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In the Midst of Revolution: The SEC, 1973-1981

First Linking Buyers and Sellers

Beginnings of a Central Market System

"In recent years, the old familiar patterns in the securities industry have been disrupted by the appearance of two new forces: institutional investors and computers. By mobilizing capital, the institutional investors have acquired the power to influence the way markets are made. Computers, because of the communication systems they make possible, offer the means to radically improve the way markets operate. Both of these forces have developed apart from the New York Stock Exchange. Together, they have had a pronounced impact on the New York Stock Exchange's performance as the principal market."

- August 6, 1971 The Securities Market – A Report, with Recommendations, by William McChesney Martin, Jr.

With the successful fight over fixed rates concluded, the SEC turned to a lengthy and more complicated reform effort, one which created both an opportunity for market innovation and the potential to do great damage to the securities industry.

During the 1960s, the massive stock volume generated in the "go-go years" often broke down the system, making it impossible to adequately offset larger block orders. For example, in the late 1960s, the New York Stock Exchange closed on Wednesdays and/or at 2:00 p.m. in order to facilitate the delayed back office work. This "back office" crisis created substantial obstacles to an orderly and efficient market system.

The incapacity of the NYSE system to execute those orders led to the creation of a separate market, which involved those non-NYSE executions of listed securities in secondary and over-the-counter markets outside the main market system and unregulated by the SEC. The 1971 Institutional Investor Study had called attention to those problems.

Even before the advent of computer technology, securities authorities proposed the idea of creating a central securities market system, which would gather and distribute all buy and sell orders in any given security so that investors could then receive the best execution of individual orders. Investors operating in that system, it was argued, could then get the best price as buyers or sellers because the system would provide a continuous matching of the highest-priced buy orders with the lowest-priced sell orders. In addition, reformers argued that the system would be more orderly, without wide and abrupt price swings, and liquid, able to process orders quickly with the capacity to handle temporary imbalances in supply and demand.(19)

In response to the Institutional Investor Study, the New York Stock Exchange issued the Martin Report, proposing a central market system that would preserve the monopoly of the exchange and integrate the national and regional exchanges to create a single, national auction for all listed securities.(20) From that point on, with the battle lines drawn, the SEC and New York Stock Exchange began the long debate over the manner and means of implementing market structure reform with a central market system.

The process of reform took center stage after the resolution of the fixed rate structure issue. It was during the attenuated term of SEC Chairman G. Bradford Cook when the SEC laid important foundations for eventual reform.

The SEC's 1973 "Policy Statement on the Structure of a Central Market System" outlined broad reforms, including the creation of a system-wide communication system; the elimination of unjustifiable impediments to market-maker competition, such as Rule 394, which was intended to ensure depth in the market; the creation of a system-wide Central Limit Order Book (CLOB); and an electronic execution system.

While the details of the proposal remained vague, the SEC called for quick action, with Cook estimating that "major elements of the system should be implemented within two years."(21) Although Chairman Cook departed just months later, the reform momentum created by the policy statement would continue to influence the debate.

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Footnotes:

(19) Seligman, 486

(20) August 6, 1971 The Securities Market – A Report, with Recommendations, by William McChesney Martin, Jr.

(21) April 25, 1973 "Democracy in the Markets" – Address by SEC Chairman G. Bradford Cook to the Economic Club of Chicago

Related Museum Resources

Papers

April 28, 1971
Institutional Investor Study Response, Securities Regulation and Tax Report
document pdf (Courtesy of Milton Cohen)
June 25, 1973
"The Central Market System," Address by SEC Commissioner Philip A. Loomis, Jr. to the Securities Industry Association California District Conference
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
September 19, 1973
Memo from Samuel A. Gray to New York Stock Exchange Executive Committee on Title IV H.R. 5050 - bill for integrated national system of processing of securities
transcript pdf (All rights are owned exclusively by NYSE Euronext copyright 2008 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
September 24, 1973
New York Stock Exchange Board Summary Memorandum on ticker tape delay procedures
transcript pdf (All rights are owned exclusively by NYSE Euronext copyright 2008 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
September 26, 1973
New York Stock Exchange Board Summary Memorandum on news tickers on the floor
transcript pdf (All rights are owned exclusively by NYSE Euronext copyright 2008 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
November 14, 1973
"Options: The New Game in Town?," Address by SEC Commissioner A. A. Sommer, Jr. to the Securities Regulation and Enforcement Cooperative Conference
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
November 16, 1973
"The Challenge of New Investment Services," Speech by Ray Garrett, Jr. to FBA - BNA Briefing Conference
document pdf (Courtesy of Harvey L. Pitt)
January 2, 1974
New York Stock Exchange Board Summary Memorandum on consolidated tape
transcript pdf (All rights are owned exclusively by NYSE Euronext copyright 2008 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
January 15, 1974
"The Consolidated Tape: A Perspective," Speech by SEC Chairman Ray Garrett, Jr. to the National Association of Securities Dealers
transcript pdf (Courtesy of Harvey L. Pitt)
February 21, 1974
"Efficiency in Transferring Securities," Speech by SEC Chairman Ray Garrett, Jr. to the New York Regional Group, American Society of Corporate Secretaries
transcript pdf (Courtesy of Harvey L. Pitt)
March 27 and 28, 1974
SEC Authority Over Third Market Trading - Hearings before the Subcommittee on Securities of the U.S. Senate Committee on Banking, Housing and Urban Affairs
image pdf (Courtesy of the Library of Congress)
April 2, 1974
"Disclosure by Foreign Companies in U.S. Markets," Speech by SEC Chairman Ray Garrett, Jr. to the Conference on the Re-opening of U.S. Capital Markets
transcript pdf (Courtesy of Harvey L. Pitt)
April 23, 1974
Letter from U.S. Senators Harrison A. Williams and William Proxmire to SEC Chairman Ray Garrett, Jr. on options trading
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
May 3, 1974
"The Analysts and the SEC," Speech by SEC Chairman Ray Garrett, Jr. to the New York Society of Security Analysts
transcript pdf (Courtesy of Harvey L. Pitt)
May 15, 1974
"Mutual Funds: Fifty Years and Beyond," Address by SEC Chairman Ray Garrett, Jr. to the Investment Company Institute
transcript pdf (Courtesy of Harvey L. Pitt)
May 22, 1974
"The Future is Now," Address by SEC Commissioner John R. Evans to Joint Conference co-sponsored by Boston Stock Exchange and Independent Broker Dealers Trade Association
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
June 10, 1974
"Is the SEC a Barrier to New York's Role in International Finance?," Address by SEC Chairman Ray Garrett, Jr. to The Financial Times
transcript pdf (Courtesy of Harvey L. Pitt)
July 2, 1974
Letter from George W. Mitchell, Federal Reserve to SEC Chairman Ray Garrett, Jr. on Citicorp
image pdf (Arthur F. Burns Papers, Courtesy of the Gerald R. Ford Library)
July 9, 1974
"Savings and Loan Associations and the SEC," Address by SEC Chairman Ray Garrett, Jr. to the United States League of Savings Associations
transcript pdf (Courtesy of Harvey L. Pitt)
August 22, 1974
Letter from SEC Chairman Ray Garrett, Jr. to Senator Howard Metzenbaum on foreign ownership legislation
image pdf (Courtesy of the Gerald R. Ford Library)
September 1974
The Capital Needs and Savings Potential of the U.S. Economy, Projections through 1985 - New York Stock Exchange, Inc.
image pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2009 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives)
September 18, 1974
"The Securities and Exchange Commission and Foreign Issues in the United States," Address by SEC Chairman Ray Garrett, Jr. to the Keidanren Kaikan, Otemachi
transcript pdf (Courtesy of Harvey L. Pitt)
September 24, 1974
"A Fool and His Gold Are Soon Parted: Do They Have to Be?" - Address by SEC Commissioner A.A. Sommer, Jr. to the North American Securities Administrators
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 3, 1974
"Bank Securities Activities - Economic Evolution or Governmental Resolution," Address by SEC Commissioner John R. Evans to Practising Law Institute
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 31, 1974
"Securities Markets Should Not Be 'Trick or Treat'", Address by SEC Commissioner John R. Evans to Municipal Finance Officers Association
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
November 6, 1974
"American Capital Markets: Roses or Thorns in Their Future?" - Address by SEC Commissioner A.A. Sommer, Jr. to Cleveland Committee of the Ohio Foundation of Independent Colleges
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
November 13, 1974
Opening Remarks of SEC Chairman Ray Garrett, Jr. at the Public, Fact-Finding Investigation in the matter of Beneficial Ownership, Takeovers and Acquisitions by Foreign and Domestic Persons
transcript pdf (Courtesy of Harvey L. Pitt)
January 21, 1975
Oral Statement of SEC Chairman Ray Garrett, Jr. to Labor and IRS Hearing
transcript pdf (Courtesy of Harvey L. Pitt)
January 21, 1975
Written Statement of SEC Chairman Ray Garrett, Jr. in support of proposed exemptions from prohibitions on transactions between employee benefit plans and certain broker-dealers
transcript pdf (Courtesy of Harvey L. Pitt)
March 14, 1975
"To Create a Fair Field of Competition," Address by SEC Commissioner John R. Evans to Midwest Stock Exchange
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
September 8, 1975
"Future Securities Markets - Reform, Not Revolution" - Address by SEC Chairman Ray Garrett, Jr. to the North American Securities Administrators Association
image pdf (Government Records)
November 17, 1975
"Tell It Like It Is," Address by SEC Commissioner John R. Evans to the Association of Registered Bank Holding Companies
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
July 8, 1976
Letter from I.W. Burnham II, Securities Industry Association, to SEC Chairman Roderick Hills on multiple cycle trading of options
document pdf (Courtesy of the estate of John Evans)
January 5, 1977
Letter from Joseph W. Sullivan, Chicago Board Options Exchange to the SEC Commission on put trading
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 11, 1977
Letter from Michael E. Tobin, Midwest Stock Exchange to Andrew Klein, Director, SEC Division of Market Regulation on options trading
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 15, 1977
Memorandum from the SEC Directorate of Economic and Research Policy to the SEC Division of Market Regulation on the economic analysis of Net Capital and Market Credit Requirements governing Options Market Makers
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 30, 1977
Letter from Thomas D. Gleason, Wolverine World Wide, Inc. to William Batten, New York Stock Exchange in opposition to future expansion of options trading
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 6, 1977
Letter from Michael E. Tobin, Midwest Stock Exchange to SEC Chairman Harold M. Williams requesting proposed rule change on options trading
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 21, 1977
Letter from Michael E. Tobin, Midwest Stock Exchange to George A. Fitzsimmons, SEC Secretary in response to SEC release to investigate options trading
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
May 24, 1978
Letter from Kenneth I. Rosenblum, Midwest Stock Exchange, to Harvey Pitt, SEC General Counsel on complaint filed by options market makers against the exchange and Michael Tobin
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
July 14, 1978
Letter from Philip J. Lo Bue, Pacific Stock Exchange, to Andrew M. Klein, Director, SEC Division of Market Regulation with comments on guidelines for replacement of involuntarily delisted options classes
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 27, 1978
Joint Submission of Chicago Board Options Exchange and Midwest Stock Exchange to SEC Chairman Harold M. Williams on the proposed combination of Midwest's stock options program with that of CBOE
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
November 10, 1978
Letter from Milton H. Cohen, Schiff Hardin & Waite, to the SEC in support of the Chicago Board Options Exchange's position on the New York Stock Exchange's creation of an options market
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
December 22, 1978
Report of the SEC's Special Study of the Options Market

(Courtesy of Stuart Kaswell)

January 4, 1979
Letter from James Buck, New York Stock Exchange, to George Fitzimmons, SEC Secretary on the NYSE proposal to enter the options trading market
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
February 14, 1979
Letter from Scott Lager, Chicago Board Options Exchange, to Michael Maloney, Assistant Director, SEC Division of Market Regulation on options trading closing
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
February 21, 1979
Letter from Elkins Wetherill, Philadelphia Stock Exchange, to George Fitzsimmons, SEC Secretary on standardized options trading
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
February 27, 1979
Memorandum prepared by Janet R. Zimmer, Special Counsel, SEC Division of Market Regulation on options closing hours and closing rotations
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
June 1, 1979
Letter from Robert J. Birnbaum, American Stock Exchange, to SEC Chairman Harold M. Williams, protesting SEC approval of the expansion of the Chicago Board Options Exchange
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
September 16, 1980
"Regulation and Expansion of Options Markets," Address by SEC Commissioner John R. Evans to The "New" Stock Options Market Conference
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 1980
Acquisition of Technology-Based Firms by Tender Offer: An Economic and Financial Analysis - SEC Capital Market Working Papers
image pdf (Courtesy of the Library of Congress)
February 23, 1981
Letter from U.S. Representative John Dingell to SEC Chairman Harold M. Williams urging the SEC to require ITS and NASDAQ to implement automated interface
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
April 9, 1981
Letter from Frank Wiglusz to SEC Commissioner John R. Evans on money market funds
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
April 10, 1981
Letter from John K. Moore, The Beach Bank of Vero Beach, to U.S. Representative Bill McCollum on checking privileges through money market funds
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)

Galleries

The Bright Image: The SEC, 1961-1973
An Economic Theory of Regulation Emerges - Facing a Challenge

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