This is the third conference in a series AEI will be running this year and next on the structure of the securities markets in the United States. In these conferences, we have tried to cut through the technicalities and get to the central policy questions that are at stake. Last May, we organized a conference on the topic "Does the National Market System for Securities Serve the Needs of Investors?" What became clear in the course of that conference is that different investors have different trading objectives, and that the needs and interests of institutional investors were far different from those of individuals.

This is important, because in creating or acceding to the market structure that currently prevails in the United States the Securities and Exchange Commission seems to have implicitly assumed that all investors have only one trading objective--to obtain the best price in the market at the time they buy or sell. This is the concept embodied in what the SEC considers "best execution" of a securities trade, and it is the key concept that appears to underlie the SEC’s support for maintaining the New York Stock Exchange as a dominant and centralized market venue. It is clearly true, for example, that if all trading in NYSE securities were centralized, large numbers of investors would find the best prices in that highly liquid market. And this idea further reinforces SEC support for the particular way that the NYSE operates, with specialists who have the exclusive right to make markets in the securities assigned to them.

However, there were very strong indications in the May conference that institutional investors do not consider achieving the best price at any moment in time the most important criterion for a satisfactory securities trading system. Although price is certainly a consideration, they seemed to place a higher priority on other factors--primarily such things as the market impact of their trades, trading costs, anonymity, and speed of execution. The NYSE, they argued, as a centralized open outcry auction market dominated by specialists, is not meeting their needs in these other dimensions. If true, this calls into question the entire securities market structure in the United States, since it is underpinned by the idea that all investors always want the best price available at the time they trade, and that can only be achieved through a centralized market such as the NYSE.

It is important to note that the US securities market has not assumed its current form because of the demands or needs of investors. This form is the result of choices made by the SEC as the market’s regulator. In other areas of the economy--food sales might be an example--market structure is dictated by what consumers want. When transportation became easier because of automobiles, the corner grocery store gave way to the supermarket. In effect, consumers created this structure because they preferred the lower prices and broader selection available at supermarkets. In general, where there is no regulation of market structure we can be reasonably sure that the market will assume a shape that meets the needs of consumers.

That is not always true of regulated markets, which are frequently shaped by regulatory decisions. And since regulation, a political process, has a tendency to freeze in place outmoded structures, we should be wary when we hear that any significant class of consumers--in this case investors--is displeased with the services they are receiving from a regulated market.

That’s why the views of institutional investors expressed at the May conference were so important. These views suggested that for the usual bureaucratic reasons the SEC might be supporting an outmoded and inefficient market structure--based on a faulty view of what constitutes "best execution." However, until the Greenwich Associates study that we will consider today came along, there was no way to ascertain whether the views of the institutional investors expressed at the May conference were unique to them or reflected the views of the institutional investor community as a whole. As a survey of a cross-section of this community, the Greenwich study answers this question, and for that reason deserves careful consideration.

If, as the study seems to show, the NYSE in its current form is not meeting the needs of institutional investors, a number of questions arise:

• Can the NYSE alter its form or its services so that it can satisfy the demands of institutional investors?
• Can it do so, and still serve the investors who find its services fully satisfactory?
• If it can’t do both, would it be better to open up trading in NYSE-listed securities so that other trading venues--such as ECNs--would be better able to compete with the NYSE
• Or would it be better to maintain the NYSE as the central trading venue in the US securities markets despite the dissatisfaction of institutional investors?

These are questions that we will be considering in future conferences.