Latin American Capital Markets

52 REENA AGGARWALcerned about the microstructure of new trading systems, their trade execution rules,the impact on the price discovery process, and issues of fairness and competition.ATSs may be owned and operated by a single intermediary (for example, Instinct) orby a group of intermediaries (for example, Archipalego). However, they do not fallunder the umbrella of an exchange and therefore are not obligated to meet the sameset of responsibilities as an exchange and are not required to perform several functions,including the SRO role.Compared with trading systems, exchanges must comply with many moreregulations.They must provide trade execution capabilities, centralize trading, and engagein price discovery.They are also required to file proposed rules with the securitiescommission and to have a process for obtaining public comments.These regulationsmake it difficult for them to respond quickly to the market environment,competitive pressures, and new business opportunities. Registered exchanges arerequired to have adequate capacity and must publicly disseminate pre- and posttransactioninformation.These concerns raise the question whether ECNs have unfairregulatory advantage over exchanges in the United States.These trading systems arealso for-profit organizations, while exchanges have traditionally been nonprofit memberorganizations. However the ownership structure is changing rapidly.The proliferation of new trading systems has ignited the debate in the UnitedStates, Canada, Europe, Australia, and even some emerging markets as to how ATSsshould be regulated. Are they exchanges, brokers, or dealers? Do they have competitiveadvantages over exchanges? As they become more and more important, howshould they be integrated into the markets? Can they and the exchanges be regulatedin a manner that would not stifle innovation? The SEC in the United States publisheda major concept release in May 1997 to explore ways to respond to the technologicaldevelopments in financial markets. The U.S. SEC recognized that ATSs alreadytrade more than 30 percent of NASDAQ orders and could potentially become themajor market for certain securities. However, ATSs are regulated as broker-dealersand not as exchanges.The definition of an "exchange" was revised under Rule 3b-l6to mean any organization, association, or group that:• Brings together orders of multiple buyers and sellers• Establishes uses and nondiscretionary methods under which such orders interactwith each otherSpecifically excluded are routing systems and single market-maker systems. Under thisnew framework, the U.S. SEC seeks to encourage innovation; it allows SROs to operatenew pilot trading systems for up to two years without requiring SEC approval.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub