Written Testimony of

David G. Downey, Executive Vice President

Interactive Brokers LLC

REGARDING THE IMPACT OF TECHNOLOGY ON THE DERIVATIVE INDUSTRY AND IT'S REGULATION.

Before the United States Senate

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY

SEPTEMBER 23, 1999

Mr. Chairman and members of the Committee: Thank you for inviting me to testify on the impact electronic trading will have on the derivatives industry and its implication for regulation moving forward. My perspective comes from my position as Exec. Vice President of Interactive Brokers , a member of the Timber Hill Group whose affiliates are well known for innovative application of technology to the financial services industry.

Interactive Brokers offers its customers electronic order routing and execution services in listed stocks, futures, options and related products around the world through its proprietary screen-based computer and communications technology.

It is clear to us that while technology is going to bring tremendous change to our industry it will not by itself eliminate instances of fraud and deceptive practices. Regulation must remain true to the public policy objective of protecting the customer from abuse.

WHAT TECHNOLOGY?

The most important technology driving change today, of course, is the internet. While advances in computers and software have empowered the individual to be more productive then they ever were before it is the internet that is allowing them to interact with others in real time which further leverages this increased productivity. No longer are people dislocated from each other by the dimensions of time or space. Customers are now able to interact cheaply and reliably with the other market participants in real time at the same speed as the most sophisticated trading desk in the world. This access is backed by extremely high resolution audit trails that time stamp orders to the second so the customer is assured of not having his order front-run or an execution misallocated. These systems can only be taken advantage of with the blessing of the exchanges and regulators.

In short, as a matter of technology it is easy to trade a security from anywhere in the world; only laws and regulation and politics stand in the way.

WHO IS PUSHING THIS?

Today, the industry handles customer orders in three steps. The member firms collect customer orders , distribute those orders and intermediate in the execution of those orders. The collection and distribution processes , which are controlled by the member firms, have been quickly overhauled and are now poised to bring more customers to the markets very efficiently. But the firms cannot get the full benefit of these innovations as the speed of the entire process is hobbled due to the inefficient systems employed by the execution arenas. The firms ,quite frankly, are demanding that the execution arenas come up to speed. The pressure is almost unbearable and it is completely reasonable to think that this pressure will find some relief and the firms are finding it in innovative pieces of software that provide the electronic execution at a reasonable price that their customers are looking for.

This is the solution provided by the electronic matching engines such as GLOBEX and EUREX as well as the Electronic Communication Networks (ECN).

SHOULD THIS BE ENCOURAGED?

Congress has appropriately sought to encourage the use of technology to increase market efficiency and competition. This should not end now. It has been our experience that as automation becomes available, the exchanges tend to take protective measures to increase the value of certain member franchises at the expense of depriving the investing public of certain benefits which can be made through modern technology.

The exchanges today have an opportunity to compete for order flow just like the ECNs but they are very slow to innovate and are strongly determined on maintaining a particular way of doing business that benefits some at the expense of all others. It is our view that as long as the third party entities meet the public policy objectives of protecting the investing public from fraud and deceptive practices by utilizing high resolution audit trails and the trades are cleared through a recognized clearing organization, then such activity should not only be tolerated but in fact encouraged.

Congress should not be concerned , nor get involved with the competition as the community will benefit no matter who eventually wins.

WHAT DOES THIS HOLD FOR REGULATON?

The beauty of the technology is that everyone will benefit including the regulators. Technology holds great promise so long as the market is allowed to come up with innovative adaptations. The challenge is to keep laws and regulations from stifling this innovation which will severely damage our markets ability to remain as a leader.

Some Specific Areas that need Attention:

· If execution arenas are allowed to attract customer orders then it should be done on a level playing field. Exchanges should not be permitted to maintain pricing power over elementary and required information under the guise that they incurred significant expense and time in developing systems to provide such information. First these systems are now cheap and secondly charging customers to see live quotes has the effect of making the customer utilize market orders which forces the customer to automatically give up the bid/ask spread. The cost of this activity far outweighs any revenue that the exchanges are taking in. At some point the public interest must outweigh parochial concerns.

· Since it is not clear at this point which technology will prevail it is difficult to spell out what the regulations should look like. We encourage the regulators to adopt a flexible structure to facilitate rapid adaptation to quickly developing technological advances which permit safer and more efficient market access. An approach which would make use of exemptive powers or other regulatory techniques to jumpstart the introduction and use of technology at the outset, subject to later refinement if necessary, is more appropriate in the current climate in which technology advances so quickly, and can become obsolete before the rigid regulatory structure has completed its process.

· There are , however, some constants that will remain regardless of what technology prevails and that is Customer Protection from Fraud. It is very important to realize that technology will not eliminate the potential for fraud. Quite the contrary…given the speed and volume of transactions the opportunity for front-running of customer orders and mis-allocation of executions will increase. Let me be quite clear on this point that the application of high resolution audit trails ,where customer orders are time stamped to the second and the customer account identifier is attached to each order, is essential to provide the necessary protections. While time stamps are a natural byproduct of computers, software and networks and they are easily collected and assembled there has been some discussions about disabling this feature. This is extremely dangerous talk and Congress simply must mandate that any system used to handle customer orders provide these fundamental protections from the outset or we fear that as the industry develops it will become very difficult to impose these protections after the systems have been built and deployed on a widespread basis.

While it is one thing to attempt to articulate what the new technologies can bring I have always found that demonstrating the technology provides a much clearer understanding for the audience. With that I would like to take a half minute more to demonstrate how the customer of tomorrow will interact with the Global markets.