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The Institution of Experience: Self-Regulatory Organizations in the Securities Industry, 1792-2010

Evolution of the Perfect Institution

Secure Place in an Unfamiliar World

"In effect, then, self-regulation today is at a crossroads...How well we all buckle down and cooperate may very well determine the thrust—and even the survival—of responsible self-regulation in our industry for years to come."

- September 16, 1981 "Self Regulation at the Crossroads" -- Remarks by John J. Phelan, Jr., President,  New York Stock Exchange, Inc. to Internal Auditors Division, Securities Industry Association

Although the unfixing of commission rates on "Mayday" 1975 seemed at the time to be the signal event of the year, of much more lasting impact on the SROs generally was the enactment, a little over a month later, of the Securities Acts Amendments of 1975.

The 1975 Securities Acts Amendments provided for the creation of the Municipal Securities Rulemaking Board, a new type of SRO. Its chief impact, however, was that Congress substantially strengthened the authority of the SEC and greatly restricted the freedom of SROs. The SEC was authorized to initiate as well as approve SRO rulemakings; the SEC's role in SRO enforcement and discipline was expanded. In addition, the 1975 Amendments required SROs to include outside representatives on their boards of directors, thus extending the federal government's reach into the structure of SRO governance.41

The 1975 Amendments also empowered the SEC to effect the unification of an increasingly fragmented securities market into a "national market system."  The SROs heeded this directive by creating the Intermarket Trading System (ITS), which linked the NYSE and the regional floors in 1978. The SEC also acted to extend its purview through the Market Oversight and Surveillance System (MOSS), tested in the early 1980s. Neither proved effective, and for much of the next two decades, the SEC more effectively stimulated competition than it countered fragmentation. After 1975, therefore, it was more often competitors than regulators who influenced the evolution of the NYSE.42

In the 1970s and 1980s, NYSE conservatism became a liability as new competition arose. In 1971 came Nasdaq, an electronic system that linked buyers and sellers through "market makers" who maintained a bid and ask spread. Although the NYSE's continuous auction provided better price discovery for heavily-traded stocks, newer thinly-traded issues gravitated to Nasdaq, which was better able to support them. By the 1990s, Nasdaq had sewn up the market for high growth "tech stocks." 

A different kind of competition came from the Chicago Board Options Exchange, which began trading listed stock options in 1973. This touched off a steady escalation of trading in derivatives—contracts to buy or sell often tied to NYSE stock prices—that depended heavily on mathematical models, ever faster computerized trading, and increasingly interlinked equities and options markets. The first big failure of this new market came in October 1987 when the Dow Jones Industrial Average fell 22 percent in one day, specialist firms were overwhelmed, and many wondered whether the NYSE was outmoded.43

The specialists helped effect change by merging, and by the early 2000s NYSE trading posts were dominated by a handful of firms, most owned by big brokerages. The NYSE redoubled its investment in technology, replacing the Designated Order Turnaround system created in the 1970s with a much larger capacity SuperDot system.

By the 1990s, technology had revolutionized NYSE market capacity. Since 1962, the average trade had increased from 204 to 1,441 shares and block trading (of 10,000 or more shares) had doubled. But true electronic trading, already reshaping other markets, was hardly considered at all. The fixes still drove most business to the floor. When it came to governance, despite 65 years of evolution, NYSE floor members still ruled. Whether they or the SEC would be the most influential participants in the public/private partnership remained to be seen.44

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Footnotes:

(41.) January 29, 1976 Letter from Lee Pickard, SEC to James E. Buck, New York Stock Exchange, Inc. on NYSE rules

(42.) 1978 The Cornerstone of the National Market System, ITS - Intermarket Trading System; October 1, 1981 SEC Second Six-Month Report on Implementation of the Market Oversight and Surveillance System (MOSS)

(43.) January 1988 Summary of SEC Division of Economic Analysis's final report on stock index futures and cash market activity during October 1987 to the U.S. Commodity Futures Trading Commission

(44.) Seligman, The Transformation of Wall Street, 570.

Related Museum Resources

Papers

January 8, 1971
Letter from Orval DuBois, SEC Secretary to Robert W. Haack, New York Stock Exchange on eligibility of listed securities on NASDAQ
transcript pdf (Courtesy of the National Archives and Records Administration)
September 28, 1971
Memo from William C. Freund, New York Stock Exchange to Robert W. Haack on working committee on a national securities exchange
image pdf (All rights are owned exclusively by NYSE Euronext copyright 2007 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
December 1, 1972
"A Blueprint for Securities Markets of the Future" - Address by James J. Needham, Chairman, New York Stock Exchange, Inc. at an annual meeting of the Securities Industry Association
image pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2010 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives. All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
June 21, 1973
"Preserving the Auction Market - Core of the Central Market System Debate?" - Remarks by James J. Needham, Chairman, New York Stock Exchange, Inc.
image pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2010 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives. All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
July 3, 1973
Letter from James J. Needham, New York Stock Exchange to SEC Commissioner Hugh Owens on consolidated tape
image pdf (Courtesy of the National Archives and Records Administration)
November 12, 1973
New York Stock Exchange Research Report on incentives to exchange membership in a central market system
transcript pdf (All rights are owned exclusively by NYSE Euronext copyright 2008 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
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)
1975
Securities Acts Amendments of 1975 (Public Law No. 94-29); Sections 203, 204, 217 of IAA amended; Sections 9, 10(e), 13(b), 15, 16, 18(i), 32(a), 36, 49 of ICA amended
document pdf (Government Records)
March 11, 1975
Letter from SEC Chairman Ray Garrett, Jr. to James J. Needham, New York Stock Exchange, on a central market system
transcript pdf (Courtesy of the National Archives and Records Administration)
October 31, 1975
Letter from James Buck, New York Stock Exchange to Lee Pickard, SEC on consolidated tape
image pdf (Courtesy of the National Archives and Records Administration)
November 5, 1975
Letter from James Buck, New York Stock Exchange to Lee Pickard, SEC on floor trading activities of newly-approved members
image pdf (Courtesy of the National Archives and Records Administration)
December 17, 1975
Letter from James Buck, New York Stock Exchange to Martin Moskowitz, SEC approving extension of time for Commision action on Rule 345
image pdf (Courtesy of the National Archives and Records Administration)
January 29, 1976
Letter from Lee Pickard, SEC to James E. Buck, New York Stock Exchange, Inc. on NYSE rules
transcript pdf (Courtesy of the National Archives and Records Administration)
January 29, 1976
Memo from the SEC Directorate of Economic and Policy Research to the SEC Commission on the monitoring of changes in NYSE memberships
transcript pdf (Courtesy of the National Archives and Records Administration)
February 1976
The Central Market System: A Progress Report from the New York Stock Exchange
image pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2009 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives)
September 27, 1977
Letter from George Fitzsimmons, SEC to William Batten, New York Stock Exchange, Inc. on compliance with Securities Act Amendments of 1975
image pdf (Courtesy of the National Archives and Records Administration)
October 18, 1977
"Who Owns the New York Stock Exchange?" - Remarks by William M. Batten, Chairman, New York Stock Exchange, Inc. to Financial Women's Association
transcript pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2010 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives. All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
1978
The Cornerstone of the National Market System, ITS - Intermarket Trading System
image pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2009 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives)
March 28, 1978
Letter from Robert Hall, New York Stock Exchange to Andrew Klein, SEC on electronic communication system
image pdf (Courtesy of the National Archives and Records Administration)
April 20, 1978
Letter from Lloyd Feller, SEC to Robert Hall, New York Stock Exchange on Intermarket Trading System (ITS)
image pdf (Courtesy of the National Archives and Records Administration)
June 23, 1978
Letter from SEC Chairman Harold Williams to William Batten, New York Stock Exchange on Intermarket Trading Systems (ITS)
image pdf (Courtesy of the National Archives and Records Administration)
July 26, 1979
"National Market System Developments: Change at the Exchange" - Remarks by William M. Batten, Chairman, New York Stock Exchange, Inc. at the 12th Annual Investment Workshop, Financial Analysts Federation
transcript pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2010 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives. All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
1980
U.S. Securities and Exchange Commission Market Oversight Surveillance System
image pdf (Government Records)
March 20, 1980
SEC Authorizations for Fiscal Years 1981, 1982 and 1983 - Hearing before the House Subcommittee on Consumer Protection and Finance of the Committee on Interstate and Foreign Commerce
image pdf (Courtesy of David Morf)
December 4,1980
"The Securities Industry in the Years Ahead" - Address by SEC Chairman Harold M. Williams to the Securities Industry Association
image pdf (Government Records)
December 22, 1980
Final Report on SEC by Reagan Administration Transition Team

(Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)

April 1, 1981
SEC First Six-Month Report on Implementation of the Market Oversight and Surveillance System (MOSS)
image pdf (Courtesy of David Morf)
July 20, 1981
Memo from Benjamin Milk to SEC Chairman Shad with MOSS Briefing
image pdf (Courtesy of David Morf)
August 28, 1981
Letter from SEC Chairman John S.R. Shad to John J. Phelan, Jr., New York Stock Exchange, Inc. on surveillance of intermarket trading activity
transcript pdf (Courtesy of the National Archives and Records Administration)
September 16, 1981
"Self-Regulation at the Crossroads" - Remarks by John J. Phelan, Jr., President, New York Stock Exchange, Inc. to Internal Auditors Division, Securities Industry Association
transcript pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2010 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives. All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
October 1981
Letter from SEC Chairman John S.R. Shad to David A. Stockman, Office of Management and Budget, concerning the impact of budget reductions on the SEC
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 1, 1981
SEC Second Six-Month Report on Implementation of the Market Oversight and Surveillance System (MOSS)
image pdf (Courtesy of David Morf)
October 5, 1981
Memo from Wayne Ginion on intermarket surveillance group efforts to date
image pdf (Courtesy of David Morf)
October 6, 1981
Memo from Dennis Shea to Douglas Scarff on NYSE audit trail
image pdf (Courtesy of David Morf)
October 14, 1981
Memo from SEC Chairman Shad to all Commission staff members concerning proposed Fiscal 1982 budget reductions
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
November 19, 1981
Memo from David Morf to George Kundahl on risk and MOSS
image pdf (Courtesy of David Morf)
December 2, 1981
"The SEC and the Securities Industry," Address by SEC Chairman John S.R. Shad to the Securities Industry Association
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
December 30, 1981
Memo from Douglas Scarff to SEC Chairman Shad on MOSS operations for FY-82
image pdf (Courtesy of David Morf)
December 3, 1982
"The Securities Industry and the SEC in the 1980s," Address by SEC Chairman John S.R. Shad to the Securities Industry Association
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
March 25, 1983
Addendum to the Testimony of John S.R. Shad, SEC Chairman, before the Subcommittee on Banking, Housing and Urban Affairs
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
March 25, 1983
Statement of John S.R. Shad, SEC Chairman, to the Subcommittee on Securities of the Senate Committee on Banking, Housing and Urban Affairs
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
July 29, 1987
Letter from U.S. Representative Edward Markey to John J. Phelan, Jr., New York Stock Exchange requesting information on NYSE arbitral procedures
image pdf (Anonymous)
August 14, 1987
Letter from John J. Phelan, Jr., New York Stock Exchange to U.S. Representative Edward Markey on arbitration
image pdf (Courtesy of Stuart Kaswell)
October 22, 1987
New York Stock Exchange Press Release: Early Closings
transcript pdf (Courtesy of John J. Phelan, Jr.)
October 22, 1987
New York Stock Exchange Press Release: President Reagan Commends Exchange Members and Staff
transcript pdf (Courtesy of John J. Phelan, Jr.)
October 26, 1987
New York Stock Exchange Press Release: Early Closing Extended
transcript pdf (Courtesy of John J. Phelan, Jr.)
October 30, 1987
New York Stock Exchange Press Release: Return to Normal Trading Hours
transcript pdf (Courtesy of John J. Phelan, Jr.)
November 12, 1987
Memo from Daniel L. Goelzer, SEC General Counsel to SEC Chairman David S. Ruder on nonpublic nature of reports of Commission examinations of self-regulatory organizations
image pdf (Anonymous)
January 1988
Report of the Presidential Task Force on Market Mechanisms (Brady Report)
image pdf (Anonymous)
January 1988
Summary of SEC Division of Economic Analysis's final report on stock index futures and cash market activity during October 1987 to the U.S. Commodity Futures Trading Commission
image pdf (Anonymous)
February 1988
The October 1987 Market Break: Report by SEC Division of Market Regulation

(Courtesy of Alton Harvey)

November 5, 1998
Letter from James Buck, New York Stock Exchange to SEC on ITS plan
image pdf (Anonymous)
July 31, 2007
"The Fog of Battle, A Personal View of the October 1987 Market Break" by Alton Harvey
transcript pdf
August 2, 2007
"October 1987, A Retrospective" by John J. Phelan, Jr., retired Chairman and Chief Executive Officer, New York Stock Exchange
transcript pdf

Oral Histories

08 January 2010

Brandon Becker

With Dr. Kenneth Durr
30 April 2007

Robert Birnbaum

With Dr. Kenneth Durr
10 May 2010

William Johnston

With Dr. Kenneth Durr
05 November 2009

Catherine Kinney

With Dr. Kenneth Durr
30 November 2009

Edward Kwalwasser

With Dr. Kenneth Durr

Programs

01 November 2007

Keeping the Markets Open - Lessons Learned from the 1987 Market Break

Moderator: Brandon Becker
Presenter(s): Andrea Corcoran, Christopher Cox, William Johnston, Richard Ketchum, David Ruder, Erik Sirri

Galleries

In the Midst of Revolution: The SEC, 1973-1981
Beginnings of a Central Market System
Will Wall Street Come Tumbling Down?
Obstacles to Reform
Conservative Approach to Radical Change
Rule 394 Compromise

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