September 7, 2000

The Honorable William J. Rainer
Chairman
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20581

The Honorable Arthur Levitt, Jr.
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Dear Chairmen Rainer and Levitt:

We are writing to acknowledge receipt of your letters of September 5, 2000, responding to our inquiry of August 3, 2000, regarding alleged trade practice abuses on the Chicago Mercantile Exchange.

According to the Commodity Futures Trading Commission’s (CFTC) response, a local trader did use the wireless version (the P2P) of the Trader Alert Beeper System (TABS), a one-way buzzer alert system, to get the attention of one or two top step brokers for the purpose of signaling them orders for his own account. This was an unauthorized use that went on for three weeks before the local reported it to the Chicago Mercantile Exchange (CME) in a pit space dispute hearing. The local had purchased the buzzer from a retired local who had previously used it for approximately four months to get the attention of top step brokers to execute his orders. The CFTC letter does not indicate what the CME knew about the prior unauthorized use and when they knew it and what action, if any, was taken. The CFTC response nonetheless says that "[t]o date, no evidence has been found that would suggest that either local used the P2P to frontrun customer orders."

The CFTC response indicates that the CME became aware of the unauthorized use of the TABS in the NASDAQ 100 pit at the pit space hearing on June 28, 2000. We are disturbed that the CME did not notify the CFTC that there was a problem until July 25, 2000, and that the SEC was notified only through press reports at the end of July. This does not give us much confidence in the current scheme for information sharing and coordination, and further reinforces the need for the amendments to H.R. 4541 recently reported by the Commerce Committee with respect to security future products. The introduction of single stock futures raises concerns about potential intermarket frontrunning and market manipulation. We therefore believe that these amendments represent the minimum oversight, inspection, and enforcement powers necessary for the protection of investors and the integrity of the markets. We look forward to working with you to secure their adoption and effective implementation. Without them, we will not support lifting the ban on futures on single stocks and narrow-based indexes.

Sincerely,

JOHN D. DINGELL
RANKING MEMBER
COMMITTEE ON COMMERCE

EDOLPHUS TOWNS
RANKING MEMBER
SUBCOMMITTEE ON FINANCE AND HAZARDOUS
MATERIALS