Speech by SEC Commissioner:
How Best Can SEC.gov Regulate Securities.com?

Remarks by

Laura S. Unger

Commissioner, U.S. Securities & Exchange Commission

At the Practicing Law Institute's SEC Speaks

February 26, 1999

The views expressed herein are those of Commissioner Unger and do not necessarily represent those of the Commission, other Commissioners or the staff.

I am very happy to be here. I really do mean that. I have been attending SEC Speaks for about 10 years now. Of course, I used to sit much further back, sometimes in the last row but always near the door.

You may have noticed that the sitting Commissioners have been taken off the panels. I don’t know if people complained about us or something. The clear benefit to us at least is that now we can actually say something.

There are many things I would like to talk to you about, but don’t worry they only gave me a ten minute slot, which so close to the cocktail hour actually means five minutes. I thought you might be interested in hearing about my newest project.

When I first came on board about 16 months ago, I knew I was interested in looking at how the Internet is changing the securities industry and what the SEC could do to encourage and facilitate these changes, while maintaining investor protection.

That was a whole 16 months ago. Now you cannot read the Wall Street Journal on any given day without seeing an article somehow involving online trading.

There are an estimated five million online brokerage accounts. By 2002, that number is expected to almost triple. Six months ago, investors traded via their computer over 250,000 times a day. Industry experts expect that 30% of retail trades will be done over the Internet this year.

The Internet empowers individual investors. Now they have access to information only brokers had before -- real-time news, research, market data, and portfolio information -- and they can interact directly with the order process. In fact, as a result of the order handling rules, these individuals directly affect the markets through the display of their limit orders.

Internet brokerage provides a visible, hands-on means for investors to participate in the markets. This trend holds potential promise -- and some perils -- for the investors and the industry alike. Without saying, it calls for a reassessment of whether our regulatory scheme is adequate. And we’ve been doing some of this.

However, given the rapid pace of change, I thought that it would be informative to see this new landscape firsthand. I am convening a series of roundtables in different cities with a cross section of academics, industry professionals and investors to talk about online trading. The title of the roundtable series is "Online Trading: Can We Keep Apace of Cyberspace?"

Fortunately, I just happened to have had the first roundtable on Monday of this week in San Francisco. There were about 20 participants, including one of our former Commissioners, Professor Grundfest, representatives from E*Trade, Charles Schwab, Discover Brokerage, Broker.bot, Intuit, TRUSTe, the Association of Individual Investors, and a private practicioner.

The roundtable focused more on the typical long-term investor (who these days means someone who holds a position for at least a day or two) and uses an online account rather than on the intraday traders. Some of the issues we considered were:

Suitability. This obligation evolved from a top-down broker-client relationship. Given the shift to investor-directed decisionmaking, should Internet brokerage firms offering investors access to investment information via "pull" technology have customer-specific suitability obligations?

Privacy. How is information gathered in a firm-client or broker-client relationship used? Do the investors have adequate notice of this?

Systems and Capacity Problems. Participants noted the need to separate systems failures and capacity issues. How realistic are customers’ expectations for instant gratification in the order execution process? Are firms doing enough to educate customers and normalize their expectations?

Best Execution. The duty of best execution evolves with changes in technology and the markets. In recent years, the Commission has stressed the importance of broker-dealers’ considering price improvement opportunities available from markets in determining whether they are obtaining best execution for their customers.

A number of participants noted that their customers consider speed of execution and certainty of execution to be very important factors. Do retail investors really understand the differences in price improvement opportunities between markets? If they understood this, would they sacrifice price improvement opportunities for speedier executions?

Market Data. Customers have voracious appetites for real-time market information. The cookie monster has nothing on online investors when it comes to market data.

Right now, most firms provide free quote information in connection with an order. Some investors game the system by entering limit orders way outside the NBBO to get a "free" quote, for example, an order to buy Microsoft at $3.

As you know, the Commission will be reviewing the current fee structure for market data and the role of data revenue in the operation of the markets. I should emphasize now that this review was not motivated by complaints from quote-consuming Internet brokers. Instead, the review is to determine whether the Commission is meeting its statutory responsibility to ensure that quote and trade information is available on terms that are "fair and reasonable" and "not unreasonably discriminatory."

Investor Education. During this discussion, everyone at the roundtable actually agreed on the conclusion -- that investors could be better educated about online trading and investing generally. We also agreed that the Internet would be extremely helpful to this endeavor and that the Commission and the industy would work together to develop an investor education initiative.

Conclusion. I will continue to pursue these and other issues during my upcoming roundtables in New York and Washington and will make my findings public in a report to the Commission. In the report, I intend to describe the state of Internet brokerage and make broad recommendations to the Commission on how we should approach the issues.

http://www.sec.gov/news/speech/speecharchive/1999/spch257.htm