motivated to sell their customers other than NYSE-listed securities, or to execute orders for NYSE-listed securities elsewhere than on the Exchange, by reason of the impact of the NYSE commission rate structure.

8. The ways of doing business in securities markets have been profoundly affected over the years by technological developments such as the telegraph, telephone and teletype, and more recently, electronic data processing. Among many other effects, it is possible, to a greater extent than ever before, to channel inquiries and orders from any location to any market with great speed and low cost and thus readily to obtain executions in the best market among competing markets. Moreover, future applications of technology will not necessarily be limited to developing new methods of operating old mechanisms but may in some degree affect the nature of the mechanisms themselves, as they have in the past.

Each of these matters is separately important but they also have important interactions, sometimes circular ones. For example, nonmember over-the-counter dealers are able to do substantial business in NYSE-listed securities, in competition with the NYSE itself, because the market mechanisms of the latter leave room for successful competition, but the loss of business to the competitive markets may in turn produce additional demands and burdens on those very mechanisms. Again, the prestige and strength of the major New York exchanges have drawn primary listings from the regional exchanges, whose prestige and capacity as primary markets have been correspondingly weakened at the same time that they have established themselves as dual markets for securities listed on the major exchanges.

It should also be mentioned that, while all the phenomena listed above are not necessarily of recent origin, some are quite new in kind or degree; and in any event the balance created by the interaction among them is new and cannot be assumed to be permanent. The changed and changing patterns necessarily pose new questions from time to time for the industry itself and its regulatory agencies.

2. COMPETITIVE MARKETS FOR NYSE-LISTED SECURITIES

The combined impact of two of the items mentioned above-regional exchange "multiple" trading and over-the-counter trading in listed securities, which are separately discussed in parts D and Emay be seen in table VIII-80. This table lists the 50 NYSE securities which were most actively traded in over-the-counter markets in 1961, and adds data as to multiple trading on regional exchanges so as to show the combined effect.273 In referring to this table it should be noted that the volume figures in the various columns are not strictly comparable, first, because NYSE volumes exclude odd lots, whereas odd lots are included for most of the regional exchanges and the overthe-counter market, and second, because over-the-counter data are not necessarily complete, as pointed out in part D.

It will be seen that the list of 50 NYSE securities most actively traded in over-the-counter markets includes 21 that are among the 50

273 The Special Study did not undertake a similar study starting with stocks most actively traded on a "multiple" basis on the regional exchanges in 1961. There is reason to believe, however, that such a list would not differ very significantly from the list shown in the table. See table VIII-79.

stocks most actively traded on the NYSE itself. Out of the 29 stocks that were not among those actively traded on the NYSE, 17 were utilities.27 Over-the-counter trading in these listed utility stocks, in turn, constituted a far higher percentage of volume of trading on the NYSE than in the case of the nonutility issues. For example, 12 of the 15 stocks which had the greatest over-the-counter volume relative to that on the NYSE were utilities. On the other hand, with respect to the regional exchanges, trading in nonutility issues for the same group of 50 stocks constituted a higher percentage of the NYSE volume than in the case of utilities. Thus, of the 15 securities, among these 50, with the greatest volume on the regional exchanges relative to that on the NYSE, only 4 were utilities. But again, 6 of these latter 15 securities were also among the 50 most active securities on the NYSE, as opposed to only 1 of the 15 NYSE issues with the greatest relative over-the-counter volume. The differing types of NYSE-listed securities showing the highest volume in the over-thecounter market and in the regional exchanges respectively suggest that varying influences are at work to attract trading to the different markets.

Perhaps the most important point to be noted, however, is thatdespite the difference mentioned in the preceding paragraph in the relative volumes for various securities in the two types of competing markets the total trading away from the NYSE is in some instances quite high compared to that done on the exchange. Thus in 16 of the 50 stocks the combined volume of trading away from the NYSE was at least 30 percent of that on the exchange. Of these 16, only 4 were among the 50 most active on the exchange itself, with 1961 total reported round-lot volumes ranging from 3.5 to 9.1 million shares; of the remaining 12 stocks, 8 had 1961 total reported round-lot volumes between 1.0 and 2.8 million shares, and 4 between 460,000 and 765,000 shares.

That the NYSE is vitally concerned with the development of both regional and over-the-counter trading in its listed securities is clear from a communication to the study from G. Keith Funston, president, under date of November 16, 1962:

The success of the Exchange's auction market depends to a large degree upon the presence of enough buyers' and sellers' orders on the floor so that the prices reflect the composite opinions of the greatest number of investors. However we are informed that over the past few years our listed issues and shares are being traded in increasing numbers on the Nation's regional exchanges and the over-the-counter market. We believe this erosion of the primary market is not in the public interest. It tends to undermine the purpose and usefulness of publicizing transactions in the primary market and may impair the liquidity which all investors rightly expect when investing in securities listed on this exchange.

Numerous problems have emerged from this development of regional secondary markets in national issues. For example, regional exchanges are at times unable to service orders involving stocks listed on the New York Stock Exchange. These orders must eventually be executed on the New York Stock Exchange, possibly at a less favorable price than would have been available if the order had been sent directly to the primary market * * *.

Similar problems arise when transactions in listed securities are executed on the over-the-counter market. Here, too, there is no assurance of obtaining the

274 For this purpose telephone companies are not included in the category of utilities.

best price available in the primary market at the time the order was executed

These diversions may bring about insufficient supply and demand on the primary market necessary to appropriately reflect the public's evaluation of the prices of these securities. This might result in the Exchange becoming merely a quotation board furnishing prices for the bulk of the transactions in listed securities being made off the Exchange floor.

Consequently, we would urge a careful examination of alternative means for preventing this erosion of the primary market

It is to be noted that Funston emphasizes primarily the "erosion of the primary market" resulting from diversion of orders that would otherwise contribute to the market's liquidity and to its accurate reflection of public supply and demand, and emphasizes secondarily a lack of assurance of obtaining in the secondary market the best price available in the primary market; i.e., the NYSE. The letter thus brings into sharp focus two of the crucial issues that must arise in a study of the interrelationships among markets.

3. DEPTH OF AUCTION MARKETS AND COMPETITION AMONG MARKETS

The concept of "depth" has been discussed in chapter V and again referred to in part D of chapter VI and parts B, D, and E of the present chapter. It is clear that the fair and orderly character of today's continuous auction markets depends partly on specialist participation, the degree and form of which, in turn, may depend on the depth of public activity reflected in the marketplace. It is clear, in other words, that the success and quality of an auction market depend on a concentration of public buying and selling orders in the market, so that, solely from this point of view, any diversion to another market would have to be counted inimical to the public interest.

What must also be taken into the balance, however, is the factor of competition that may be provided by multiple markets. At least as early as 1936 the importance of this factor was proclaimed by the Senate Committee on Banking and Currency when the subject of unlisted trading was under consideration. In its report 275 the basic policy of Government was said to be to

endeavor to create a fair field of competition among exchanges and between exchanges as a group and the over the counter and to allow each type of market to develop in accordance with its natural genius consistently with the public interest.

It is unnecessary to discuss at length the general public benefits of competition in securities markets, which-looked at apart from the factor of depth referred to just above are not unlike the benefits of competition in other types of markets. Where there are multiple marketplaces for particular securities, they may be responsive to differing or changing needs and their very existence may add to total market depth and may provide incentives toward better executions in each marketplace. The following expression from an important institutional investor in response to the Special Study's Questionnaire IN-4 may speak for the interest of investors generally:

We would deplore any official encouragement of a single national exchange, which by its nature would be monopolistic. Regional exchanges provide compe

76 S. Rept. No. 1739, 74th Cong., 2d sess., p. 3 (1936).

tition to the major New York exchanges and encourage the listing of local issues. Because of the time difference around the country, they also provide facilities for trading after the New York exchanges are closed. Bearing in mind that the New York Stock Exchange is a privately owned association, we feel that any limitation of a healthy, competitive atmosphere would be a disservice to both institutional and individual investors.

While the emphasis is put on regionals in this instance, the actual practices of many institutions suggest that an even greater emphasis might be put on over-the-counter competition.

The general public interest is also involved, perhaps even more importantly, in the sense suggested by the last sentence of the quotation. The extent of needed regulation of markets in the public interest surely depends, at least in part, on the effectiveness of competition among markets-not merely competition for the handling of transactions in multiple traded securities but competition to become the primary market for particular securities—in maintaining high standards of performance. Indeed, in the absence of effective competition among markets in both senses, the sheer size and power of any one or two markets might enlarge the scope and degree of needed governmental intervention to the point where the adequacy of present regulatory concepts would be open to question. Considerations of this kind appear to have entered into the Commission's expressions of policy on unlisted trading privileges in 1936 and multiple trading in 1940. (See pt. E.) Although the context may have changed somewhat, these considerations have at least equal pertinence today.

The factor of depth in the primary market thus must be looked at, not in isolation, but in relation to the factor of competition. Both with respect to over-the-counter markets in listed securities (in pt. D) and regional exchange multiple trading (in pt. E), the Special Study has considered in some detail the separate factors and their interplay. For reasons set forth in the respective parts it has been concluded, not that impairment of depth in the primary market is irrelevant or inconsequential in either case, but that, under the facts and circumstances disclosed and analyzed, the public benefits of competitive markets (including added depth in the total market which they may provide) by and large outweigh any detriment in the form of impairment of depth in the primary market. This conclusion does not preclude the possibility that the balance would be otherwise in particular instances. But, based on the study's analysis, the basic policy would still be "to create a fair field of competition" among markets and generally to foster free and open competition rather than restrict competition.

In its specific application this policy potentially touches many places in the interrelated markets. It encompasses the prevention of unfair competition as well as the fostering of free and open competition and, as indicated, in limited areas may involve protection from forms of competition that would interfere with efficient operation of essential market mechanisms. Moreover, the fluid character of the total market pattern, as discussed above, means that the contexts in which questions of competition arise, and the nature and importance of specific questions, may undergo change from time to time. A most important aspect of the Commission's continuous role as regulator and overseer of self-regulators, therefore, is to keep informed of developments affecting or potentially affecting the balance of competitive factors in the markets.

4. THE PROBLEMS OF BEST EXECUTION AND MARKET ACCESS

Where there are competitive markets for the same security, presumably there are possibilities for different results in the execution of any transaction in one or another of the competing markets. As noted above, one of the concerns expressed in NYSE President Funston's letter is that in another market a customer might not achieve the best price available in the primary market; i.e., the NYSE. The problem of best execution is, however, a wider one.

Within the confines of a single exchange, the centralized character of the auction market and its established procedures and mechanisms (see ch. VI and particularly pt. B) are such as to obviate any problem of best execution in the ordinary transaction in the regular auction. The problem is a more serious and difficult one in the over-the-counter markets, because of their more diffuse character and their more limited development of mechanisms and standards for assuring best executions-problems which are discussed and are the subject of recommendations in chapter VII.

Still other questions arise when multiple markets for the same security are considered in relation to each other. One kind of question, as suggested in Funston's letter, is whether the mechanisms and regulations of regional exchanges are always such as to assure as good a result in the regional market as in the primary market. But there are also other kinds of questions, such as whether the commission rate structure of the various exchanges may itself sometimes motivate other than best executions from the customer's viewpoint, or whether restrictions on members' doing business away from the primary market may have a similar result. Presumably there are situations, for example, where a better execution might result if all or part of a transaction in an NYSE-listed security were handled over the counter,276 but where an exchange member firm would be precluded from handling the transaction away from the exchange.277

A related type of question may arise in respect of what might loosely be called access to particular markets on the part of public investors. The point is not, of course, that the public is ever affirmatively excluded from access to any market; what may be involved, however, is the more intangible matter of public securities business being channeled toward or away from a particular market, and hence toward or

276 As discussed in pt. D, institutions responding to Questionnaire IN-4 cited "price and cost" as the major reason for effecting certain of their transactions in listed securities over the counter.

277 The pertinent NYSE rule does allow off-board transactions with specific permission, but where permission is sought and given under this rule it is apparently always in terms of capacity of the auction market to handle the particular business, not in terms of best executions as such.

It may be noted here that prior to March 1963, when it adopted a rule generally corresponding to the NYSE rule, the Amex had a rule requiring execution of any order on the floor "unless, after [a] reasonable time, the member firm or member corporation is satisfied, upon the exercise of due diligence, that the order may be executed at a better price elsewhere" but also providing that the general requirement for execution on the floor "shall not apply to orders which the customer has specifically directed should be executed off the Exchange" (former Amex rule 5; Amex Guide, par. No. 9225).

The following statement in a Commission opinion of 1936 on an application for extension of unlisted trading privileges is also of interest in this connection:

"The second [point in answer to an issuer's contention in opposition to unlisted trading in its bonds] is that a well-governed exchange recognizes limits to its operation as an automatic auction market. Not only should it recognize and enforce the duty of a broker to get the best price for his client, even though that price is only obtainable off the floor of the exchange, but its appropriate committees should be alive to any disruption in prices of the type envisaged and thus for the moment bring to an end the automatic operation of the auction prices." [Emphasis supplied.] Edison Electrio Illuminating Company of Boston, 1 S.E.C. 909, 913 (1936).