First, in recent years electronic trading systems, usually known as electronic communications networks (ECNs), have been taking business from the established over-the-counter stock market, the NASDAQ, and threatening the preeiminence of established stock exchanges such as the New York Stock Exchange. The SEC is requiring ECNs to create their own SROs or to become subject to the SRO subsidiary of the National Association of Securities Dealers, which runs the NASDAQ. Neither option makes sense. ECNs that automatically match trades by means of specialized computer software do not face the same regulatory challenges as do stock exchanges with physical trading floors. And subjecting ECNs to a competitor’s SRO has obvious conflict-of-interest problems that will require excessive SEC oversight.
Second, competition is pressuring NASDAQ and NYSE officials to propose that their respective exchanges change from private, member-operated associations to public, for-profit companies that would sell stock to the public and thus would be owned and controlled by shareholders. That sound initiative is encountering resistance from exchange members. Shareholders would place the interests of the NYSE ahead of its members’ interests and would likely insist on a move to an efficient electronic exchange. But a for-profit NYSE and NASDAQ, especially with electronic exchanges, would be fundamentally inconsistent with a government delegation of self-regulation through an SRO.
The Cato Institute
June 21, 2000