Securities Trading:

SEC Action Needed to Address National Market System Issues

GGD-90-52: Published: Mar 12, 1990. Publicly Released: Mar 12, 1990.

Additional Materials:


James L. Bothwell
(202) 512-8678


Office of Public Affairs
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GAO reviewed the Securities and Exchange Commission's (SEC) actions to establish a national market system for U.S. market securities, focusing on: (1) exchange-imposed trading restrictions; (2) the Intermarket Trading System (ITS); and (3) a multiple stock-options listing.

GAO found that: (1) SEC has not determined whether trading restrictions that limit exchanges to the exchange floor restrict competition and hinder market efficiency, or whether those restrictions should be modified or eliminated; (2) since the 1987 stock market crash, SEC has not evaluated overall ITS effectiveness, despite a 10-fold increase in the system's share volume and competition-limiting operational weaknesses identified by users; (3) recent SEC approval of multiple options listing and trading appeared to be consistent with national market system goals to increase competition and ensure better prices for investors; and (4) the development of a trading linkage system to enhance the benefits of multiple options listing will likely require SEC guidance and monitoring since options exchanges differed widely on the type of system to be used.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: Officials from the SEC Division of Market Regulation stated that while the Division was studying the trading restrictions issue as recommended by GAO, they were not willing to publicly acknowledge or discuss such a study because of the competitive and sensitive nature of the issue.

    Recommendation: SEC should reopen the trading restrictions issue to determine whether those restrictions should be further modified, removed, or reaffirmed. One potential modification of the restrictions would be the elimination of their applicability to after-hours trading. If SEC decides against removing any or all exchange-imposed trading restrictions now, SEC should consider their continued appropriateness periodically to keep pace with the rapidly changing marketplace.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Not Implemented

    Comments: Officials from the SEC Division of Market Regulation did not see a need to do a comprehensive evaluation of ITS as recommended by GAO. Such an evaluation, in their opinion, is useful only if fully supported and desired by ITS participants. However, ITS participants have not indicated any support for an SEC evaluation of ITS.

    Recommendation: SEC should do a comprehensive evaluation of ITS, paying particular attention to the effects of recent system changes and increased trading volume. SEC should address the system's operational efficiency, effect on intermarket competition, and capability to handle future market crises.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Not Implemented

    Comments: SEC's proposal for a linkage system was never carried out because of objections about the costs of such a system by the exchanges. SEC has issued additional requirements to help accomplish the same effect, such as rules to deal with trade-throughs, information in trading pits on best bids and offers from all exchanges, and enhanced communication systems to deal with problems between market centers. The exchanges have for the most part, met the latter two requirements but are still working on additional trading rules.

    Recommendation: SEC should closely monitor the exchanges' progress in developing a market linkage system for options trading. If SEC determines that the exchanges are not making sufficient progress, SEC should direct construction of a linkage system.

    Agency Affected: United States Securities and Exchange Commission


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