some markets are becoming increasingly isolated from buyers and sellers in other markets. He expressed particular concern that internalization of market orders and payment for order flow may discourage broker-dealers from competing through quotes with the rest of the market. Because there is not agreement on how to address this concern, the Commission recently released a concept release on market fragmentation. Levitt emphasized that, while the Commission has not yet determined what, if any, regulatory action should be taken, any action taken by the Commission in this area "must pass one acid test: competition among market centers must remain vigorous and dynamic."