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INTRODUCTION In beginning this symposium on the structure and regulation of the securities markets, I’m sure we will all keep in mind George Santayana’s caution that: “Those who cannot remember the past are condemned to repeat it.”1 Although enormous changes have taken place over the past few decades, we keep hearing echoes of the past. When the London Stock Exchange (LSE) switched from floor-based to electronic trading exactly twenty years ago, it decided that the transformation might be too traumatic for its members, so it adopted a hybrid market—an electronic market combined with traditional floor trading. The hybrid market lasted just over four months, at which time the LSE closed its floor for trading in equities. Will the New York Stock Exchange’s experience with its new hybrid market be the same or different? The Consolidated Limited Order Book (CLOB), which I expect will be discussed today, was first proposed to the SEC thirty years ago by Professor Peake, one of today’s speakers, in 1976, a year after Congress told the SEC to create a national market system. The CLOB, which would execute investors’ orders electronically under a rule of time and price priority, seemed to him the best way to assure best execution of investors’ orders throughout the national market system. In 1978, the SEC told the exchanges to create a CLOB. A year later the Commission had second thoughts: it feared that a CLOB would lead to the elimination of exchange trading floors by inexorably forcing all trading into a fully automated trading system. In 2000, the SEC again suggested the CLOB as one of several possible alternatives in order to prevent fragmentation of the markets. Like Rasputin, it simply wouldn’t die. But last year, when it adopted Regulation NMS, the Commission again rejected the notion of a CLOB, but for a very different reason from the one it had given back in 1979. This time, the SEC said that a CLOB would greatly reduce the opportunity for markets to compete by offering a variety of trading services. I mention this little piece of history not necessarily to promote the CLOB, but rather to remind you that when we consider the future structure of the markets we are not writing on a clean slate. Also, we should never forget that the overriding goal of securities regulation is to protect investors. As David Walker, a senior adviser at Morgan Stanley, wrote in the Financial Times last Wednesday, “there are important public interests at stake that mirror the utility-like services”2 that stock exchanges provide, 1. GEORGE SANTAYANA, THE LIFE OF REASON OR THE PHASES OF HUMAN PROGRESS: INTRODUCTION AND REASON IN COMMON SENSE 294 (1906). 2. David Walker, Exchange Mergers Must Benefit Users, FIN. TIMES, Nov. 8, 2006, at 19. 272 BROOK. J. CORP. FIN. & COM. L. [Vol. 1 and that in the new era of publicly owned stock exchanges, accountability to shareholders must be complemented by explicit accountability to users (i.e., investors). That reminds me of a story about the humorist Robert Benchley who, while an undergraduate at Harvard, took a course in international law. Having been carousing the entire night before the final exam, he was ill- prepared to answer the only question on the exam, which was “to discuss the North Atlantic fisheries dispute from the point of view of one of the parties.” He answered, and I paraphrase, “Wiser heads than mine have discussed this case from every point of view, except for the point of view of the fish. I would like to undertake that task.”3 He flunked.4 Norman S. Poser* 3. The exact quote that has been attributed to Robert Benchley is: “I know nothing of the point of view of Great Britain in the arbitration of the international fisheries problem and nothing about the point of view of the United States. I shall therefore discuss the question from the point of view of the fish.” Robert Benchley: A Profile in Humor, http://www.davidpietrusza.com/ benchley.html (last visited Mar. 28, 2007). 4. See id. * Norman S. Poser is a Professor of Law at Brooklyn Law School, where he teaches Securities Regulation, Contracts, Corporations, and Corporate Finance. He has served at the Securities and Exchange Commission as Assistant Director of the Division of Trading and Markets, and at the American Stock Exchange as Executive President for Legal and Regulatory Affairs. He is the author of the treatise Broker-Dealer Law and Regulation and several other books and law review articles. He has served as a consultant to the World Bank, U.S. Agency for International Development, International Finance Corporation, and Organization of American States concerning securities regulation in developing countries. He received an A.B. from Harvard College and an LL.B. from Harvard Law School. ARTICLES INTERMARKET COMPETITION AND MONOPOLY POWER IN THE U.S. STOCK MARKETS Roger D. Blanc* I. INTRODUCTION Stock exchanges in the United States have undergone dramatic change in the last several years. Their conversion from not-for-profit entities controlled by their members into for-profit, publicly owned corporations over which their former members have substantially less influence and control has significantly altered the initial regulatory assumptions that allow stock exchanges to be self-regulatory organizations. The introduction of electronic trading media put substantial pressure on floor-based exchanges and encouraged stock exchanges to embrace electronic technology. The new profit incentives and ease of transferring information in the age of electronic communications led the exchanges to begin marketing the quotation and trading data their members were required by law to give them. The exchanges are now using the data entrusted to them as self- regulatory organizations to further their new profit-seeking objectives. In response, the Securities and Exchange Commission (SEC) has substantially revised its regulation of the markets in light of several of these changes, yet its revised regulations consistently appear to be one step behind the exchanges, which have used their regulatory revenues to serve private, for-profit ends rather than the ends the Securities Exchange Act of 1934 (Exchange Act) envisions. This article reviews some of the effects of those changes on market structure and on market participants, including the effects on “fragmentation” of the markets. A particular concern is that a result of the exchanges’ profit-seeking structure has been to foster the creation of a two-tiered market where large investors are charged market data fees beyond the means of smaller investors and then given faster access to that data, thus granting them substantial trading advantages. The article then reviews the current debate over the revenues the exchanges are * Mr. Blanc is a member of the New York Bar and is a member of Willkie Farr & Gallagher. Mr. Blanc has represented some of the companies mentioned in this article in connection with the issues discussed. Copyright © 2007 Roger D. Blanc. The Creative Commons license is not applicable to this article. 274 BROOK. J. CORP. FIN. & COM. L. [Vol. 1 attempting to collect by selling depth-of-market data, and the recent petition by NetCoalition.com seeking to overturn the SEC staff’s approval of certain NYSE Arca market data fees. That petition strikes at the heart of the revenues exchanges collect. It has sparked a vigorous debate and challenges the staff’s use of its delegated authority to approve exchange rule changes setting market data fees. II. THE FRAGMENTATION OF THE U.S. STOCK MARKETS There was a time not very long ago when fragmentation of the U.S. stock markets was thought to arise from having separate market centers. It was a time when trading resided mostly on physical exchange floors and in the offices of over-the-counter dealers. In fact, the SEC may have helped promote fragmentation in 1941 when, in the Multiple Trading Case,1 it forbade the New York Stock Exchange (NYSE) from preventing its members from trading in NYSE-listed securities on other exchanges. Indeed, the exchanges’ “off board trading rules,” chiefly the now-rescinded NYSE Rule 390 (formerly Rule 394), severely limited the ability of NYSE members to trade NYSE-listed stocks in the over-the-counter market.2 The time when physical exchange floors dominated equity trading in the United States began to draw to a close in the 1970s. In 1975, the Congress directed the SEC to use its authority under the newly amended Exchange Act to foster the establishment of a national market system (NMS). It cast serious doubt, moreover, on whether off-board trading rules, such as NYSE Rule 390, would continue to have a place in the new system.3 It was not until the late 1990s, however, that the SEC responded to that call and directed the NYSE to abandon its off-board trading rule.4 But 1. In the Matter of The Rules of the New York Stock Exchange, 10 SEC 270, 297 (Oct. 4, 1941) (holding that the NYSE rule prohibiting dealings on other markets is against public interest and illegal). 2. See Order Approving Proposed Change to Rescind Exchange Rule 390, Exchange Act Release No. 42,758, 65 Fed. Reg. 30,175 (May 5, 2000) (approving the NYSE rescission of Rule 390). See also Andrew M. Klein & Andre E. Owens, The Intermarket Trading System: Reassessing the Foundation of the National Market System, WALLSTREETLAWYER.COM, Mar. 2000, at 1. 3. Exchange Act § 11A(a)(2), 15 U.S.C. § 78k-1(a)(2) (2000). The Congress added this section to the Exchange Act as part of the Securities Acts Amendments of 1975, Pub. L. No.

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